Maxwell (NASDAQ:MXWL) has had 18 straight insider stock purchases at market by seven different insiders since April. There have been no insider sales. None at all, which is very unusual for a small technology company. The largest purchases have been within the past month, when a director bought 30,000 shares on October 31st. He followed that by buying 30,000 more the next day, on November 1st, 20,400 more on November 2nd and 37,000 on the 5th. He then made two additional smaller purchases later that week for 1,000 and 7,000 shares.
To put these purchases in perspective, this is a company with a market cap of only $200 million, with $165 million in trailing revenue, and roughly 29 million shares. These are major, major purchases for a company that size.
Look at the small-cap tech stocks you own and tell me how many have any insider stock purchases, much less 18 in a row? All of them that I looked at had 30, 40 or 50 insider sales in a row. No buys. Even in companies that are profitable and growing rapidly no insiders are buying. They are reducing their stakes.
So what's going on with Maxwell? To paraphrase Peter Lynch, there are lots of reasons why insiders sell (to buy a house, to send their kids to college, to diversify, or just because they want the cash), but there is only one reason why they buy: because they think that the price will go up.
So what do the insiders know about Maxwell. Let me give you a little history: Maxwell lost 24 cents a share in 2009, broke into the black with a profit of 5 cents in 2010, almost quadrupled that last year with 18 cents, and will come close to tripling that again this year with adjusted earnings in the range of 50 cents. (After the third quarter, their 12-month trailing earnings were 47 cents). They made 21 cents in the just reported third quarter, more than they made all last year.
Maxwell is dominant in their field. Their products are used in everything from the build-out of the Russian electric grid to Chinese bus fleets (a huge market), to the turbines in Chinese (among other) wind farms and to Lamborghini sports cars. In fact, the company's technology can be found in 500,000 other cars on the road today, and in trucks, buses and in heavy duty construction equipment that have to start in extremely cold winter weather where batteries won't work. This gives you an idea of the scope of their potential market.
Their most rapidly growing product, which they seem to have a lock on, is ultracapacitors. Ultracapacitors now make up about 60% of the company's revenue. Ultracapacitors store energy, and thus are related to batteries - but ultracapacitors and batteries are very different:
First, ultracapitors don't require metals like lead and lithium that are needed in batteries.
Secondly, they work by mechanical processes, not chemical ones like batteries, so they can work at almost any temperature. If you think about that, it's an enormous advantage.
Third, ultracapacitors don't degrade with use. A battery can be recharged a limited number of times, getting slightly weaker each time. In contrast, an ultracapacitor can be recharged and release its charge millions of times with no loss of strength.
And fourth, ultracapacitors charge and discharge almost instantaneously, so they can take a charge very rapidly and emit it in a pulse of energy when it is needed.
Note that this last property isn't necessarily better than how a battery works, just different. For a trivial example, consider a flashlight, where you want a gradual drawdown of the electrical charge rather than a quick pulse. In general, ultracapacitors and batteries work together, batteries giving duration of action and ultracapacitors giving a sudden spurt of energy. I read somewhere that an ultracapacitor is like a small receptacle with a large opening so it can fill quickly and empty quickly, while a battery is like a big receptacle with a tiny opening so it fills very slowly and empties very slowly.
Ultracapacitors are used in windmills because no one wants to climb up 400 feet on an external ladder to change a dead battery.
Ultracapacitors can be used for regenerative braking. They capture some of the energy that is normally wasted in braking and then release the energy in a jolt to aid reacceleration. This saves on gas mileage and gives better acceleration. In 2011, Maxwell was selected by Flextronics (NASDAQ:FLEX) to supply ultracapacitors for Flextronics' energy recuperative system to help vehicles meet the European Union's stringent emission standards. In 2012 they were selected by Bombardier (OTCQX:BDRBF) to do the same thing for a similar system for trains.
Banks of ultracapacitors are also used in utilities to give a burst of energy to bridge the gap when turning one massive generator off and another on.
In 2011, Maxwell won a collaborative research contract from the US Advanced Battery Consortium, sponsored by General Motors (NYSE:GM), Chrysler and Ford (NYSE:F) to lead a team develop a hybrid energy storage system for electric cars.
Working with Continental, a global auto parts company, and Citroen-Peugeot, Maxwell has already introduced a "stop-start idle elimination system." This system is almost magical: when you stop, at a red light for instance, the motor doesn't idle and continue to use gas and emit exhaust. It switches off. Then when you step on the gas, the ultracapacitor gives such an instantaneous jolt of energy that you're never even aware that the motor had been off. Cars throughout Europe, from Mercedes to Lamborghini, are starting to introduce "stop-start" systems. They cut air pollution AND gas consumption, and protect the battery from being drained.
Maxwell doubled its production facilities in 2010 and is enlarging them again. Stepping up production to meet demand now requires very little increase in SG&A and most revenue goes direct to the bottom line. This is evident from the last three quarters, where earnings went from 7 cents to 12 cents to 21 cents on just a 12% sequential increase in sales.
This sounds like a company which would have a P/E multiple of 30 or 40 times trailing earnings, and which would thus sell at $15 or $20.
But there's a problem side to this story too. In April, this little company, which had indeed been selling in the high teens to lower twenties, announced that they had to be more cautious in their outlook because of the European economic crisis and the Chinese slowdown.
This should have been no surprise to anybody, but there had been hopes that their ultracapacitors would be rapidly installed in millions of European cars. In addition, uncertainty in China, especially with a change of leader coming this fall, caused more cautiousness. The price of Maxwell stock dropped more than 50% in two months, from about $19 to between $7 and $8.
Analysts cut their estimates for adjusted earnings for the September quarter to 5 cents, but Maxwell reported 21 cents, beating estimates by over 300%.
However, the company also said that again due to the slowdowns in Europe and in China, as well as to a mechanical problem that is slowing production of buses for one of their large Chinese customers, they had to reduce estimates for fourth quarter and first quarter revenues. In response, the stock sold off to $6.30.
How much of a disaster is this going to be? It's reasonable to anticipate earnings of 10 cents for the December quarter, which will give them 50 cents for the year (a near tripling from the year before) and a P/E of 14, given the current price.
The mechanical problem at their customer will be fixed in the first quarter, and the new regime in China almost certainly won't totally cut subsidies for wind power, especially in the midst of an economic slowdown. Europe will surely stay down for a long time, but it won't last forever. Europeans will start buying cars again.
If you think the world is coming to an end, don't look at Maxwell. But consider the possibility that the world isn't coming to an end. Maxwell's potential market in trucks and buses is probably 10 times what they have now, and their market in automobiles could be hundreds of times their current market if the stop-start system gets incorporated in cars worldwide as a standard feature. (Maxwell ultracapacitors are currently in 0.5 million cars after a few years of trial installations, but there are over 1 billion cars on the road, and there are expected to be 62 million new cars sold world-wide in 2012).
When Maxwell's revenues rise again the increase will go mostly to the bottom line and give them tremendous leverage. Four quarters with no greater revenue than what they had this quarter would give them earnings of 84 cents. And if revenues really rise they could easily make $2.00 or more by 2014. This is what insiders are seeing, and why they are buying. At $7.00, Maxwell seems like a real bargain.