Aspen Aerogels Inc. (ASPN)
Is $ASPN Insulated for Good Value?
In our Ledger Island Spotlights, we look at companies that could be a good fit in your portfolio or worth a closer look down the road. Some of them you have heard of. Some might be new finds. Either way, you’ll always get two retail investors’ perspectives from Clint & Phil. While they don’t always agree, they work to come to a middle-ground consensus on what to do moving forward and update guidance as they continue to track the stock on the Ledger Island Watchlists. Today, they’ll be looking at Aspen Aerogels Inc. $ASPN.
Aspen Aerogels Inc. is a SMALL-CAP company founded in 2001 and began public trading on the NYSE in June 2014. In their own words from Aspen Aerogels’ investor relations page:
“Aspen Aerogels’ technology enables a more sustainable world. Our aerogel products promote adoption of electric vehicles, enhance energy efficiency and asset resiliency, improve safety in green buildings and support availability of cleaner fuels in traditional energy markets.” https://ir.aerogel.com/overview/default.aspx
Phil's Take:
Clint may be the futurist between the two of us, but that doesn’t mean that I don’t have my eyes on some stocks driven by exciting new R&D. While Clint is focused on eVTOLs and autonomous freight, I’m excited about the future of insulation. Aspen Aerogels manufactures aerogels and low-density, lightweight materials designed to act as insulators. They use a manufacturing process that uses silica or carbon to create a material that is 97% air. The resulting combination is a powerful insulator with diverse applications.
Put that together, and you get a company manufacturing a product trying to break into an established market. Their most recent financial results suggest meaningful progress in that department. The last year has transitioned from an R&D/capital outlay spending spree to a more sustainable manufacturing/sales model. Q3’2023 had a record revenue of $60.8M. Profit margins also improved to 23%, up 6 percent from the previous quarter and up from 11% in Q1FY23. Their PyroThin thermal barrier accounted for $32.8M of that revenue, at 160% growth quarter-over-quarter. PyroThin’s use in batteries gives them a strong product in a world where batteries play an increasingly important role.
Equally encouraging is the increase in revenue across both their industrial and thermal barrier products. Their energy industrial products have seen a 7.6% growth year-to-date compared to last year, and the growth in PyroThin sales drove their thermal products revenue up 88.4% over the same period. Revenue is also up across geographic regions, with Asia, Europe, Latin America, and the US all seeing higher revenue year-over-year. Aspen has increased capital expenditures to ramp up production capacity, including a planned manufacturing facility in Georgia. The anticipated decline in electric vehicle demand in 2024 raises some concern that sales could drop, but that should be countered by increased profit margins and improving sales across their other products.
The massive hype and valuation the stock saw in 2021-2022 was ridiculous for a company that had yet to establish a solid product production pipeline. The mid-$5 range we saw in August also felt like a natural floor for a company ramping up production. The stock had been trending down since peaking in December of the market’s rate cut excitement. Then, they beat expectations with their Q4FY23 earnings, and it was off to the races. Revenue was up, gross profit was up, and gross margins were up. For a company still investing in expansion, it was a strong showing.
The current price is still a little rich for my blood, but ASPN 0.00%↑ tends to surge after a good earnings report and creep back down. A more appealing price should be available in a month or two. That being said, the market for ASPN’s products should only get more extensive, and their margins should improve. This Q4 performance justifies some analysts’ belief that ASPN can get to $20; it may be a bit of a roller coaster to get there.
Clint's Take:
I was skeptical when Phil first pitched ASPN 0.00%↑ , but I have to give it to him. Great find! (Don't tell him I said that. He never reads my takes.) An insulation manufacturer that is lean, above the mean (math joke), and green? Top all that off with visuals that look like Bits from the movie Tron, and I am intrigued. Safety-wise, it is better than typical insulation in commercial spaces (i.e., inhalation, ingestion, skin contact) but must still be handled carefully. The point is that aerogels are not a new product lacking a long view of exposure risks. Invented in 1931 by Dr. Samuel Kistler and in use since the 1960s by NASA, this isn't a potential "asbestos 2.0" with class action suits or federal bans on the horizon for investors to endure.
Now, ASPN 0.00%↑ does have a lot going on in the EV space, which, as we noted in previous Spotlights, has been a disappointment of late. Q4FY23 showed a +66% volume increase in their EV Thermal Barrier Revenue (32K vehicles total in the 2nd half of 2023), which was a miss on projections. However, their leading auto partner, General Motors GM 0.00%↑ , missed their EV production target by roughly 31K units. You can't insulate a car that doesn't get made. Now, if GM meets (or even still misses by the same 20%) and the Honda HMC 0.00%↑ Prologue launch (another ASPN deal) goes as planned, the revenue growth could be a big win for ASPN. Broader view: I personally think that the Chinese EV maker's momentum and increasing global market share will force US automakers to recommit to EVs in the second half of 2024.
Fortunately, ASPN 0.00%↑ is not a one-trick pony tied only to its EV partnerships. Energy Industrial revenues have been steady ($31M Q4FY23) but still down YoY partly due to being at maximum production capacity. Their industrial products (i.e., Cryogel Z, Spaceloft Sub Sea, and Pyrogel lines) should all get a boost from the Georgia Plant II construction (loans being sourced from Department of Energy incentives) and, indirectly, by freeing up more resources from the EV Thermal Barrier assembly tooling in Mexico investments. Both moves offer growth for the industrial segments, which currently lag behind auto thermal revenue. Over time though, industrial may be the saving grace on ROI (Return on Investment) should EV production or adoption continue to decline.
I like ASPN 0.00%↑ a lot; I just don't love it in this current price range (ASPN its not you, its me). As Phil said, historically, we've seen this big boost coming out of earnings, and then it settles again right before the next one. Q3FY23 report 11/01/23: the price is $7.71. Good report. Ramps to $17.19 by December (helped by Powell Pivot) then down to $10.91 by 02/05/24. Nine days later, the Q4FY23 report and we are back over $17.00 again. I find it unlikely we will see sub $12 anytime soon, but I would be more comfortable in the $14-$15 neighborhood. Admittedly, that may be a reach as it has taken some real strides over the past two quarters, and EV growth has eclipsed (resources, space, and revenue) its original base model.
Moving Forward:
We find there is more to “pros” than “cons” for ASPN long-term. The only fly in the ointment is the current price and the history of volatility coming out of a positive earnings read. ASPN 0.00%↑ will continue to grow, and revenue will increase, but over $17 seems high for a company that has one hand tied to someone else’s production matrix (EVs) and the other bound by capacity concerns (industrial). We are putting ASPN on the “Prove It to Me” watchlist, but probably not for long. We think there are substantial gains to be made for ASPN in the back half of 2024 and their closest competition, Cabot Corp. CBT 0.00%↑ , may be larger but not as agile in EV. If ASPN’s price completes its normal high/low post-earnings cycle and we get a better read on EV production and demand for the rest of 2024, we will then reevaluate, set a new target price, and upgrade.
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