ASPN - Aspen Aerogels: Not Insulating Investors From The Cold

2023-06-20 06:12:12 ET

Summary

• Aspen Aerogels was an intriguing business when it went public nearly a decade ago.
• Shares have been suffering ever since, except for a momentum run, and subsequent bust in the years which followed.
• I am cautious amidst the continued losses and investments, making me quite cautious here.

Nearly a decade ago, I voiced some concerns on shares of Aspen Aerogels ( ASPN ) . The company went public in the summer of 2014, and was struggling from the get go on the back of severe margin pressure and financial concerns.

Forwarding nearly a decade later, we can draw the same conclusion, although that there have been a lot of moving factors in recent times, making me interested in the name, as I continue to shun an investment in ASPN stock for now.

A Recap

Back in 2014, I called Aspen Aerogels an interesting "energy " technology business which focuses on high-performance aerogel insulation, often used in large-scale energy infrastructure facilities.

Its insulation blankets provide superior thermal performance versus traditional thin blankets, saving clients on energy consumption, while offering better protection to workers and assets.

Its Pyrogel and Cryogel products are used by oil producers, refineries and petrochemical businesses used to maintain products and pipes both in hot and cold temperatures, a niche market estimated around $3 billion.

The company went public at $11 per share, as 7.5 million shares offered made that $82 million was raised with the offering, the vast majority of which benefited the company. Shares were priced far below the preliminary offering price around $15 per share, and with shares trading near $11 on the first day of trading, the company was awarded a market value just in excess of two hundred million.

Ahead of the public offering, for the year 2013, Aspen Aerogels posted an $86 million revenue number, up a solid 36% on the year before. That was about the good news, with net losses reported at $48 million, as gross margin only came in at high double digits. That said, there was some positive traction in terms of sales and margins for the first quarter of 2014, while the IPO proceeds would reduce interest expense as well, as the overall financial concerns made me cautious on the prospects for the shares. In fact, the substantial losses made that I shied away from investing at the time.

What Happened?

Since 2014, shares have been trading downhill, only exchanging hands at $1 and change in 2018. Shares traded in the mid-single digits in 2020 and rose in a spectacular move towards the $60 mark amidst the war between Russia and Ukraine, but also enthusiasm on increased usage of batteries and electrification of transport. Ever since, it has been all downhill, with shares now trading at $8 again.

If we look at the underlying results, we see that sales have hovered around the $100 million mark for quite a few years, with no structural growth seen since the public offering. This changed a bit in 2022. In fact, 2022 revenues rose by 48% to $180 million. That was about the good news as gross profits of $5 million were dismal, with the company seeing operating losses doubling to essentially $79 million. Moreover, a lot of the growth was not really driven by volumes, but more apparently by inflation.

However, the company touts key partnerships with General Motors ( GM ) among others, as well as commercial traction with a German luxury OEM manufacturer. Moreover, the company has seen stronger growth in the fourth quarter, with fourth quarter sales of nearly $60 million being strong, and operating losses narrowing to just below $10 million. The company guides for a similar (annualised) performance in 2023, with sales seen between $200 and $250 million, and adjusted EBITDA losses between $50 and $60 million. In comparison, the 2022 adjusted EBITDA loss just topped $60 million.

The company took the opportunity to bolster the finances last year, with the company reporting a $281 million cash position, in part offset by a $108 million convertible note facility as the company reported a diluted earnings number of 49 million shares. Trading at $8, the valuation has fallen to just $400 million, including a massive $173 million net cash position!

In May of this year, the company posted a 16% increase in first quarter sales to $45.6 million, amidst stable operating losses of $81 million and change. Following the release of these numbers, the company maintained the full-year outlook (in terms of sales and losses) although that net capital spending was reduced to $100-$150 million. This is down from an initial estimate as high as $350-$400 million! Moreover, remember that depreciation charges run at just around $10 million per annum here, while net cash holdings are down to $100 million after the first quarter.

On the corporate front, the company announced that it was awarded a PyroThin thermal barrier contract with a European EV commercial truck program, although few other details were announced.

Early in June, the company opened its latest state-of-the-art thermal barrier center in Marlborough, with the 59,000 square feet facility designed to bolster the electrification of transit, another encouraging sign (at least for topline sales developments).

And Now?

The reality is that a current operating asset valuation of around $300 million makes it early to conclude that it has been a lost decade for Aspen. That being said, the company has recently seen some topline operating momentum, albeit accompanied by big losses, and has seen some commercial traction in the sense of new orders and the opening of its new facility.

While this commercial traction makes it interesting to pick up coverage on Aspen here going forward, I am not tempted to get involved at this point in time. The company has seen a lost decade and such huge losses, not to mention the net capital investments in the business, which make that cash balances deplete rapidly here. Given all this, I am cautious to get involved, but find the acceleration and some positive factors here interesting enough to keep an eye on the shares going forward.

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