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4 Small Cap Turnarounds: IN, CBK, XIDE, ZILT

October 18, 2010 | About:

The economic slowdown of 2008 and 2009 was especially unkind to stocks of smaller companies. Their shares were the first to be sold off when investors panicked, and many of them remain out of favor while economic concerns persist. Indeed many small caps may be well off of their 52-week lows, but remain far from highs seen just a few years ago.

Here's a look at four companies that are moving in the right direction. If the economy can start to improve in 2011, these stocks may see their shares move back to the peaks of a few years ago.

1. Intermec (IN) ($756 million market cap.) -- This maker of barcode systems had a steady-as-she-goes business until the economic storm hit. Annual sales routinely came in around $800 to $900 million, and from 2005 to 2008, its shares traded in the $20 to $30 range. The economic slowdown led to a -26% plunge in sales in 2009, and shares now trade for around $12.

But signs are emerging that sales may finally start to rebound in coming quarters. We got the first sign last week, when barcode distributor ScanSource (NASDAQ:SCSC) noted that September quarter sales had surged. That was a sure sign that small and medium-sized businesses were finally starting to invest in new equipment. Equally important, Intermec is set to embark on a new product cycle, with plans to release a raft of new profits in the fourth quarter of 2010 and the first quarter of 2011.

You'll know that Intermec's sales are on the mend when retailers start to step up spending again on warehouse automation. Many retailers have been conserving cash in the face of anemic sales. Yet lower expenses are once again leading to rising retail profits, and many of them are long past due in terms of investments in the warehouse inventory monitoring tools that are Intermec's specialty. If you exclude the company's $3.60 a share in net cash, shares of Intermec trade for just 0.75 times projected 2010 sales, well less than the multiple of two that shares used to garner.

As a final kicker, Intermec holds dozens of patents in the area of radio frequency ID (RFID), which some believe may eventually supplant bar code readers. That hasn't happened yet, but if it does, Intermec would reap ample royalties.

2. Christopher & Banks (NYSE:CBK) ($242 million market cap.) -- Sticking with the retail theme, this purveyor of women's business casual clothing developed a strong customer base when the economy was strong. Sales rose at a steady +10% to +15% annual clip from 2003 through 2007, pushing total revenue past the $500 million mark and per share profits close to $1. That helped to push shares to almost $30 by 2006 as investors saw the company as a steady growth vehicle with ample room for expansion.

Since then, the tight economy has led many women to make-do to with their existing wardrobes, yet as we all know, clothes eventually wear out from usage. So at some point, same-store sales should rebound for Christopher & Banks, which still has a strong reputation in its niche. Right now, though, the retailer is going through a tough stretch, as its summer assortment of new clothes apparently missed the mark with consumers. Shares have fallen from $11 in late April to a recent $7, a far cry from that $30 peak in 2006.

Could a turn be at hand? Sterne Agee's Margaret Whitfield notes that a "positive response was noted to new September merchandise with fall colors and versatile items resonating with consumers." She notes that shares are too cheap, with $3 in net cash and price-to-sales ratio below 0.5. She predicts shares will move back up $11 once Christopher & Banks is able to show a better merchandising touch. That could happen soon, if those September impressions are any guide.

Longer-term, shares have the potential to move well above that $11 target price. That's because CEO Lorna Nagler, who took the reins in 2007, has worked to streamline many aspects of the retailer's operations. Highlights include a $15 million investment in new technology, $20 million in cost reductions and more targeted promotions. Those improvements are being masked by still-weak sales but should be in evidence once employment picks up and shoppers file back into stores.

3. Exide Technologies (XIDE) ($417 million market cap.) -- This battery-maker was dealt a severe blow when Walmart (NYSE:WMT) opted to stop using its batteries in the auto department. Sales, which would have grown nicely in fiscal (March) 2011, instead will likely be just flat.

Yet a new technology should give a boost to sales in coming years. An increasing number of new cars are expected to be sold with stop-start technology which saves fuel when a car is temporarily stopped. To cycle an engine on and off many times over the course of a day, and to keep the air-conditioning and other items running when the engine is off, means that more robust batteries will be needed. As an added kicker to growth, the company has entered the South American market with a recent office being opened in Brazil. That's the fastest-growing car market in the world, outside of China.

And don't worry about the lost Walmart business. Exide concluded that profit margins were too low on that contract and were dragging down the company's pricing power with other customers that demanded similar pricing. Management is now focused on generating the most robust gross margins possible. Gross margins have risen from 16% in 2008 to 20% in 2010, and should exceed 21% by next year. That's why a +7% jump in sales next year is expected to lead to a +150% jump in profits. Further sales gains in subsequent years, should propel earnings per share (EPS) growth at an even higher clip.

4. Zoltek (ZOLT) ($343 million market cap.) -- Thanks to its light weight and high strength, carbon fiber has long been eyed as a great replacement material for heavier steel and less-strong aluminum. But its high price meant that it was only suitable for advanced applications. And many of those advanced applications made less sense in tough economic times. That was bad news for this company, which had embarked on a major capacity expansion just as the economic crisis hit. The new higher level of overhead turned a $0.22 per share profit in fiscal (September) 2008 to a $0.12 per share loss in 2009, as sales fell -25%. What was once a $45 stock back in 2007 -- is now a $10 stock.

The good news: signs are emerging that demand may finally start to rebound in coming quarters, leading analysts to predict that sales will rise +26% in the fiscal year that just began, to $178 million. Even better news: the 2008 capacity expansion means Zoltek can produce $300 million worth of carbon fiber with minimal further investment. That should eventually lead to 30% gross margins and 20% EBITDA margins. Zoltek's near-term results are likely to be lackluster, so these shares may not start rebounding until we move into 2011.

Action to Take --> Even as the market has rebounded sharply after the 2008 economic crisis, many individual stocks remain well below pre-recession levels. These companies did just fine when the economy was more robust. As the economy rebounds, these shares should post outsized gains.


-- [url=http://streetauthority.com/users/david-sterman]David Sterman

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David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More...

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

About the author:

Street Authority
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