Exide: A Not-So-Exciting Bet


Battery maker Exide Technologies' (NAS: XIDE) fiscal-first-quarter losses narrowed by nearly 42%, as sales grew in both its segments.

Management maintained the operating income guidance it provided earlier. So far, so good. But does the stock look like one with promise? Let us see.

The numbers
Total revenues for the quarter rose 16% to $745.1 million. The larger transportation segment reported a 9% rise in sales, driven by lead prices and positive foreign currency translation. While the U.S. automotive segment remained weak, sales in the rest of the world rose by around 25%. This seems to be the general industry scene now. Peer Johnson Controls (NYS: JCI) also reported a 38% rise in third quarter-sales in Europe in its automotive segment.

Equipment downtime in its recycling facilities and higher spent (used) batteries cost led to lower U.S. sales for Exide.

In the industrial energy segment, U.S. sales rose nearly 29%, while sales in the other regions grew 26%. Peer Enersys' (NYS: ENS) sales also surged around 31%, as sales in all regions grew.

But high costs ate into top-line growth. Cost of goods sold went up by 18.6% to $628.4 million from a year ago. As a result, operating margin slipped from 2.9% to 1.9% year-on-year.

Yet net losses narrowed from $9 million to $5.2 million year-on-year. Fools should note that there was a high restructuring charge of $8.2 million in the third quarter last year. This time, the charges amounted to just $0.3 million.

A lotta debt
Exide's total debt-to-equity ratio stands at a high of 182%. Moreover, its quick ratio doesn't look too good at 0.8 times. Unlevered free cash flow has also dipped from $24.5 million to a negative $12 million year-on-year as a result of an inventory buildup that resulted in negative cash from operations. While Exide's inventory has risen from $447.5 million to $599.8 million year-on-year, its revenues have not gone up as significantly. Higher capital expenditure also contributed to the negative free cash flow.

With such a large amount of debt, it's important that the company maintain or expand what are currently some pretty narrow profit margins.

The lead effect
Lead is the key material used by Exide for its lead-acid batteries, constituting nearly 51% of costs. Lead prices have been highly volatile on the London Metal Exchange. Average prices rose 13% from March last year to this year. And on May 25, it rose by a further 13% to $2,530 per metric ton. Higher lead prices should impact margins for Exide. Moreover, higher lead costs also mean more investment in current assets like inventories, thereby reducing the amount of cash available for other purposes. Lead prices are the primary concern for Exide.

Exide also faces competition from companies like Valence Technology (NAS: VLNC) , which are focusing on lithium-based batteries targeting electric-driven vehicles. The company's revenues have also been growing. Its sales to electric vehicle maker Smith Electric Vehicles was a key driver for Valence's 2011 top-line growth, and it now accounts for 42% of Valence's revenues as compared to just 12% in 2010. All this indicates a growing demand for electric vehicles, hence for batteries which compete with Exide's products.

The Foolish bottom line
Though management expects its operating income for the forthcoming quarter to be higher than the previous year, it may not mean higher profits. With losses on books, high debt, no dividends, and volatile lead prices, Fools may want to wait for better cost control and higher margins before getting excited about the stock.

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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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