The Heart of Cleantech Sells at 50% Discount to the Broader Market

In a recent thematic report, The Sixth Revolution: The Coming of Cleantech, Merrill Lynch cleantech strategist Steven Milunovich identified cleantech as the sixth technological revolution since 1771 and warned that “investors must pay attention because cleantech could revolutionize much of the economy, including the utility, oil and gas and auto industries.” The six historical inflection points identified by Milunovich were:

1771		The Industrial Revolution		Britain
1829		The Age of Steam and Railways		Britain spreading to Europe and USA
1875		The Age of Steel, Electricity and Heavy Engineering		USA and Germany
1908		The Age of Oil, the Automobile and Mass Production		USA spreading to Europe
1971		Age of Information and Telecommunications		USA spreading to Europe and Asia
2003		Age of Cleantech and Biotech		USA and Europe going global.

On the cover page of the report, Mr. Milunocivh observed that, “Industries tend to be vertically integrated and centralized early on then diverge to become more horizontal and distributed. Energy markets are mostly centralized today; solar and wind farms might continue that trend. On the other hand, we think decentralized energy generation and monitoring through solar panels, distributed storage, and microgrids may be the wave of the future.” Later in the report, Mr. Milunovich described energy storage as “perhaps the toughest problem in cleantech” before pointing out that “Energy storage is the holy grail of cleantech and a difficult problem” that must be solved before solar and wind can become more than niche technologies.

In simpler terms, energy storage is the heart of the cleantech revolution.

Most stocks have experienced major sell-offs over the last few months. However, if you compare the energy storage sector with the broader market, you find that hard times for the Dow and the S&P 500 have been savage times for the storage sector. In essence, the entire energy storage sector is on sale at incredible bargain prices. The following table uses percentage changes from 200-day moving averages to compare the relative performance of the energy storage stocks I’ve been following for several months with broader market indices.

		Dec 11th	Market	200 Day	%
		Close	Capitalization	Average	Change
Russell 2000 Index	^RUT	476.4	N/A	637.73	-25.30%
S&P 500	^GSPC	899.24	N/A	1,150.25	-21.82%
Dow Jones Industrial Average	^DJI	8,761.42	N/A	10,586.40	-17.24%
Ener1, Inc.	HEV	$8.88	$956.47 MM	$6.83	30.01%
Ultralife Corporation	ULBI	$10.22	$178.42 MM	$9.92	3.02%
Hong Kong Highpower	HPJ	$3.03	$41.07 MM	$3.46	-12.41%
Valence Technology, Inc.	VLNC	$2.31	$277.49 MM	$3.14	-26.43%
Advanced Battery Technologies,	ABAT	$2.41	$132.02 MM	$3.77	-36.07%
Altair Nanotechnologies Inc.	ALTI	$1.21	$112.68 MM	$1.91	-36.65%
ZBB Energy Corp	ZBB	$1.71	$17.98 MM	$2.80	-38.93%
China BAK Battery, Inc.	CBAK	$2.22	$128.04 MM	$3.68	-39.67%
Axion Power International	AXPW.OB	$1.15	$30.38 MM	$1.96	-41.33%
C&D Technologies, Inc.	CHP	$2.80	$72.04 MM	$5.95	-52.94%
Maxwell Technologies, Inc.	MXWL	$4.97	$108.41 MM	$10.59	-53.07%
Beacon Power Corporation	BCON	$0.59	$52.12 MM	$1.27	-53.54%
Enersys	ENS	$9.54	$474.82 MM	$22.80	-58.16%
Exide Technologies	XIDE	$4.20	$316.79 MM	$10.43	-59.73%

I think the disparities are shocking! The three broad indexes are down an average of 21.45% from their 200-day averages. However average discount in the storage sector (excluding HEV and ULBI) is 42.41%. In effect, the entire sector is on sale at a 50% discount to the broader market.

Surprisingly, companies that focus primarily on the North American markets have suffered the biggest percentage declines. If Mr. Milunovich’s analysis is correct and energy storage is a key enabling technology for the cleantech revolution, then it won’t be long before governments worldwide begin to treat energy storage companies as strategic national assets and implement regulations and tariffs designed to keep home country battery production available for home country use.

We are currently witnessing a rare convergence of events where the cleantech revolution is or should be obvious to all but the most casual observer and energy storage, the key enabling sector for the revolution, has been brutalized to the point where it is trading at a 50% discount to the broader market.

Disclosure: Author holds a large long position in Axion Power International, has recently bought small long positions in Exide and Enersys and may make additional storage sector investments in the future.

Comments

[Alan Young:]

I'm a cleantech fan, in principle, but.... How many of these companies were earning their price 9 months ago? If you calculate the "discount" by P/E ratios rather than by decline from 200DMA, I bet there's not much of a discount at all.

