Nine Energy Storage Stocks for the Recession

Everybody hates recessions because they make us reflect on our excesses, adjust our expectations and get back to basics like saving money, carefully analyzing purchase decisions, making loans to people who can repay them and investing in companies that make essential products. The adjustments are invariably painful, but markets, companies and individuals are far more rational after a recession than they were beforehand.

Ultimately recessions help clarify the difference between what we want and what we need.

Analyzing the likely impact of a major recession on companies in the energy storage sector is extremely difficult because they manufacture a wide range of products for commercial and consumer applications that span the entire spectrum from essential to frivolous. The inherent limitations of a financial blog increase the difficulty because it's impossible to present more than an overview from 10,000 feet. Nevertheless, I believe investors need to understand some fundamental market drivers that are likely to impact the energy storage companies I've been writing about for the last few months. So I'll accept the risk of hostile comment and contrary opinion, wade right into the swamp and offer my best guess about how energy storage companies are likely to fare during this recession.

I'm convinced that Exide (XIDE), Enersys (ENS) and C&D Technologies (CHP) will be the top performers over the next couple of years. While the knee-jerk reaction is that these companies have too much exposure to the automotive sector, the reality is that OEM demand for automotive batteries only represents 16% of an estimated $20 billion annual market for lead acid batteries. The balance of the total comes from $13.2 billion of automotive replacement batteries (66%), $1.6 billion of batteries for motive applications (8%), and $2 billion of batteries for stationary applications (10%). While the markets for replacement, motive and stationary batteries may soften a little during a recession, they are far more stable than the automotive OEM segment.

Exide, Enersys and C&D are not major players in the automotive OEM market and they've each been reporting growth rates in the neighborhood of 20%. So as strange as it may seem, I think it's reasonable to believe that all three companies could have solid revenue growth during the recession. With stocks that presently trade between 8% and 26% of sales and less than 5 times earnings, I believe all three companies are compelling values for investors that want to position their portfolios for long-term growth in the energy storage sector.

Ultralife (ULBI) is another established battery manufacturer that appears well positioned to weather a recession because of its focus on specialty products for military and commercial applications and its modest exposure to consumer products. Ultralife's stock is not as objectively cheap as the lead acid group, but the company's growth rates and earning power are impressive and it should weather the recession well.

I don't expect Axion Power International (AXPW.OB) to report substantial revenue from sales of PbC batteries until the middle of next year. Nevertheless, Axion should weather the recession well because it is well financed and its disruptive new PbC technology offers advanced battery performance at a lead acid price, giving it the lowest total cost of ownership in the storage sector. Considering the size of the lead acid battery market and the superb economics of PbC batteries in a variety of commercial applications, Axion should be able to target high-margin motive and stationary applications and grow despite the recession by offering commercial lead acid battery users a cheaper alternative.

ZBB Energy (ZBB) is another emerging battery manufacturer that should prosper because its large-scale flow battery systems have tremendous potential as long discharge duration backup systems for places that rely primarily on wind and solar power or do not have robust and reliable utility service. As a manufacturer of large systems, ZBB has a fairly long marketing cycle. But sales should increase rapidly as marketing efforts that began in earnest at this time last year begin to bear fruit.

When we get out of the commercial markets and focus on lithium-ion and other advanced chemistries for consumer products, my outlook ranges from cautious in the case of China BAK (CBAK), Hong Kong Highpower (HPJ) and Advanced Battery Technologies (ABAT) to negative for the rest. Established manufacturers in the exotic chemistry group typically have huge exposure to consumer products spending and derive a substantial portion of their sales from developing economies, both of which fare poorly during recessions. Well-capitalized companies with diverse product lines will probably muddle through, but I think companies that need additional capital or focus on a narrow consumer market are poor risks.

I believe companies that have bet the farm on making batteries for the HEV, PHEV and EV markets are in serious trouble because automobile sales have already fallen by roughly 30% and expensive automotive options that would be a tough sale in a booming economy will almost certainly have a hard time gaining significant traction in an environment where falling oil prices and a difficult economy make a miserable cost-benefit analysis even worse.

Disclosure: Author holds a long position in Axion Power International (AXPW.OB) and is a former director of that company.

