Battery bet: Turnaround at Exide?

by George Putnam, editor The Turnaround Letter

Exide (XIDE) traces its roots back to the Electric Storage Battery Company founded in 1888. Today it is a leading global producer of lead-acid storage batteries for a variety of automotive and industrial uses.

The small cap company -- with annual revenues of $264 million -- went on a debt-financed acquisition program in the 1990’s, but when the global economy turned down, the debt burden forced Exide into Chapter 11 in 2002.

It emerged in 2004, just in time to be battered by a substantial increase in the price of lead, its principal raw material. This led to another restructuring in 2006 which put the company on an upswing until the global recession hit in 2008.

Then, as the company was once again rebounding in 2010, it lost the contract to supply Wal-Mart with auto batteries. Exide has struggled for much of the past two years with over-capacity as it tried to replace the Wal- Mart business.

Exide’s recent history seems to read like the children’s books “A Series of Unfortunate Events”.  However, management appears to be taking the right steps to create a more positive future.

Most importantly, Exide has finally realized that it needs to reduce manufacturing capacity, and it has begun to close its Bristol, TN facility. That should produce $20-25 million in annual cost savings.

The company has also brought in new management at the divisional level which is taking additional steps to reduce costs in both its U.S. and European operations.

In addition, to cutting costs, Exide has had recent pricing success allowing it to pass on more of its costs to customers.

The company is also improving its techniques for collecting and recycling spent batteries. This will not only reduce Exide’s raw material costs, but will also raise revenues because the company sells excess recycled lead to third parties.

The balance sheet remains leveraged, but the company has refinanced its debt so that it has no significant maturities until 2016. Moreover, the company is once again generating free cash flow.

Despite these improvements, Exide’s valuation remains cheap compared to its competitors. If management can’t get the stock price up, we expect it to face substantial pressure to sell the company.

This is not a glamorous business, and it will never be transformed into one. But the company is taking a series of basic, gritty steps to create shareholder value. We recommend buying Exide stock up to 5.

Learn more about this financial newsletter at George Putnam's The Turnaround Letter.

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