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 (OTCQB:AXPW) 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 (OTCPK: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 (OTCQB:AXPW) and is a former director of that company.