Pasha Pechenkin
Last summer, I believed that Aspen Aerogels (NYSE:ASPN) was not insulating investors from the cold, like its products are supposed to do. The company after talked about its promise, but that did not convince investors as it took a long time to show up in the results.
With the business having seen runaway sales growth, but moreover operating leverage in recent quarters, investors have gotten a lot more faith into the story, for good reasons.
I like the business and prospects, even after an impressive run-up, which for now seems more than backed up by the fundamentals here.
On The Business
Aspen Aerogels is an “energy” technology business which focuses on high-performance aerogel insulation, used in large-scale energy infrastructure facilities.
Such insulation blankets and related products provide superior thermal performance versus traditional thin blankets, saving on energy consumption, while providing better protection to both workers and assets.
Labeled as Pyrogel and Cryogel, these products are used by companies such as oil producers, refineries and wider petrochemical businesses, to maintain piping and other equipment, in both hot and cold temperatures.
The company went public at $11 per share in 2014, as the business targeted a niche market which was estimated at around $3 billion. Note that the business was still relatively small, posting revenues below the $100 million mark, accompanied by substantial losses at the time.
In the decade which followed, wild swings were observed. Since the public offering, shares gradually fell to lows around $1 in 2018. It was easy to understand why shares were trading so poorly, as revenues were stagnant at around $120 million in 2021 (basically at par from the time of the public offering) as the company continued to post substantial operating losses.
A Spike, Driven By The Energy Market
The energy crisis in the wake of the war between Russia and Ukraine sent shares to a high of $60 per share, only to be followed by a renewed downturn to just $8 in the summer of 2023.
In contrast to the time of the offering, the company has grown another business line. Alongside the core energy industrial business, the company has developed a thermal barrier business, geared towards electrical vehicles. In this market, Aspen provides lower weight and thermal safe energy packing solutions, a huge addressable market of course.
2022 revenues were up 48% to $180 million, yet that was the good news as gross profits of $5 million left little potential for earnings, as operating losses were reported at $79 million. While the company touted a key partnership with General Motors (GM) and a German luxury OEMs, that still had to translate into the results.
Initially the company guided for 2023 sales between $200 and $250 million, yet this growth is underwhelming, certainly as expected EBITDA losses of $50-60 million were set to show a very modest improvement from an EBITDA loss of $60 million reported in 2022.
These losses and large net capital expenditure requirements, in order to grow capacity, cast a very uncertain roadmap in terms of cash flow, and continued dilution down the road. With an operating asset valuation of $300 million in June of last year, it was easy to say that Aspen has seen a lost decade, and while the commercial traction was compelling, the issue of losses and large investment needs made investors (including myself) very cautious.
Things Improve
In August, Aspen Aerogels reported a mere 5% increase in second quarter sales to $48 million and while this was soft, the company reported a spectacular improvement in gross profits, allowing operating losses to improve to $17 million.
By October, the company announced that Audi will use its PyroThin solutions in its vehicle platform by 2025. The company now saw sales in excess of $225 million for 2023, with EBITDA losses set to come down to $30-$40 million.
In November, the company reported a 66% increase in third quarter sales to $60.8 million, with operating losses down to $14 million and change. Addressing its dwindling cash balances, and taking advantage of an uplift in the shares, the company sold 6.1 million shares at $12.375 per share in December in order to raise $75 million in proceeds.
In January, the company pre-announced full year sales at $238 million, with fourth quarter sales up 38% to $84 million. Momentum is set to continue with 2024 sales seen at $350 million, including potential upside to the numbers from the EV business.
In February, the company posted fourth quarter sales at $84.2 million as the company actually posted an operating profit of $1.2 million, still resulting in a minimal net loss after accounting for interest expenses. More important, fourth quarter adjusted EBITDA came in at $9 million as the company guides for 2024 EBITDA around $30 million, which suggests that the company posts largely break-even results in 2024.
The company needs to make these continued investments, as capital spending totaled $175 million in 2023, which compares to a depreciation & amortization expense of $15 million in 2023 (which by now runs at $20 million per annum). This suggests that even if break-even results are achieved, which would be great, the issue is that large capital expenditure requirement are needed. Note that capital expenditures are set to come down to around $100 million this year, still outpacing depreciation expenses by a huge degree.
And Now?
The company ended the year with $140 million in cash as well as $115 million in convertible notes. With 70 million shares, on a diluted basis, the company commands a $1.05 billion equity valuation. The truth is that its run-up, as shares doubled from $8 last summer to $15, while dilution has been incurred, is likely deserved as the improvements in recent quarters are very impressive.
The real potential has to come from PyroThin, the thin, lightweight, and high-temperature thermal insulation which mitigates thermal runway propagation across lithium-ion battery system architectures. Of the $350 million revenue guidance for 2024, some $200 million is expected to come from this market, but Aspen believes that this could become a $3 billion business as soon as 2027/2028, with the business currently having capacity to generate $650 million in revenues.
In such a case, the potential is huge. Even if the business can grow to $2 billion in sales at some point in time, and operating margins might come in around 10-20%, operating profits are seen at $200-$400 million. With no interest expense due, and statutory tax rates taking into account, earnings might come in at $2-$4 per share. This assumes that the company can self-fund the necessary expansion, which runs in the hundreds of millions.
Of course, retained earnings down the road furthermore create borrowing capacity, so dilution might be limited in such a case.
Conclusion
The truth is that the run higher in the shares seems well-deserved, as Aspen has really picked up its performance here. The company has seen remarkable growth, but more important, demonstrated on operating leverage, which helps a lot amidst declining capital expenditure needs.
This creates a roadmap for cash flows to improve greatly, as the 2024 guidance even feels a touch light, as the long-term potential is certainly there. This can easily become a >$50 stock if it delivers on its potential for the coming years, which of course is still a big if, but recent developments are at least very encouraging.
Amidst all this, I am actually more upbeat now at $15 than I was at $8 in the summer, as I am happy to dip into the shares here, certainly upon unexpected setbacks.
