The Zotefoams (LSE:ZTF) share price surged by double-digits yesterday after it released its third-quarter earnings report. The 14% jump has helped reverse some of the lacklustre performance this year and has brought the stock’s 12-month return back to nearly flat. So what was in the report that has investors so excited? And should I be considering this business for my portfolio?
Zotefoams’ share price rises on record earnings
As a quick reminder, Zotefoams is a cellular materials specialist. The company produces a range of foams used in a vast number of applications, from aeroplanes to footwear.
Despite what the lacklustre performance of Zotefoams’ share price throughout most of 2021 would indicate, revenue has been growing at an impressive rate. And looking at the latest earnings report, this trend has not changed. Sales over the past three months came in 11% higher than last year. And that growth rate increases to 35% when comparing against pre-pandemic levels.
A good chunk of this new-found revenue is driven by the return of demand for its polyolefin foam products. Now that customer production facilities are reopening, sales of this product line are back on the rise and not by a small margin. Compared to 2020, sales grew by 75% over the same period.
Meanwhile, the investments made into its soon-to-be-launched mono-material barrier, ReZorce, seem to be paying off. ReZorce is a potential replacement for existing beverage carton materials, and it’s 100% recyclable. Management hasn’t been too generous with the details. But ReZorce is apparently meeting expectations and could soon be entering the marketplace.
This is all quite positive news, so seeing the Zotefoams share price rise on this report isn’t too surprising. But I do have some reservations.
The risks that lie ahead
As mentioned earlier, revenue growth has been delivered for most of 2021. So why has the Zotefoams share price not reflected this? The issue lies in the profit margins. The pandemic is close to an end and is no longer as disruptive on the demand and manufacturing side of the business. However, it’s still creating problems on the supply side of the equation.
Global supply chain disruptions have triggered a substantial increase in raw material costs, especially for polymers. Combining this with general price inflation has resulted in gross margins falling to around 28.9% from 34.8%. And management doesn’t foresee this problem being resolved any time soon.
The bottom line
Zotefoams as a business seems to be in a much stronger position than a year ago (even if its share price disagrees). However, I’m concerned about the degree of impact supply chain issues are having on margins. It’s unclear for how long these adverse effects will persist. And for the most part, they’re out of management’s control. Therefore, I’ll be keeping this stock on my watchlist for now.