Companies That Stand To Benefit From Increased Affordability And Growth Of Electric Vehicles

Includes: NRG, ROC, TSLA, USGT
by: Josh Hutheson

Electric vehicles (NYSE:EV) continue their march toward mainstream success with technological improvements in the vehicles themselves as well as external factors continuing to push the public towards the clean-energy solutions. Although we still are ways away, the car market is beginning to see the changes that should make electric vehicles more affordable to the masses. In a recent article in the LA Times, it was reported that electric car prices are expected to drop over the next several months, positive signs -on any product development curve. EV sales have also been at all-time highs. In a recent article, Barron's reported that for a fourth consecutive month, U.S. electric vehicle sales hit a record, with about 7,600 sales in November and 47,500 year-to-date. It was also recently stated that 2013 may be the turning point for the EV industry.

Most of the EVs out there are produced by the major car manufacturers that will see little impact on their stock prices from their successes in EVs. Still, there are some companies out there that could see a significant change in the public's interest in their shares due to the development of the EV market and demand of their products. Here are four stocks in four different industries that could be of interest with the after mentioned trends:

The obvious benefactor from the increased market penetration of EVs is Tesla Motors (NASDAQ:TSLA). Tesla's goal is to accelerate the world's transition to electric mobility with a full range of increasingly affordable electric cars. Tesla designs and manufactures EVs, as well as EV powertrain components for partners such as Toyota and Daimler. Tesla has delivered more than 2,400 Roadsters to customers worldwide. Model S, the world's first premium sedan to be engineered from the ground up as an electric vehicle, began deliveries to U.S. customers in June of this year. Tesla has already received more than 13,000 reservations worldwide for Model S.

The proof in Tesla's strong position in the EV market is in the pudding as Tesla recently became cash flow positive. Furthermore, it raised prices on its Model S, suggesting strong demand for the vehicle. With its new manufacturing facilities coming online, the temptation would be to lower prices or keep them fixed as the market will have to absorb a large increase in supply. The combination of additional supply and higher prices suggests consumers are lining up for the new cars and are ready to pay a premium. Separately, the Model S was just awarded Motor Trend's 2013 Car of the Year award.

Tesla is forecast to become profitable in 2013, for the first time its brief history as sales are expected to nearly quadruple to $1.63 billion as the company gets its new manufacturing facilities on line. With the after mentioned cash flow news, the company now moves from a cash burning enterprise into a cash generating enterprise and increasing the pool of investors. With a number of catalysts on the horizon, the company should continue to be of interest to investors with its new found profitability, forecast growth, and continued EV efforts.

Back to the car, the battery pack in the Tesla Roadster is the result of innovative systems engineering and 20 years of advances in Lithium-ion cell technology. Tesla battery packs have the highest energy density in the industry. To achieve this energy density, Tesla starts with thousands of best-in-class Lithium-ion cells and assembles them into a liquid-cooled battery pack, wrapped in a strong metal enclosure. The battery is optimized for performance, safety, longevity, and cost.

Other electric vehicles also use lithium-ion batteries. Consequently, lithium producers stand to benefit as more and more lithium-ion batteries are made. One lithium producer is Rockwood Holdings (NYSE:ROC), a world-class specialty chemicals and advanced materials business with revenues of nearly $4 billion. The company's subsidiary, Rockwood Lithium, is the world's leading manufacturer of lithium-based compounds and an innovative developer of metal-based fine chemicals for use in specialty applications.

Rockwood's lithium-based compounds are used in a variety of high growth applications, including base chemicals for numerous industries, drug intermediates, elastomers for car tires and rubber soles, lithium batteries, thermoplastic materials and high performance greases. Rockwood has lithium production facilities in the United States, Chile, Germany and Taiwan. The company was in the midst of a lithium acquisition but it was outbid by a Chinese company, signifying the potential of lithium. In simple economic terms, the more demand there is for a product, in this case lithium assets, the more utility the buyer expects to gain from the purchase.

The sentiment on ROC seems to be positive as it was recently initiated as a Buy at SunTrust. Other analysts are positive on the stock as well, projecting upside of nearly 20%. The stock trades at a reasonable 9x trailing earnings and has a history of stability with EPS in FY11, FY12, and FY13 were and are expected to be between $3.99-4.02 so downside protection is in the cards.

Graphite is another, but unknown, component of lithium-ion batteries. Graphite is a key component in the anode portion of the batteries and with demand for EVs increasing, it is widely expected that demand for graphite will increase as well. USA Graphite (OTC:USGT) is a publicly traded US exploration company focused on the acquisition, exploration and development of world-class graphite properties in North America. The company recently acquired two graphite properties.

In November, the company announced it acquired a 100% stake in the Blue Wing Mountain Graphite property, a strategic project located in Pershing County, Nevada. The property consists of 96 lode claims covering an area of approximately 1985 acres. Road access to the project is excellent and is situated directly between I-80 East and US-395 North. Initial prospecting and geological analysis on the claims confirmed the presence of flake graphite at surface.

In December, USA Graphite announced that it issued 2,000,000 shares of the company's common stock in order to exercise the company's initial option relating to the acquisition of the Gordon Creek Graphite Property. This property consists of 10 lode claims in Elko County, Nevada, covering an area of 206 acres. The area is a newly discovered graphite occurrence with flake graphite present and visible at surface.

A brief side note, investing in micro-cap stocks is risky as they tend to be new and unproven. Low trading volumes increase liquidity risk.

NRG Energy (NYSE:NRG), the utility company, has placed a big bet on the success of electric vehicles. A primary issue holding back the EV revolution is consumer concern over the limited range of electric vehicles, but NRG is seeking to replace that range anxiety with range confidence by providing electric vehicle charging infrastructure and services. In 2010, NRG launched eVgo, the nation's first comprehensive, privately-funded electric vehicle charging ecosystem. Starting in Houston and expanding to additional markets, eVgo delivers an unlimited miles home-and-away charging service for a low monthly fee, making EV ownership easier and more affordable.

The shares are up 28% for the year as there seems to be excitement stemming from its recently completed merger with GenOn, creating the nation's largest competitive power generator with a diverse fleet of approximately 47,000 megawatts with asset concentrations in the East, Gulf Coast and West. The transaction is expected to enhance annual combined company EBITDA by $200 million by 2014 by realizing cost and operational efficiency synergies. In addition, the transaction will enable the combined company to reduce its interest and liquidity costs, and realize other balance sheet efficiencies, in aggregate, of $100 million per year. As a result, total recurring FCF benefits generated by this transaction will be approximately $300 million per year.

Even though the stock has had a nice run, there may be more upside ahead. The rising natural gas prices are a boon for the shares as well as recent moves by smart money, with hedge funds scooping up shares of the utility giant. Cost savings in the merger integration are just a cherry on top.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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