Zoltek Companies: An Intriguing Alternative Energy Play

By Ian Wyatt, Big Idea Investor | Jun 05, 2007 | comment

Zoltek Companies: An Intriguing Alternative Energy Play

by Rising Star Stocks Research Staff

Zoltek Companies was one of five stocks profiled in Rising Star Stocks' recent special report, Alternative Energy Investing 2007: 5 Top Stocks Set for Profits.  The report is your free bonus when you sign up for a 30-day trial today.

Incorporating its proprietary continuous carbonization process, Zoltek Companies (Nasdaq: ZOLT; Market Capitalization: $1.12 billion; Recent Price: $38.23) develops and manufactures carbon fibers, high strength, high stiffness synthetic fibers that reinforce and improve the performance of composites used as the primary building materials in every day commercial products. Ten times stronger than steel and eight times aluminum?s strength, carbon fibers are much lighter than both materials ? five and 1.5 times, respectively. Additionally, their fatigue properties are superior to all known metallic structures, and they are one of the most corrosion-resistant materials available, when coupled with the proper resins.  

Carbon fibers can be used to customize the electrical properties of injection molding compounds, paints, and adhesives, ultimately providing the benefits of plastics with the conductivity and electrical shielding capabilities of metals. The electrical conductivity of carbon can be used to greatly enhance the cure times for adhesive applications. And combined with its ability to be configured into a semi-permeable membrane with defined mass transport properties, carbon is a superb choice for next generation fuel cell engines and serves key applications in wind power. 

Zoltek has greatly evolved since its founding in 1975 as an industrial equipment and services company. The company jumped into the carbon fiber business via a 1988 acquisition, which changed its focus to high-priced, low-volume aerospace applications.  But the snail-pace of business development pushed Zoltek into making a cutting-edge discovery, and a revolution in the carbon fiber business. The company?s research efforts resulted in the manufacture of carbon fibers from inexpensive, textile-type acrylic fibers, which duplicate the properties of the most common aerospace carbon fibers ? at a substantially lower cost.  

Today, Zoltek produces the lowest-cost carbon fibers around the globe, and is also the world leader in installed capacity, commanding a 25% market share. And the company?s strategic plans include continued rapid capacity growth.  

For its fiscal second quarter 2007, ended March 31, 2007, Zoltek?s sales were strong, rising 40% to $36.7 million from $26.2 million in the year-ago quarter. Revenue growth was boosted by a combination of healthy demand and increased capacity. The company approached break-even, posting a loss of $6,000, or $0.00 per share, versus a loss of $27.7 million, or $1.31 per share, in the year-ago quarter.  The move toward profitability can be directly attributed to improving gross margins, which over the trailing twelve months have improved from 23% to 29%. 

The consensus analyst estimate calls for earning per share of $0.77 on revenues of $156.3 million in fiscal year 2007 and EPS of $1.49 on revenues of $245.2 million in fiscal year 2008. 

Zoltek has created a solid market niche for itself with strong strategic advantages. Further, the potential growth for new applications and markets utilizing the company?s products is clearly promising and starting to materialize.  On May 22, the company announced that it had expanded its long-term strategic supply agreement with Vestas Wind Systems AS, of Denmark, the world's largest producer of wind turbine generators. Under the expanded agreement, Zoltek remains the Preferred Supplier of carbon fibers to Vestas and based on current commitments and pricing for base quantities, expects to provide Vestas with over $300 million of carbon fiber and carbon fiber materials over the first five years of the agreement. 

Read more about Zoltek Companies, plus four more companies in Rising Star Stocks' Special Report Alternative Energy Investing 2007: 5 Top Stocks Set for Profits.  Begin your 30-day trial and download the report today.

Penny Lane

by Rising Star Stocks Research Staff

We often get the inquiry from our subscribers, "Why don't you cover more penny stocks?"

The answer to which we hope to provide in this education piece.  Let's start with a formal definition. According to the Securities and Exchange Commission, "The term 'penny stock' generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally trade over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they may also trade on securities exchanges, including foreign securities exchanges." The SEC goes on to describe particular disclosures a broker must make with regard to penny stocks before ending with the following statement: Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

As per the SEC's definition, at the time of publishing, the Rising Star Stocks portfolio held six penny stocks.  However, we don't necessarily subscribe to the SEC's definition, opting instead for the more traditional definition of a stock trading below $1. By this measure, the portfolio held no penny stocks at the time of publication.

There are valid reasons for this.  Let's start with what's important.  We like returns.  We like a stock that goes from $1 to $2 equally as much as we like a stock that goes from $5 to $10.  A $1,000 dollar investment in 1,000 shares of Company A at $1 per share that later goes up to $2 a share or $2,000 is equal to the same $1,000 dollar investment in 200 shares of Company B at $5 per share that later goes up to $10 a share or $2,000.  To us, it's all about the return. 

Many individual investors feel that it's easier for a $0.10 stock to go to $0.20 than for a $10 stock to go to $20.  This is in no way the case.  Over the years, studies have shown that lower priced stocks don't do better than higher priced stocks and generally tend to do worse. The reality is that it's not easier for a $0.10 stock to go to $0.20. However, it is easier for the stock to go to $0.00, just as the SEC warns.  The underlying reason for this is that the companies behind the penny stocks are usually long shots and often don't offer much in the way of tangible sales and earnings.

Other reasons why we're not huge fans of stocks under $1 include the large bid/ask spread on many of these shares, meaning you could be down a significant percentage upon executing your order.  Also, penny stocks are very thinly traded, meaning that in unwinding from a gain, you'll be driving down the price in leaps and bounds.  Further, penny stocks are easy to manipulate.  A common scam in the penny stock universe is the "Pump and Dump", where insiders hype the stock on one hand, wait for investors to buy, then unload their positions for gains, leaving you holding a worthless stock certificate.

At Rising Star Stocks we are happy to bring you stocks trading in the $1 to $5 range, penny stocks by the SEC's definition, but will, as a rule, avoid stocks trading under $1. There a few exceptions, and we do occasionally buy stocks under $1, but not by much.  The exceptions were all ones we felt were deserving of coverage based on fundamental valuation and were liquid enough to avoid price manipulation.  As always, we encourage you to perform all the needed due diligence prior to acquiring a position - whatever the stock price.

Rising Star Stocks is a top performing emerging growth investment newsletter advisory.  Since its inception in 2004, Rising Star Stocks has achieved average annual gains of 33.6% for its subscribers by seeking out rapidly growing micro-cap companies ahead of Wall Street.  To learn more about Rising Star Stocks or to start a complimentary 30-day trial subscription, please visit our website.

Comments on this article

There are no comments for this entry yet.

Add your comments