Happy New Year!

Thought I would take some time to talk about a secular trend that has strong growth but is difficult to find good stocks to play.


Carbon Fiber -- this is a new material that is stronger and lighter weight than steel or aluminum so it is taking over airplane frames and other uses throughout industry. The growth is very predictable and very long term but on the other hand -- not particularly profitable. Issues -- a. capital spending equal to 33-50% of sales -- wow. b. operating margins only around 10%, which are ok but not great. c. free cash flow isn't that great because of the huge cap ex requirements. d. one reason the margins aren't that great -- what is the barrier to entry? what is the competitive advantage for firms -- how do they differentiate themselves enough to get firms to pick them over other suppliers despite charging premium prices? e. too few customers -- there are only 2 buyers for airframes -- Boeing and Airbus -- so they can squeeze suppliers hard because they have pretty concentrated market share. ie. don't like the prices I want to pay? fine, sell to someone else. oh, there isn't anyone else? sorry.


The key is to see the difference between this situation and FLIR -- which has cap ex to sales of around 5-6% and operating margins in the mid 20's. FLIR also has revenue growth that is as fast or faster than the carbon fiber companies. FLIR also has a more diversified customer base -- 50% of carbon fiber is to aerospace. That diversified customer base allows FLIR to have some pricing power -- that and their ability to use brand name, technical specs and distribution to differentitate themselves.