Comments

[redbaron:]

You failed to mention Johnson Controls (JCI), as they also make batteries. Much of their business is in building energy management, where they use technology tools to better manage energy in large buildings, an area where large savings is possible.

2008 Oct 27 09:14 AM

[John Petersen:]

JCI is a major battery producer for the automotive OEM market, but it's so widely diversified that it would be very difficult to include in this small group of pure play companies that do energy storage and nothing else. There's no disrespect intended, but I'm really uncomfortable once I get out of a very narrow niche.

2008 Oct 27 09:38 AM

[catalite:]

Is it true that Axion Power International has to overcome manufacturing hurdles, both technical and cost-wise? If so, have they been making enough progress on it to begin ramping up production in 2009? Also, I was looking around the patent literature and could not find any issued patents for Axion. What is their intellectual property position? I asked the company these questions over a week ago and they have not responded.

2008 Oct 27 11:17 AM

[John Petersen:]

The manufacturing hurdles involve automating the electrode fabrication process, which is currently labor intensive. 1st generation automated equipment will be installed late this year and 2nd generation equipment is scheduled for next summer. That should take them to about 1,000 units per day using cost competitive manufacturing methods.

Axion's SEC reports disclose that the PbC technology is protected by six issued U.S. patents and seven pending U.S. patent applications. For more detail, go to:

www.sec.gov/edgar/sear...

Enter Axion Power as the company name and then download the 424B3 prospectus from mid August.

2008 Oct 27 12:49 PM

[footleg:]

What about the ultracapacitors in this recession senario? I know that you've talked before about tried and true technologies, but wouldn't a game changer be just what we Need?

2008 Oct 28 03:14 PM

[John Petersen:]

Ultracapacitors (also called supercapacitors) are great for power, which is what you need for acceleration. But they don't typically have much energy density, which is what you need for distance. So ultracapacitors alone will not do the job.

Axion's PbC device is a battery-supercapacitor hybrid that combines the power characteristics and life cycle of a supercapacitor with the energy density of a battery.

In my opinion, the PbC device is a game changer.

2008 Oct 29 05:46 AM

[jscilla:]

It seems as though you are committed to promoting lead acid batteries,
while minimizing Lithium ion batteries. With the entire auto world
looking at hybrids and plug in electric cars, you are going against the flow. Lithium ion can also be used in backup systems and in conjunction with
solar power. I am not sure about the timing on Li stocks, but that's where I am going. Time will tell which stocks do better.

2008 Nov 02 08:08 AM

[John Petersen:]

The "entire auto world" is often profoundly wrong when it tells us what the next big thing in transportation will be. For proof you need look no further than the food shortages caused by ethanol. I like Li-ion technology in my cell phone and laptop. But I believe it is far too expensive for use in cars and will never be affordable for Joe Lunchbucket. Remember, you're talking about a 20 year old technology and every time somebody makes it safer, they reduce performance.

2008 Nov 02 10:01 AM

[Matt_the_Batt:]

I would like to know what you think of the SAFT Batteries Group from France? Its a pure battery player in the market with a very broad customer and product range, simliar as Ultralife... big parts of their revenues come from the defence, space, telecommunication as well as renewables sector. Furthermore, they recently have announced a JV with Johnson Controls and thereby seem to be well-positioned for the EV/HEV market.

Thx in advance!

2008 Dec 06 07:16 AM

[John Petersen:]

SAFT is a wonderful company but it only trades on the Pink Sheets in the US. Since the principal market for SAFT is Euronext Paris and it can be very hard to find comparable performance figures and make all the currency conversion adjustments, I generally omit SAFT from my list.

The JCI-SAFT joint venture you mentioned will provide batteries for the new S Class Mercedes hybrids. So it's clearly worth watching if you are willing to do the extra diligence work.

2008 Dec 07 03:50 AM

[thefuture007:]

Hi Good Article and informative Questions and Timely answers on Writers part.!
I'll ask this as an Obama/Infrastructure Buildout Scenario..
Which companies in this Sector...Electrical Processing,Batteries,T... type areas will benefit most or be affected most by Building out to Wind Farms/Solar Grids ETC?
Thanks in Advance.

