Polypore offers more details

The company sheds more light on its business and strategy after shares got pummeled this week.

By Jim J. Jubak Feb 3, 2012 4:21PM
Shares of Polypore International (PPO) fell 30% on Jan. 31 as panic selling arose from the combination of a short recommendation from Axiom Capital and news that Polypore customer LG Chem would start making its own battery separator membranes -- instead of buying them from Polypore, the market assumed. 

More than 26 million shares traded hands that day, way above the daily average of 960,000 shares.

Since then, the stock has rebounded to $46.69 a share from the Jan. 31 close at $38.08. That's still way below the $56.38 close on Jan. 27. (The stock is a member of my Jubak's Picks portfolio.)

So what did Polypore have to say in an investor call Friday? (Here are instructions on how to listen to the replay.)

The call began with a discussion of the market for separator membranes in lithium batteries, moved to a technical discussion of the differences between wet and dry separators, and then finished with a few details about what it sells to LG Chem and what that Korean company is actually planning to manufacture.

I found it a reasonably good refutation of the math that put the Axiom short recommendation and the LG Chem news together to get panic selling. I'm keeping my one-year target price at $70 a share by January 2013. (Here’s my original post from Feb. 1.)

Polypore noted that their fastest growing business is separators for lithium batteries -- no surprise there. The company's traditional lead acid battery business is growing at faster than GDP growth rates in key Asian markets as incomes rise and more people buy cars, but growth in that business is working off a much higher revenue base. 

According to the company, the lithium separator market should grow 8% to 20% a year -- without any contribution from membranes for batteries in electric vehicles -- hybrids, plug-ins and pure electric vehicles. If -- and here's the crux of the speculative element in the stock and the company’s presentation that got short-sellers' attention -- electric vehicles got to be 5% of the car market, then that would double the size of the market for lithium battery separator membranes. Polypore said that it is selling into vehicle programs for 25 vehicles today and will be in 50 vehicles by the end of 2012 and in 100 by 2015.

All that was just a re-iteration of the company's standard presentation at investment conferences. (You can find those presentations on the company's website.)

But the next two segments of the call added significant detail.

Separator technology for lithium batteries comes in two flavors, wet and dry. In smaller lithium batteries the choice comes down to battery manufacturer’s preference. But in larger batteries -- in electric vehicle batteries -- dry separator technologies have a significant edge. 

Dry technologies produce membranes with significantly less shrinkage over time. In a large-format battery membrane, shrinkage can expose the electrodes and cause internal shocks. Dry technologies also produce membranes with significantly higher resistance to oxidation and therefore longer lifespans. The OEMs (original equipment manufacturers) that Polypore sells to are looking for batteries that last for longer than eight years and that have the least chance of internal shocks (especially after the delayed fire in test Chevy Volt that occurred two weeks or so after the vehicle went through a crash-impact test.)

Polypore itself is constrained by concern for customer confidentiality in talking about plans at LG Chem. But the company did feel it could pass along comments from industry analysts outside of the two companies that it had talked to recently. According to the analysts, LG Chem is focusing on wet technologies and is looking to supply half of its internal needs by 2015 with no plans, again according to these analysts, to sell to outside customers. LG Chem does buy dry technology separator membranes from Polypore right now.

And that's what we know today that we didn't know yesterday. More to come, I'm sure, and I'm also certain that the battle between longs and shorts on Polypore isn’t over.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund owned shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: PPO


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