Zoltek Avoids The Fiscal Cliff
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The fiscal cliff deal could have ended the wind energy production tax credit, so the deal had major implications for carbon fiber maker Zoltek, (NASDAQ: ZOLT) which makes fiber for large wind turbines. Bears argued that Congress would cut the credit, which would make large wind turbines more expensive. Michael Bastach, at the Daily Caller, reported that the Senate fiscal cliff bill kept the production tax credit in place for 2013. Janet Hook, Corey Boles, and Siobhan Hughes at the Wall Street Journal reported that the House passed the Senate fiscal cliff bill without changes. Although the fiscal cliff negotiations scared off some Zoltek investors and produced significant short interest, with a deal in place, Zoltek may have the potential for a better 2013 now.
Rush Buys
Prospective windmill buyers changed their plans in anticipation of the fiscal cliff. Matt McGrath, at BBC News, reported that wind power firms accelerated their large turbine building projects in late 2012 to avoid missing out on the production tax credit, which can be worth $1 million per turbine over a ten year period. Although these rush projects could produce a short term revenue boost for Zoltek, and may have already given the carbon fiber maker a boost this year, a few projects completed early would not make up for weaker long term growth prospects.
Bear Case
Other wind power companies changed their plans in preparation for the end of the wind energy production tax credit. The Fool's Rich Duprey explained that Vestas Wind Systems provides half of Zoltek's revenue and laid off almost a fifth of its work force as a precaution before the cliff. Vestas is based in Denmark, but it also owns factories in the United States that produce wind turbine parts. The Vestas layoffs gave short sellers an additional reason to target Zoltek. According to Yahoo! Finance, on December 14, 2012, 22.4% of Zoltek's float was held short. With the deal passed, it looks like Vestas underestimated Congress' support for the wind industry, and both Vestas and Zoltek may have better prospects now.
Bull Case
The renewal of the production tax credit supports the bull case for Zoltek. Even without a renewal, Zoltek investors would still have valid reasons to hang on to their shares. An Energy Information Administration article explained that the credit expired on three prior occasions, but Congress renewed the credit retroactively each time, so the wind turbine installations still received all of the scheduled subsidies. The production tax credit even remained in place during the depths of the global economic crisis in 2008 and 2009. Zoltek bulls could have argued that a production tax credit cut because of the fiscal cliff might be temporary, as well. With the credit in place, the revenue and income estimates for Zoltek look more solid.
Valuation
Zoltek looks fairly priced with a PEG ratio of 1.02. The carbon fiber maker did report 6.8% weaker earnings last quarter, but overall it's had a good year. Diana Barr, at the St. Louis Business Journal, reported that Zoltek achieved 23% sales growth over the full year, and CEO Zoltek Rumy stated that 2012 was Zoltek's best year so far. Zoltek isn't the only option in the wind power industry, though.
The production tax credit renewal could also be good news for Hexcel. (NYSE: HXL) With a $2.7 billion market cap, Hexcel is a bigger company than Zoltek, which has a $266 million market cap. Hexcel sells a variety of aerospace products, including carbon fiber, and it can also benefit from a stronger wind turbine market. Zoltek comes out ahead on the PEG ratio comparison here, since Hexcel has a 1.17 PEG, although both companies show promise right now.
Woodward,(NASDAQ: WWD) an aerospace business with a $2.6 billion market cap, could also come out ahead with this deal. Woodward makes wind converters for large turbines, and turbine tax credits could mean more wind converter sales. Zoltek, Hexcel, and Woodward all have five star CAPS ratings right now, so investors currently have several strong choices in the wind turbine business. Zoltek also boasts a better PEG ratio than Woodward right now, since Woodward has a 1.66 PEG.
IXYS, (NASDAQ: IXYS) also receives a vote of approval from Fools with its own five star CAPS rating. Like Zoltek, IXYS is a small cap, with a current market cap of $285 million. This semiconductor company offers exposure to the wind power industry, as well as other renewable power businesses such as solar power. With an 0.35 PEG, IXYS looks very cheap right now as well. The production tax credit could help sustain demand for IXYS' power management equipment.
Takeaway
Zoltek just avoided a major threat with this deal. Although the production tax credit will still come up for renewal next year, at least for now, Zoltek's revenue looks safer. Zoltek's latest quarterly results weren't that appealing, but its full year performance looks a lot better. Zoltek may have gained some extra sales from the rushed turbine installations, and a short squeeze could also happen, so this could be a decent entry point as well.
enovinson has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