2008 Dec 11 10:45 AM

[John Petersen:]

Aalan, the PE ratios (for the 5 of 14 companies that have them) are:

ABAT 8.13
ENS 5.51
HPJ 13.18
ULBI 9.76
XIDE 4.93

The forward P/E ratios are even more impressive.

2008 Dec 11 11:09 AM

[Alan Young:]

Thanks for the reply, John. I think that gives us a better perspective. I'll take those 5 (or at least one); you can keep the 9 that are unprofitable.
In a season when analysts are slashing estimates by 40-60% all over the place, forward PEs are meaningless.


On Dec 11 11:09 AM John Petersen wrote:

> Aalan, the PE ratios (for the 5 of 14 companies that have them) are:
>

2008 Dec 11 01:55 PM

[John Petersen:]

Aalan, there are compelling business models in the group that are not yet profitable (together with some dogs and cats) and it would probably be a bit short sighted to overlook them at this early stage in the game.

2008 Dec 12 01:12 AM

[Matt_the_Batt:]

aalan, which is the (one) company you think will have most success in mid-term future?


On Dec 11 01:55 PM Aalan wrote:

> Thanks for the reply, John. I think that gives us a better perspective.
> I'll take those 5 (or at least one); you can keep the 9 that are
> unprofitable.
> In a season when analysts are slashing estimates by 40-60% all over
> the place, forward PEs are meaningless.

2008 Dec 12 11:27 AM

[John Lounsbury:]

John - - -

I like the forward prospects for CBAK, especially since the risk that their rapid facility investment is a temporary overbuild is mitigated by a Chinese government financial backstop.

Disclosure: I have started buying CBAK during the past five months and have owned ABAT for almost a year.

2008 Dec 12 11:50 AM

[John Lounsbury:]

John - - -

Steve Milunovich's inflection point chart is interesting. I have had this sequence on a scrap of paper for some time. It has occurred to me that there may be some useful lessons in how investment markets have responded to these historic "stimuli". Although I haven't developed a thorough analysis as yet, the following list shows some interesting relationships.

Economic Revolution 1: Railroads, 1830's
Contemporary Crashes, 1847-1857, rolling through Europe to U.S.
Major attribution - Railroads (RR)
Economic Revolution 2: Steel & Electricity, 1870's
Contemporary Crashes, 1873, Europe, U.S.
Major attribution - RR, Real Estate (RE)
Economic Revolution 3: Oil & Mass Production, early 1900's
Comtemporary Crashes, (a) 1907, U.S. and (b)1929, U.S.
Major attribution - (a) RR, Coffee and (b)Stocks, RE
Economic Revolution 4: Technology, 1970's
Contemporary Crashes, (a) 1974, World and (b) 2000-2002, U.S.
Major attribution - (a) Stocks, RE and (b) Tech
Economic Revolution 5: New Energy, early 2000's
Contemporary Crashes, 2008-?, World
Major attribution - Credit Bubble (Banking), RE

Interesting points:

1. There was a market crash early in all revolutions (except the first) that were not directly related to the revolution.

2. Crashes associated with a specific economic revolution occurred later in that revolution process, and sometimes after the start of the next revolution.

3. One revolution (railroads) had a legacy of repeated bubbles and crashes

This means that investment strategies for the seemingly undervalued storage sector must look forward to a potential bubble down the road.

One additional note: There has been a credit cycle (banking)involvement in all economic (and stock market) cycles, but often secondary to another prime mover, especially in the biggest crashes. What is different in 2008 is the real estate cycle effect on the economic cycle has been overshadowed by collapse of a mountain of highly leveraged debt derivatives.

2008 Dec 12 12:59 PM

[frflyer:]

“Energy storage is the holy grail of cleantech and a difficult problem” that must be solved before solar and wind can become more than niche technologies."

This is an overstatement. For one thing Denmark has somehow managed 20% wind power already. Parts of Europe including parts of Germany and Denmark have 40% wind power. But here in America with tiny percents of power coming from these sources, this is repeated over and over by those opposed to renewable energy
The argument is too often used as more disinformation to delay shifting to alternative energy.

The statement doesn't take into account solar thermal with heat storage.
This technology can replace coal plants as base load power. It can also act as load following power. And storing heat is 20-100 times cheaper than storing electricity and much more efficient. In a way, solar thermal with storage is better than base load because it peaks when energy demand peaks, while also being able to put out steady power when the sun goes down.

Yes we need storage solutions but that isn't as big a factor as made out to be.
We have a long way to go before it is a fatal lack. With a tiny percent of power now generated by solar and wind in the U.S. there is a lot of room for growth before it is a major problem. For one thing, the statement doesn't take into account the use of solar panels to partialy or fully power individual homes either on or off the grid.

