In May, I offered a few words of praise for Aspen Aerogels, Inc. (NYSE:ASPN) after a(nother) blowout quarter. Following an impressive transformation in the business, the company has become a key and successful supplier to the electric vehicle sector.
With sales up triple digits, and the guidance hiked considerably, I saw a bright future for the company and shares, although that quite some was priced in already. Currently, momentum remains strong, but this raises some capital spending questions as well.
Aspen Aerogels — A Successful Transformation
The company originally focused on high-performance aerogel insulation blankets and related products, used in energy infrastructure facility applications. With products like Pyrogel and Cryogel the company offered these solutions to oil producers, refiners and petrochemical companies.
The benefit of these products was to save on energy consumption, avoid energy loss, while protecting assets and workers.
The company went public a decade ago, back in 2014 at just $11 per share. Aspen generated just $100 million in sales at the time, while posting substantial losses at the time. These losses made that shares fell to just a dollar in 2019, as the outlook was dismal.
The company was thrown a lifeline because of the energy crisis in 2021 as a result of the war between Russia and Ukraine, as well as the transition of the firm. It started to develop these products for EV applications in which batteries need (thermal) protection. Shares rose to the $60 mark in late 2021, but were down to mid-single digits in the summer last year, as these hopes did not materialize into the tangible results (yet).
Momentum Unleashed
Following the more favorable market conditions post-pandemic, sales rose by 48% to $180 million in 2022, although that gross profits only amounted to $5 million, resulting in a huge $79 million operating loss. The company originally guided for 2023 sales to advance to $200-$250 million, still seeing an EBITDA loss of $50-$60 million.
Momentum started to reveal itself during the year. While second quarter sales were up 5% to $48 million, third quarter sales rose as much as 66% to $61 million, after which fourth quarter sales rose by 38% to $84 million, with break-even achieved in the final quarter.
With the company guiding for $350 million in revenues in 2024. Upside had been seen from the EV business (being backed conservatively in the guidance), EBITDA was seen at $30 million for the year. Based on the cost structure, this would imply largely break-even results to be expected.
The real momentum was seen in the first quarter sales, with revenues up 107% to $94.5 million, and thermal barrier (EV) sales up 400% to $65 million, as energy industrial sales were down 14% to $29 million. Moreover, operating profits were reported at $2.4 million. The company subsequently hiked the full year sales guidance to $380 million, upping the EBITDA guidance by $25 million to $55 million.
These earnings are welcomed, as capital spending is set to become elevated, with the company needing to make plans to fulfil this demand. This comes as the current revenue potential of existing facilities is seen at $650 million per annum.
Trading at $24, the 75 million shares of Aspen Aerogels command a $1.8 billion valuation in May. Following a big momentum run, expectations had risen substantially. While I greatly like the business, I was aware of the momentum, making me take a cautious stance and willingness to buy a dip.
Eventful Times
Since the spike in May, shares have risen to the lower $30s in June, with the earnings report triggering continued momentum. What followed was quite a pullback over the summer, with shares down to $18 per share in recent trading action, now trading at $22 following the release of the second quarter results.
Second quarter sales rose another 25% on a sequential basis to nearly $118 million, with revenues up 145% year-over-year, with momentum still driven by the thermal barrier business whose sales more than five-folded to $80 million. The energy business was doing fine as well, with the company even resorting to external manufacturing capacity while being awarded orders in the carbon capture space.
This translated into massive earnings on the bottom line, with operating profits advancing to nearly $20 million, resulting in GAAP earnings of twenty cents per share based on a share tally of 79 million shares (as the higher share price meant that conversion of this debt was in play). Absent of this debt, the company was holding some $91 million, as the cash flow need is substantial.
After this strong quarter, the company hiked the sales and EBITDA guidance to $390 million and $60 million, respectively. This modest hike in the guidance raises some questions, as year to date revenues came in at $212 million, with EBITDA reported at $42 million. This suggests real sequential declines from here, or a very conservative guidance for the remainder of the year.
Part of the cautious guidance comes as the company focuses on baseline numbers, with the company sounding upbeat that it will beat this guidance, although the modest hike in the guidance feels a bit soft. This raises some questions on the pace of the EV transition here as well into the second half.
What Now?
The truth is that based on the current quarterly profitability number, shares look quite cheap. With earnings power seen around $0.80 per share on an annualized basis here, a mid-twenties multiple looks very justifiable given the growth, as a current just over $2 billion enterprise valuation looks reasonable given the underlying growth.
That is a bit too simplistic, however, as capital spending in the near term is pressured, with the company working with the Department of Energy (and its Energy Loan Programs Office) to obtain funding for its Georgia plan. This plant is set to open in 2027 and is designed to grow capacity from $650 million to over $1.8 billion in sales, although the plans appear delayed even after a cumulative $300 million in capital spent already. This, in my eyes, is causing an overhang for the business and shareholders, as the company clearly will run out of capacity soon, while required capital spending is huge.
All this creates a balancing act between very impressive near term operating performance, and the long-term ambitions of the business, set to multiply sales. For that, the EV transition has to remain on track, as there are real concerns on that front, while the company still needs to incur significant capital spending for its Plant II.
Amidst all this, I am performing a balancing act, with Aspen Aerogels, Inc. shares down since May while the operating performance of the business (certainly margins) remain very impressive. On the flip side are concerns about the EV transition at large and delays of the Georgia plant. Overall, I am reiterating my upbeat tone on the business here, looking to enter around the $20 mark here.
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