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Overview

Polypore (NYSE:PPO) specializes in filtration. They make microporous membranes used in separation and filtration processes.

The business divides its products into two business segments:

• Energy storage (ES)
• Separations media


Energy storage includes applications for both lead and lithium ion batteries. In batteries, ions flow to create the charge and the membranes regulate that ion exchange.

Health care membranes also filter molecules and ions and are used in hemodialysis, heart/lung machines and plasmapharesis.

In addition to healthcare, separation media has an industrial segment serving wastewater treatment needs, water purification, flat screen and other electronics, and ink jet printing.

One of the fastest growing parts of Polypore business is lithium ion battery membranes —- both personal electronic device batteries and electric car batteries are driving growth.

Polypore has not been a publicly traded company for long. It was bought by Warburg Pincus in May 2004 for $1.15 billion. The IPO was in June 2007 was 15 million shares and priced at $19 per share below the $22 per share expected. A secondary offering in 2011 by mostly Warburg was 4.2 million shares at $39. That left Warburg with 6 million shares and they are a greater than 10% owner.

As with many moves from private equity to public company, Polypore was highly leveraged and remains so.

Debt in millions

2010 2009 2008 2007 2006
=======================================================
total debt 715.33 803.43 801.49 819.52 1,044.15
debt/capital 65.5% 73.9% 67.1% 71.0% 93.7%



High levels of debt in fast-growing momentum stock are sometimes a wart that can be tolerated.

Growth

Growth operating segments & revenue
           
2010 2009 2008 2007 2006
====================================================
lead battery 11.8% -19.2% 18.5% 11.6% 7.7%
lithium battery 52.1% -15.5% 16.0% 10.3% 22.8%
----------------------------------------------------
total
energy storage 21.3% -18.3% 17.9% 11.3% 10.9%
====================================================
health care 5.1% -0.9% -0.1% 9.7% 2.8%
filtration 34.6% -17.7% 9.9% 22.3% 34.8%
====================================================
total
revenue 19.3% -15.3% 14.2% 11.8% 10.6%

While Polypore trades like a high growth momentum stock, the biggest part of the business is lead batteries and likely a mature market. Energy storage total (batteries) was 72% of revenue in 2010 and lead battery segment 71% of that. Lithium ion is beginning to move to a bigger percentage -— now 29% of ES revenue compared to 21% in 2005. Li+ was $131 million out of a total of $617 million in total revenue for 2010—only 20%. Lead battery business is 51% of total revenue and still the core of the business.

In 2009, PPO lost a big account in lead batteries— Johnson Controls. The company has not yet regained all of the lost revenue pre-2009. It is coming back slowly. Lead battery membrane sales in 2008 were $348.2 million. In 2009 it dropped to $281.5 million –- Johnson was a $52 million loss. It recovered to $314.7 million in 2010 and is at $281.3 million through nine months 2011. It appears PPO is well positioned to grow the lead battery separator business for 2011 by possibly as much as 20% replacing and exceeding the 2008 revenue. This is a resounding come back and shows the core business is intact.

For the first 9 months of 2011, lead battery separator growth was 25% and Lithium ion was 54%.

With the steady growth of the lead battery segment and the high growth lithium ion business, PPO trades like a high growth stock—which may be the case in the near term. Personal devices and electric cars are likely to sustain high growth and lead battery membranes, while a mature business, is a steady consumable.

Combined growth quarterly normalized for goodwill impairment
         
9/2011 6/2011 3/2011 12/201
=============================================
revenue 25.3% 30.8% 27.8% 11.5%
gross 34.2% 43.1% 36.2% 21.1%
operating 51.5% 57.1% 59.8% 24.2%
EBT 113.0% 96.9% 73.7% 49.6%
net 90.8% 85.1% 46.3% 31.9%
eps 85.2% 103.2% 41.0% -14.9%

Annual growth is made more difficult to calculate than TTM due to an endless stream of restructuring costs and impairments. Restructuring is a combination of reserves and impairments and is largely non-cash in nature. It’s fairly easy to reverse the non-cash charges and arrive at an approximate normalized operating income

normalized growth annual

2010 2009 2008 2007 2006
=================================================
revenue 19.3% -15.3% 14.2% 11.8% 10.6%
gross 26.1% -9.2% 9.5% 19.5% -28.0%
operating 78.3% -31.0% 3.0% 30.3% 7.1%
normalized EPS 1.41 0.80 0.99 1.35

Over 5 years, revenue has increased 30%--2009 was a severe setback. At $54 per share, the market is pricing Polypore at a CAGR of 13% for 10 years. That requires revenue to increase 3-fold to $2.4 billion by year 10 in the DCF model, far in excess of historical annual growth. It is in line with the past few quarters.