2008 Dec 09 09:09 AM

[thefuture007:]

Hi Good Article and informative Questions and Timely answers on Writers part.!
I'll ask this as an Obama/Infrastructure Buildout Scenario..
Which companies in this Sector...Electrical Processing,Batteries Transmission Lines/Cables,Connector...
I added this comment after my first got abit garbled.
Would companies like...Powr,EME,EMR,BG... do well and whom would be the Big Construction type companies to benefit any thoughts.?
Thanks for any Help in these areas just trying to seek some Alpha..hehehe.Have a Great Day
Happy Trails

2008 Dec 09 09:16 AM

[John Petersen:]

My two recent articles on Why Frequency Regulation is Important and Storage is an Investment Tsunami spend a good deal of time discussing these issues. ZBB is clearly in there with a cost effective load leveling system. I also think Axion, Beacon and Altair each have a piece of the pie. When you get to the contractor side my knowledge gets pretty weak because beyond ABB I really don't know who the big infrastructure players are.

2008 Dec 09 09:42 AM

[TRU:]

TRU Group Inc announces results of its updated long range Lithium supply-demand forecast - Lithium industry not immune from effects of global recession

TRU Group Inc, Toronto ON, Tucson USA - Lithium consultants TRU Group Inc says that its updated lithium outlook for presentation Tuesday at the IM Lithium Supply & Markets Conference Santiago 2009 will conclude that the industry is not immune from the global recession and will be pushed into oversupply this year through 2013. Global use of lithium will decline sharply by at least 6% in 2009 and demand is unlikely to bounce back any time soon as consumers put off buying laptops or cell phones containing lithium batteries. This is bad news for an industry accustomed to strong sustained growth over many years.

TRU president Edward Anderson commented that “an outlook presentation of this type is very unusual for us because all of our work is client confidential. However, Mitsubishi Corporation who commissioned the original analysis has authorized TRU to release some of the material”. The techno-economic analysis and supply-demand forecast is a major in-depth assignment conducted by the TRU Lithium Team made up of the world’s top technical experts on lithium production and extraction on the supply side, as well as our highly specialized industry analysts on the demand side. Impacts of recent advances in lithium extraction technology (for example, in selective ion adsorption, electrodialysis, and nanofiltration) are considered.

It is likely now that some expansions and new projects will be delayed or cancelled until market conditions improve. The long range however remains bright because new and large uses for lithium will start having a major impact on demand within the five year horizon: Lithium use in electric vehicle batteries and lithium alloys for aircraft. TRU forecasts that demand will be strong and sustained in these two segments over the long term 2020. The industry does need at least one of the announced pipeline production projects to come into production and also could do with another new project as the market tightens around 2015-2017. New lithium producers still will need to be cost competitive with existing salt lake brine based producers in South America and China. Emerging technology may make some of the undeveloped medium sized (brine) lithium resources quite attractive. Certainly the industry through expansion and development of new resources will have no problem meeting demand.

TRU Group Inc based in Toronto, Canada and Tucson, USA are industrial management and engineering consultants with a strong capability in lithium project development. The firm is a world leader in resource evaluation, salar exploitation, brine & mineral lithium extraction and processing technologies - those in use, prospective, and leading edge. TRU has evaluated and modeled most of the known existing lithium properties and advised a number of players on a wide variety of lithium resource, engineering, process, business and investment issues. The TRU website is trugroup.com and the presentation will be posted on the site after the conference on January 27, 2009 at the link trugroup.com/Lithium-M...

Contact:
Edward R. Anderson
President& CEO
TRU Group Inc
Website trugroup.com/
email [e-mail]
Tucson 520-575-0674
Toronto 416-935-1754
Cell 1-520-229-78336

Jan 22 11:12 AM

[John Petersen:]

TRU, thanks for the post. I guess there's no reason to question lithium availability over the next 10 to 15 years while li-ion batteries struggle to overcome their crippling cost handicaps and become economically feasible. It does trouble me a bit when you talk about the market tightening in 2015 - 2017 when peak cheap oil concerns will be far more critical than they are today. Does that mean we get to run out of oil and run out of lithium at the same time? Wouldn't that be wonderful.

Until there is a credible third party analysis showing plentiful lithium for the next 50 - 100 years, I'm not impressed. A 10 - 15 year supply is just enough to get us into trouble. It is certainly not enough to get us out of trouble.

Jan 22 03:34 PM