Aspen Aerogels (ASPN) announced on Monday after the close that it had turned a letter of intent (LOI) with Audi for its PyroThin thermal and fire barrier materials into a supply award with an expected start of production in 2025.
Another piece of good news was the announcement that Scania was the brand it previously announced for a commercial vehicle supply contract with Volkswagen (VWAGY).
Lastly, Aspen also updated its 2023 projections for revenue and adjusted EBITDA. It now expects sales of more than $225 million. Previously, it had provided a range of $200 million to $250 million. As for adjusted EBITDA, its previous guidance was for a loss of $50 million at the midpoint of its outlook. That’s been dropped by $15 million to $35 million.
Now 25% more expensive than yesterday, is Aspen’s stock still a buy?
Here are my thoughts, pros and cons.
The Positives of Monday’s News
As far as I can tell, the move from LOI to award is the most significant piece of Monday’s press release.
A letter of intent highlights the general points of an agreement between two parties. It is non-binding. A letter of award (LOA) lets a bidding party know they have secured the supply agreement. Terms of the supply agreement are included in the LOA. It is a legally valid and binding contract.
So, Aspen’s gone from Audi saying it might do business with the company to saying it will do business with it starting in 2025. That’s what you want to hear if you own shares in its stock.
In May, in its Q1 2023 press release, Aspen said it had been awarded a contract for PyroThin with a European EV commercial truck program. That would be Scania Group, one of Volkswagen’s commercial automotive brands. It’s expected to start early next year.
Investors now know that it has two significant contracts with two Volkswagen brands.
In the company’s Q2 2023 conference call, CEO Donald Young discussed its design awards to date.
“Well, we have talked about 3 to-date award -- design awards. We're -- as I said in the last earnings call and reiterate again, we feel confident that we will have a half a dozen design awards by the end of this year and that will begin to contribute a bit in 2024, but really ramp in 2025,” Young stated on Aug. 3.
It confirmed in Monday’s press release that it continues to be on track for the six by Dec. 31. Aspen announces Q3 results on Nov. 2. I assume it would have said something in the Monday press release if it had confirmed additional awards in hand. Unless something happens in the nine days, the earnings report will be anti-climactic.
Lastly, the update to revenue and EBITDA for 2023 was positive, if not a home run.
So, the big question is whether what amounted to one award announcement is worth a 25% one-day increase in its share price.
The Not-So-Good News
Based on yesterday’s update, ASPN stock is trading at 2.6x 2023 sales. While that’s less than its five-year average P/S ratio of 3.6, it’s still pretty high for a company that’s got to hope that the sales anticipated from these design awards meet expectations. Awards have a way of turning into nothing but dust.
“We remain focused on maximizing the value of our existing assets and commercial relationships with the goal of achieving a revenue capacity of over $550 million of product to a broadly diversified customer base in our EV Thermal Barrier and Energy Industrial segments,” Young stated in its Monday press release.
Based on 20% annual revenue growth beyond 2023, it will take four to five years to deliver $550 million.
In the past two quarters, Aspen’s cash position has fallen from $282.6 million at the beginning of 2023 to $134.6 million as of June 30. That’s a 52% reduction in its cash on the balance sheet. At this rate, it will need to raise additional capital early in 2024.
Remember, awards are outstanding, accelerating expenses, increased losses, and cash deficiencies.
According to GuruFocus.com, Aspen’s current Altman Z-Score is 1.04. New York University finance professor Edward Altman developed the Altman Z-Score. It is a calculation that takes items from the balance sheet and income statement along with a company’s market cap and evaluates the likelihood of going bankrupt in the next 24 months.
Anything below 1.81 suggests that bankruptcy is possible. Aspen’s is currently 1.04, meaning it will be in trouble if it doesn’t nail all these awards.
The Bottom Line
Aspen closed Monday trading at $6.67. The news of the awards and guidance boosted its shares into the mid-$8s. It might not be a $6 stock, but it can also be said that it’s not a $9 one. It’s probably somewhere in the middle.
That puts us at $7.50.
If you look at Aspen’s options expiring in six months (April 19/2024), the $7.50 call has an ask price of $2.50 with a 0.70477 delta. If you buy the calls expecting to exercise your right to purchase the shares at $10, they’ve got to appreciate by at least 19% over the next 178 days. To double your money on the put by selling before expiry, they must increase by 42% over the same period.
So, in this instance, you don’t have much of an escape route should the shares not move much higher.
As for the $7.50 put in April, the bid is $0.50. If you sell the put, that’s an annualized yield of 12.1%. On the downside, your net price should you have to buy the shares would be $7. The shares would have to fall 17% before you’re losing money.
They’re both not sure things. I’d probably wait a few days to see how things shake out before making a move.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