Restructuring

Frequent and continuous restructuring is often a red flag. For Polypore, it looks like a rational and necessary response to shifting business demands.

Growth has been difficult to track as the company has been in a constant state of restructuring since 2005.

In 2006, PPO exited cellulosic membranes and took charges for the shut in of part of a German facility and employee lay offs—- $32.4 million total

2008 saw the loss of Johnson Controls and shut down of an Italian plant for $61 million.

In 2009, PPO saw excess capacity in lead acid battery separators and idled part of their American operations--$20.4 million.

In 2010 there were no new initiatives in restructuring but reserves were drawn down.

The total charges were part non-cash impairments against PP&E and cash charges that came out of cash flows from operations. Expenses from restructuring continue to wind down. There will be several million more taken out of cash flow over the next few years. The amounts are under accrued liabilities both on the balance sheet and cash flow statement.

One final note concerning restructuring and impairments concerns $132 million in goodwill written off in 2009 against the lead battery segment.

Overall, between the goodwill and the charges against PP&E, I calculate PPO is nearly $200 million in assets lighter.

Should do wonders for ROIC


2010 2009 2008 2007 2006
=================================
ROIC 15.3% 12.7% 14.2% 11.2% 10.1%

WACC is 10%

The positive spread indicates Polypore is returning value on its investments. If we add back the $200 million in assets written down, the ROIC is 13%.

Discounted cash flow

The market is expecting big things from Polypore even at the current price that is 21% off 52-week highs. PPO currently sells for around $54. A couple of weeks ago it was $42—possibly a more realistic price. It all depends on what type of growth you believe PPO can do.

At $54, PPO needs a 13% CAGR for 10 years. If the last 4 quarters are a guide, then that looks possible. If we look at the last 5 years, it looks improbable.

Revenue has to go from $741.63 million TTM to $2.4 billion in 10 years—nearly a 3-fold increase. In the years from 2006-2010 PPO revenue went from $478.20 million to $616.63 million. That’s well short of future growth expectations priced in to the company now.

Terminal growth would be 1% in perpetuity—fairly conservative

Margins would stay the same. There is some potential for improved margins as Li+ ascends.

The discount rate is 11%

Polypore is a fair value if we believe in 13% growth for 10 years
It’s a great value if they come in at double that –about what the last few quarters grew. As always, cheaper is better and offers some safety if we guess wrong about growth. What a difference a couple of weeks makes.
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No. of Recommendations: 3
Personal devices and electric cars are likely to sustain high growth


Electric cars are selling at a disappointing rate and are likely to continue to do so unless the price of oil rises mightily. The "Volt" catching fire isn't helping. Car companies are innovating and have already introduced gasoline engines, not hybrids, that are getting 40 miles per gallon plus on the highway, without the higher costs and drawbacks of hybrid and electric cars. There's little incentive for most people to buy electric cars, something would have to fundamentally shift for there to be so.

kelbon
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Kitkat, Excellent post. Thanks Tom
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PPO Snowball.

Now trading as a value stock.

Looks like customer LG Chem is trying to get into the membrane seperator business.

Bad for short horizons.

Good for long horizons.

Competitors means there is a market.
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See indiscr33t's more comprehensive (and good) response here re Polypore:

http://boards.fool.com/long-story-short-lg-chem-joining-the-...

Hockeypop
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Xposted from Metar


Please expand on the PPO comments you posted at Metar
Specifically-do you have numbers on the LG Chem loss? How much business does this represent? Li+ ion is 30% of PPO business so any feel of what LG contributes?

Also what do you think bodes well for long-term? Is there enough Li+ business to sustain everyone that gets into membranes. Lead batteries are the core but I think it is mature and there is not much growth

Last, I would love to hear the backroom talk about Johnson Controls defection. PPO has made an impressive recovery from that
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BLUF: I own too much PPO right now. It is fairly priced as a growth stock, but overpriced as a value stock. I have been holding for a few months without adding shares, at an average PPS of $44. It'll take a lot of chart healing and European healing to fix this stock short term. Long term looks bright.

<Do you have numbers on the LG Chem loss? How much business does this represent? Li+ ion is 30% of PPO business so any feel of what LG contributes?>

LG Chem + 4 others make about 25% of PPO sales. LG Chem and PPO made it clear that the LG Chem development is 'wet' produced lead-acid separators, not 'dry' produced Li+ seperators. 'Wet' produced seperators equate to about $371M sales, or 50% of total sales, but have much lower growth prospects (low teens to eventual single digits over 5-10 years). I'll assume worst case LG Chem was 15% of PPO total sales, so $111M in total sales might be gone through 'wet' produced seperators. This means that worst case, you're looking at 30% reduction in 'wet' produced sales.

