Description

Exide Technologies (www.exide.com) just emerged from Chapter 11 Bankruptcy reorganization on May 6, 2004 and began trading on the Nasdaq under the symbol XIDE. This one is dirt cheap by any yardstick. The recent market weakness and selloff hasn’t helped the stock either. The $660 Million Market cap (including the future dilution from warrants) represents at least a 50% discount from conservative intrinsic value based on the $100 Million of free cash flow (FCF is after Capex) the company is projected to generated in the next 12 months. The FCF is projected (by the company) to grow to $135 Million in three years – leading to an even wider discount to IV.

History

Exide Technologies, with operations in 89 countries and fiscal 2003 net sales of approximately $2.4 billion, is one of the world's largest producers and recyclers of lead-acid batteries. The company's two global business groups – industrial energy and transportation – provide a comprehensive range of stored electrical energy products and services for industrial and transportation applications.

Industrial uses include network power applications such as telecommunications systems, fuel-cell load leveling, electric utilities, railroads, photovoltaic (solar-power related) and uninterruptible power supply (UPS); and motive-power applications that power a broad range of equipment uses, including lift trucks, mining vehicles and commercial vehicles.

Transportation applications include starting and "deep cycle" batteries for automotive, heavy-duty truck, agricultural and marine uses, as well as new technologies being developed for hybrid vehicles and new 42-volt automotive applications. The company supplies both aftermarket and original-equipment transportation customers.

Founded in 1888, Exide filed under Chapter 11 for bankruptcy reorganization on April 15, 2002. After 2 years of the usually drawn out bankruptcy process, they reemerged on May 6, 2004. Under the plan, Exide reduced its debt by approximately $1.3 billion, or more than 70 percent, to approximately $540 million. The annual interest payments alone were reduced by approximately $70 million. Additionally, the Company implemented a number of cost reduction initiatives including the closure or consolidation of certain manufacturing and distribution facilities, reductions in workforce and corporate overhead, and making quality and productivity improvements.

Pursuant to the Plan:

• Exide's existing stock was cancelled and no distribution given to current shareholders.

• 22.5 million new shares of common stock will be issued to the Company's pre-petition secured lenders, representing 90% of the Company's common stock. Symbol is XIDE.

• Exide's 2.9% convertible notes and 10% senior notes will be cancelled, and the holders of such notes will share in the unsecured creditors' distribution.

• 2.5 million shares of common stock and warrants to purchase 6.25 million shares of common stock at $32.11 per share have been issued to the Company's unsecured creditors. These warrants have the symbol XIDEW and closed on May 7, 2004 at $5.63. The warrants are valid for seven years from the date of issuance.

The link to the Plan of Reorganization is:

http://docs.bmccorp.net/exide/docs/3-17-04_FINAL_V9.pdf

This 350 page document lays out the plan. On Page 183 of the PDF are management projections of the balance sheet, income statement and cash flow statement through 2009. Based on the history of the business, the projections look very reasonable. Some might argue that, like typical post-bankruptcy companies, the numbers are conservative.

For the year ended March 31, 2005 here are the company’s projections:

Sales: $2.6 Billion
FCF: $98.6 Million (net of Capex and onetime restructuring charges)

For the year ended March 31, 2008 here are the company’s projections:

Sales: $2.9 Billion
FCF: $134.8 Million (net of Capex)

(Note: Company is assuming $1= 1 Euro). If we buy into Mr. Buffett’s thesis on the weakening dollar, this provides additional upside. For 2009, with a weaker dollar than 1:1, cash flow will be even higher.
For detailed projections, look at the filing mentioned above.

The Business – Good though not Great

Exide might appear, on the surface, to be a commodity business - i.e car batteries. One should keep in mind that this business represents about 60% of the pie. Gross margins in the car battery segment are stable at about 20-22%. They have strong brands (Champion, Exide etc.), strong distribution channels and major long-term relationships with all the major car manufacturers. The other businesses have higher margins. Motive power (submarines, airplanes, trains etc.) are about a 25% gross margin business. In some segments like submarine batteries, Exide has a monopoly and hence pricing power. In the network power business historical margins are in the 27% range but got squeezed with the slump in telecom equipment demand in recent years.

The explosion in demand for hybrid cars and the ongoing increase in the use of various types of batteries and fuel cells plays directly to Exide’s strengths and aren’t represented in the aforementioned numbers. I do believe we are likely to see a dramatic increase in Hybrid cars (as an aside Lexus has planned the 2005 RX330 to be a hybrid car). This upside represents additional gravy and margin of safety.

The Valuation

As late as the April – June, 2001 period, Exide stock traded at $12.30/share. With 27.4 Million shares out this represented a market cap of $337 Million plus $1.4 Million of debt or an economic value of $1.75 Billion. Today the EV is $1.16 Billion ($500 Million Debt). If it gets back to its old EV, in 2 years, it’ll mean a price of $42 for the stock or an annualized return of 41%.

If you do a 12x multiple on the FCF for next 12 months, it suggests a market cap of $1.2 Billion or a stock price of $38.50. An d if this convergence takes place in one year annualized return is 82.5%. If it takes 2 years, annualized return is 35%.

Another (better) way to value it is to suggest a 12x multiple on FCF 2 years from now or a market cap of $1.6 Billion or a stock price of $52 – leading to an annualized return of 57%. Anyway you look at it, Exide common is very very cheap with a solid margin of safety with a solid upside. If hybrids takeoff in a big way, that business might be valued much more highly by the market – leading to higher gains.

The warrants (XIDEW) are also interesting. With a price under $6/warrant, if the stock goes to $42 in two years, the warrant will be $11 in the money with 5 more years left – leading to plausibly being traded north of $16 – giving a 63% annualized return. If the stock goes to $52 in 2 years, the warrants would be $21 in the money and might trade north of $25 – giving an annualized return of 104%. So warrants offer higher returns – but come with higher risk – they’ll be worth zero if the stock is below $31 seven years from now.

You can do the math on future valuation yourself using whatever multiple and discount rate you find reasonable. With pretty much any set of rational assumptions, you’ll arrive at an intrinsic value much higher than today.

Catalyst

Company will eventually get analyst coverage, get discovered etc., but value is its own catalyst.