Carbon Fiber = Cash
A recent future value calculation of Zoltek (ZOLT) has re-sparked much interest in the carbon-fiber industry. How did carbon-fiber catch my attention in the first place? Once again, simple supply-and-demand rules. Follow the path I took, and you’ll find some interesting stuff about this niche industry:
- About a month ago I had a talk with Melody, asking how Jason was doing up in Washington. She said he was working at a small carbon-fiber company that produces airplane parts (airplane industry = hot hot hot). She said the company was very busy. They had more work than they could handle! Please note, this is a small private company- when the smaller companies have too much work, than you know the entire industry is in bull mode. Ah! That got me thinking: “If the carbon fiber industry is en fuego, then shouldn’t the carbon fiber related stocks be hot too?”
- The demand is there, what about supply? Currently there is a worldwide shortage of carbon fiber! If you tried ordering carbon-fiber materials from this store you can’t! Click here, scroll through and read all the red print. They even go on to explain why there is a shortage of carbon-fiber, basically blaming the boom in the aerospace industry (remember, all these new airplanes are made of carbonfiber components). Pretty interesting isn’t it? Their regular customers have priority to carbon fiber when shipments come in. This type of backlog reminds me a lot of Titanium Metals pretty problem of having more orders than inventory.
- Carbon Fiber applications– Carbon fiber is not just found on your golf club or your road bike. Currently, the huge demand for carbon fiber is attributed to the aerospace cycle: this year the new Airbus A380, Boeing 787 in 2007, and the Airbus A350 in 2010 require a lot of carbon fiber. Other carbon fiber applications include automobile components, and windmills. Yes, I said windmills- so you get a bonus here, since carbon fiber in a way is a play on alternative energy, another hot sector.
- Carbon Fiber Stocks Bullish– There aren’t too many plays on CF. These include Hexcel (HXL), Zolt (ZOLT), SGL Carbn (SGG), and Graftech International (GTI). Zoltek seems to be the purest carbon fiber play, while Hexcel is the “blue-chip” of the bunch. The biggest carbon fiber company I believe is Torray, which is in Japan which trades on Nikkei. These stocks have performed exceptionally well despite little coverage on the industry. For example, HXL is up 33% in 4 months, and ZOLT is up 300% since the beginning of the year! GTI took a hit, but looks like to be trending up by “filling the gap.”
- Zolt’s run, deserved?– About a month ago I convinced myself that ZOLT looked overbought. But it went on another 70%. I have no idea why this company is acting this way. The income statements shows declining income on rising costs. I’m sure those rising costs is due to increased prices in carbon fiber, but the rise in stock price has to have some catalyst… I have to dig deeper on that one.
- Zolt worth $300 in 5-years?- Ron and I came up with some interesting numbers. Go to this website (Diamond Hill Investments) and use their calculator to find the stock’s value based on their earnings model. Try different scenarios, like plug in Google, Apple, Timet. Now plug in ZOLT. The financial calculator spits out a 5-year stock target at over $300! What?!! That’s incredible, but just remember, this calculator is “earnings biased” since the variables uses earnings and P/E ratio in the calculations. Nevertheless, being conservative on that estimate presents a big return. Definitely something to think about.
- Learn more about Carbon Fiber– check out this .pdf document from the leader of CF, Torray. You’ll learn a lot about CF, and you can see a nice chart showing the demand for CF.
Well, the Carbon Fiber industry is something to keep close watch on. It will be interesting to see in the next few weeks if Zolt will consolidate or crash. Hopefully something better than the latter.
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