Bottom line PPO keeps client info very secretive and the best swing they took at the question directly was LG Chem will be supplying in house half of their 'wet' produced separator internal consumer electronics needs by 2015.

<Also what do you think bodes well for long-term? Is there enough Li+ business to sustain everyone that gets into membranes.>

Yes. Long term Li+ bodes well for PPO, as a 5% increase in worldwide EDV utilization would double the need for separators, as EDV require multiple separators. The advantages of this ‘dry’ produced technology owned by PPO primarily are patents. Remember the Koreans and Chinese do not necessarily care about honoring patents, and that for me personally was the biggest scare. To hear LG is only executing 'wet' produced (lead-acid) seperator development in house, is quite a relief. I'm sure PPO has the patents under lock and key, but IMO that was the biggest fear.

Without EDVs, Li+ core electronics and Li+ large-format cells are expected to grow 8-20% YoY. Add EDVs and you have a higher growth rate.

Advantages of Li+ seperators by PPO and why it has growth prospects are outlined as per one of their recent presentations to protect shareprice last week:

Monolayer technology & patented trilayer technology
Lower capital cost, lower cost process, advantaged time from decision to capacity
Performance advantages in large format cells
Broad polymer selection contributes to unique performance attributes
Industry has been capacity constrained
Major industry participants have sought licensing rights

Finally, Celgard is the 'dry' produced line owned by PPO for Li+ seperators. If a 'wet' produced seperator were to be applied by say, an LG Chem, for use in Li+, then the seperator would experience tranverse direction shrinking, wherein the membrane would shrink and short the cathode and anode. Celgard's line, because it is created using a patented superior 'dry' production process, does not experience this shrinkage. 'Dry' produced seperators also do not experience oxidation in the way that 'wet' produced seperators do.


<Lead batteries are the core but I think it is mature and there is not much growth.>

80% of PPO’s lead-acid sales are for replacement batteries. Remember, lead-acid batteries are old tech for us, but there are many markets where personal energy storage is unheard of. 'Wet' seperators equate to about $371M sales, or 50% of total sales, but have much lower growth prospects (low teens to eventual single digits over 5-10 years).

<Last, I would love to hear the backroom talk about Johnson Controls defection. PPO has made an impressive recovery from that>

http://www.daramic.com/

On Aug 2008, the Daramic Polypore plant in Owensboro, Kentucky went on strike. At 9 pm on a Wednesday night, the union employees walked out on strike. The Owensboro plant produced more battery seperators than any plant in the world and also supplied major companies with HUGE orders, including Exide. Exide told the company that if the union went on strike and no contract was reached, they would negotiate a contract with another supplier. Exide and Daramic had been on rough terms for awhile over shipments, product, etc. so surely with the employees out on strike, their orders would not be left unfulfilled for long. It wasn't just Exide, Johnson Controls also became dissatisfied with the Daramic slowdown. Turns out Johnson Controls decided to leave, since Polypore was only a secondary supplier (JCI was 10% of sales). JCI was a nightmare come true because they vertically integrated their 'wet' lead-acid seperators, and the fear was a vertical integration into 'dry' lithium, for which Polypore had just intiated an R&D relationship with them. Another fear was that Italy plants had to be closed due to now overcapacity, and how much overcapacity was there exactly in this market? In a field where the difference between 'wet' and 'dry' production processes is met with ignorance TODAY, imagine attempting to estimate membrane seperator overhang back then, and how exactly does one attain that type of information? :) Combine that with the destruction of wealth heading into 2009 worldwide (and the implications that has for 'green tech') and the FTC's intervention in the Microporous merger in Mar 2008, and you have an investor's worst nightmare on your hands.

Short term, if Europe goes down the crapper, here we go again. Any signs of a backstop, however, and this stock will achieve lift-off.

Happy Trading!
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thanks a bunch--your knowledge of PPO is really impressive

I am hearing you correctly --LG Chem is not going into the Li+ business? Or are they planning to use the wet tech for their Li+ batteries? Or are they removing all of the lead business?

The loss of $111 million from the lead battery business is big. Total lead was $445.8 million in 2010 and 71% was lead or $315.95. That does take out more than 30% of business which is a huge blow --much worse than JCI. JCI removed $52 million from $349 million or 15%. If you are right about the amount then this is devastating. I was under the impression they were competing in Li+. This strike against the core will be heavy
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