Maxwell technologies (MXWL): Buy or steal?

Confusion reigned following Maxwell Technologies' (NASD:MXWL) earnings call Thursday night. What would be the impact of the company's reduced sales growth guidance on the stocks value?

The Bulls

• At below $10, I thought the stock was “a steal” and it would quickly rise by the end of the day.
• CEO David Schramm and three other insiders apparently agreed with me, since they bought 48,000 shares at prices between $9 and $10.20 early the following week.  
• Also on the bullish side was Needham & Co analyst Micheal Lew, who said:

We believe the sluggishness in Europe is the primary reason for the tempered near-term outlook. This has led to a slight pause in demand from some of the major-end markets (i.e., wind and hybrid buses in Europe). In our view, the long-term fundamentals are very favorable for Maxwell Technologies given the global focus on emissions reductions. We believe the pullback in share price presents an entry point for investors to own MXWL shares.

Needham lowered their price target from $23 to $18.

The Bears

Skeptics included:

• Analyst Jonathan Dorsheimer at Canaccord Genuity, who said:

Maxwell missed slightly our consensus estimates for Q1 and also lowered its full year implied guidance. The company cites the general European slowdown and push outs in China s hybrid bus program for the revision. Maxwell's ultracapacitor results also remain hampered by the prolonged slowdown in China’s wind market.

Our numbers came down on a lower ultracapacitor growth rate. While numbers are being tempered, we feel a 20x multiple is justified as we are still expecting a respectable high-teens growth rate over the next two years.

Canaccord slashed their price target from $23 to $14.

• Pacific Crest also downgraded Maxwell from Outperform to Sector Perform.

What’s MXWL Worth?

Clearly, Maxwell had to fall on the downgraded growth rate guidance, but different analysts are interpreting the guidance to mean different things.  In the conference call, Schramm tried to emphasize that the reduced revenue growth guidance was only for 2012, and that he expected more rapid growth to resume in following years.  As he said in the Q&A:

I think this is a timing issue, that when this recovery in the world finally kicks into play, there should be pent up demand that we’ll address.

If we accept that this is a temporary growth slowdown in 2011, and annual growth will pick back up over the next year or so, we can do a rough valuation based on projected 2013 earnings.

After the recent revisions, analysts are currently projecting earnings of 56 cents per share in 2013, and 25 percent long term growth.  However, as Cleantech Group managing director Rafael Coven told me, Maxwell is a “serial disappointer,” so we should take those projections with a grain of salt.  To reflect this, I’ll assume a 20 percent long term growth rate.

If we then look for a Price/Earnings/Growth (PEG) ratio of 1, that translates to fair valuation of $11.2 in spring of 2014, when 2013 earnings are announced.  As I write, Maxwell is trading at $8.78, so that would imply 28 percent appreciation over the next 21 months, or a 15 percent annualized return over the next 18 months.

Conclusion

I may have been overoptimistic to say MXWL below $10 was “a steal”, but it seems like a good time to get in to a company which dominates the ultracapacitor industry.Although most analysts have slashed price targets, the price has also been slashed.  Even after the recent downgrades, the average price target over 10 analysts is 18.50, according to First Call.  My own valuation for early 2013 is much more conservative, yet even that allows for a 12 percent annualized return.

Company insiders, who know more about their company’s prospects than any of us, have 48,000 new shares that say they think the price won’t stay this low for long, either.

Disclosure: Long MXWL

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This article first appeared on the author's Forbes.com Green Stocks blog and AltEnergy Stocks and was republished with permission.

http://www.renewableenergyworld.com/rea/news/article/2012/05/maxwell-technologies-mxwl-buy-or-steal