Thursday, March 29, 2007

Calls of Note Part 2

- RBC Capital is out with a wonderful call on Zoltek (NASDAQ:ZOLT) saying they elieve carbon fiber (CF) as a raw material to the wind industry is tracking similar to silicon and the solar industry two years ago. Firm believes Zoltek is in a parallel commodity cycle position as the incumbent silicon producers (ie MEMC Electronic Materials) were in early 2005 as the solar industry started to develop. Today, with the wind industry, the rapid replacement of fiberglass with CF in the production of longer turbine blades (which generate more power per $ invested), is driving RBC's estimate of 45% CAGR of CF.

The dynamics in silicon in 2005 and CF today are the same: both industries produce a commodity product required for an explosive growth end market, both of which happen to involve alternative energy. The barriers to entry are not huge: making silicon or CF is not limited by some resource in the ground - new entrants, which the firm fully expects in both industries, is only a matter of capital, time to construct capacity, and the conviction that demand for higher volumes is sustainable.

Before the cycle expands with more players, the incumbents have the ability to lock in long-term contracts, and leverage pricing power that can generate significant margin upside. Zoltek is one of very few wind-derivative plays in the U.S. equity market, has cost and capacity ramp advantages vs. new entrants, and is best positioned to capitalize.

RBC's new $45 target (up from $32) represents a 27x P/E multiple on their calendar 2008 EPS
estimate of $1.67. Maintains Outperform.

Notablecalls: The call makes perfect sense but on the other hand one has to respect the trading dynamics. I expect to see some buy interest in ZOLT today possibly followed by a pull back in price over the next week or so. The stock has gone too high, too fast. At least for my taste.

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