2008 Dec 12 02:06 PM

[John Petersen:]

Frflyr, your disagreement is precisely the reason I try to include links to the source material whenever I quote authoritative opinion. I may agree with the quoted source, but I feel no duty to defend their position.

Your wind penetration rate numbers for Denmark are accurate, but all published reports indicate that Denmark has a dismal record in trying to put anything close to its installed capacity into the grid; which is why they sought out Project Better Place to use the capacity that their grid didn't need. The numbers for Germany are way off base.

The experience throughout Europe is that once you put more than about 15% renewables into the grid there must be massive storage capacity to offset the instability that renewables create. And while the US does not have lots of problems created by renewables, Sandia estimated that our aging and overloaded grid needed about $80 billion in storage capacity in 2004.

Solar thermal is a great idea, but nobody is doing it beyond a pilot scale yet. It will come, but I'll not go getting all excited till it arrives.

We have a problem today and we must go to work today with the tools we have to solve the problem. We also need to be ready to adopt better tools when they arrive. But waiting for the better tool to get here isn't really an option because there will always be something a little better on the horizon.

2008 Dec 12 02:50 PM

[frflyer:]

John, thanks for replying to my comment. I don't doubt the need for storage.
I had seen those numbers for parts of Germany and Denmark a couple of different places, but you may be right. I read somewhere that Denmark was selling windpower into Germany's grid in exchange for base power from Germany.

We could make a good start on building solar thermal which comes with it's own inexpensive energy storage.

For what it's worth, a report from the Western Governers Association said the industry is capable of building 13 gigawatts of capacity by 2015. They said once there were 4 gigawatts installed, the price should drop to less than 10cents/kWh and should continue to drop as the scale increased to 5-8 cents/kWh. There are already 2 gigawatts scheduled or already building in California. These aren't pilot projects- some are as big as 500 megawatts. The report also said 300 gigawatts could be built near existing transmission lines.

I gleaned the following from articles at Green Wombat

Abengoa Solar's 280 MW with 6-hour molten salt heat storage for Arizona Public Servic.

Ausra 175 MW plant near San Luis Obispo,CA (central coast)
building now

FPL has filed plans with California regulators to build a 250-megawatt plant in the Mojave Desert.

Brightsource has a contract for up to 900 megawatts in the Mojave desert. this is two or three plants.

eSolar, contract with Southern California Edison with 245 megawatts plant

Solel signed with PG&E (PCG) to build a 553 megawatts solar thermal plant in the Mojave Desert

Stirling filed a license application with the California Energy Commission to build a 750-megawatt plant 100 miles east of San Diego

That's 2,753 megawatts total, if Brightsource builds only 500 megawatts.
3,153 megawatts total, if Brightsource builds 900 megawatts.
- assuming that all of these are completed.





BTW nice move in Exide today

2008 Dec 13 02:07 AM

[John Petersen:]

Frflyer, I applaud anything that works and makes economic sense. So I like the progress that's being made in solar thermal. But we still have a long way to go and it will take a whole box full of tools.

Download Milunovich. It's a real eye opener.

2008 Dec 13 09:14 AM

[Matt_the_Batt:]

Which report of Milunovich are you talking about, John?

2008 Dec 13 07:24 PM

[John Petersen:]

The first line of the article includes a blue hot link that will take you to a complete copy of The Sixth Revolution: The Coming of Cleantech.

2008 Dec 14 12:37 AM

[Matt_the_Batt:]

Upps... this one escaped my notice!

Thank you!

2008 Dec 14 05:22 AM

[frflyer:]

regarding:
The Sixth Revolution: The Coming of Cleantech.
haven't read it all but very interesting.

Related articles on climate solutions and what it will take
to reduce carbon emissions enough to prevent the worst case scenario for climate change.

An Introduction to Core Climate Solutions
climateprogress.org/20.../

which is based on this 2004 study published by Science magazine. You will notice that in 2004 solar thermal wasn't considered, but thinking has changed since then, as the first link shows.

Science magazine article on Stablilization Wedges to solve global warming carbonsequestration.us...

also:
www.nature.com/climate...

climateprogress.org/20.../

It should be noted that it will take tremendous effort to keep CO2 at or below 450ppm by 2050, while many scientists say we should reduce emissions till we lower CO2 to 350ppm from the current 380ppm
It was 280 ppm at the start of the industrial revolution.

At 450ppm we will still face major problems from climate change.

2008 Dec 14 02:59 PM

[frflyer:]

One last comment
Found this Green Car Congress website

www.greencarcongress.c...

An analysis and comparison of what are the best choices for low emission vehicles.

2008 Dec 14 04:02 PM

[RZ:]

John,
I always find your articles informative and interesting. Keep them coming, I look forward to learning more each time.
Thanks

2008 Dec 14 10:04 PM