Battery Investing for Beginners, Part 3 26 comments
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I've been blogging about pure-play energy storage device manufacturers since July 2008. By mid-November I'd assembled a short list of thirteen pure-play public companies that accounted for almost 25% of the $30 billion global battery market. Frankly I was shocked to learn that major battery manufacturers like Exide (XIDE) and Enersys (ENS) that report billions in annual sales carried tiny market capitalizations when compared with far riskier technology development companies like Ener1 (HEV) and Valence Technology (VLNC) that would be little more than rounding errors on the big boys' financial statements.
As I focused on the obvious valuation disparities, it became clear that the market was paying huge premiums for companies that are developing cool energy storage devices and heavily discounting companies that manufacture objectively cheap energy storage devices. My belief at the time was that the cool companies were likely lose ground while the cheap companies were likely to gain ground. My original peer group comparison table follows (click on the image for a larger view).
While the last ten months have been anything but normal, I revisited my valuation analysis in May of this year and showed that from November 14, 2008 through April 30, 2009, the cheap group appreciated an average of 56.5% while the cool group appreciated an average of 6.7%. I revisited the analysis again in August of this year and showed that from November 14, 2008 through July 31, 2009, the cheap group appreciated an average of 59.2% while the cool group appreciated an average of 21.42%. We all know that past performance is never a guarantee of future performance, but the theory seems to be holding up pretty well.
With its successful IPO last week, A123 Systems (AONE) dropped a $2.2 billion market capitalization rock into what was previously a $4.4 billion market capitalization pond. The ripple effect will be felt for months as analysts and investors perform detailed comparisons of the publicly traded energy storage companies in an effort to ferret out the bargains and identify the diamonds in the rough.
Now that the initial volatility of A123's IPO has passed, the market seems to be returning to more normal conditions, and we've reached the end of a calendar quarter, this seems like a convenient time to do a final comparison of market performance since November 14, 2008. It also provides an opportunity to conform the cheap and cool classifications to the tables I used in Battery Investing For Beginners, Part II and reset the baseline for future comparisons using yesterday's closing prices.
The following table provides comparative price data for the pure play energy storage companies I track. It shows closing prices on November 14, 2008 and September 30, 2009; calculates the percentage of change since November 14, 2008; and shows current market capitalization of each company. It also provides comparable tracking data for the Dow, the S&P 500 and the Nasdaq Index. While I've included A123 in the cool sustainable group effective September 30th, I have not adjusted the historical performance of the group for the first week of trading in its stock (click on the image for a larger view).
The following table summarizes the portfolio appreciation that a hypothetical investor would have realized over the last ten months if he had invested $1,000 in each company on November 14, 2008. It also presents comparable data for the broad market indexes.
| Tracking Category | Percentage Gain |
| Broad Market Indexes | 25.09% |
| Cool Emerging Companies | 4.30% |
| Cool Sustainable Companies | 75.14% |
| Cheap Emerging Companies | 54.73% |
| Cheap Sustainable Companies | 121.02% |
| Chinese Battery Companies | 126.24% |
Equity markets are driven by a combination of greed and fear, emotional reactions that are frequently at odds with economic realities. Over the past few years, the cool companies have been driven by headlines that highlight opportunities while the cheap companies have been driven by headlines that highlight problems. Since headlines inevitably feed the greed and fear cycle, the cool companies were driven to objectively high valuation levels while the cheap companies were driven to objectively low valuation levels. If the last ten and a half months are any indication, the pendulum is moving back toward a more balanced position where the cheap group valuations will eventually reach a more reasonable parity with the cool group valuations. They still have a long way to go.
I have consistently argued that every energy storage decision in transportation, alternative power and the smart grid will boil down to a cost-benefit analysis. As long as the cost of storage exceeds the value of the stored electricity, waste will prevail. When the value of the stored electricity is higher than the costs of storage, the market will respond appropriately. While there is no doubt that the cool companies will have more business than they can handle, there is also no doubt that the bulk of the incremental sales revenue will flow to companies that serve the mundane needs of the average user, rather than the extreme needs of "power users." It's ultimately a choice between meat and potatoes or rainbow stew.
While I believe the cleantech revolution will result in rapid and sustained growth across the entire spectrum of energy storage companies, I remain convinced the best stock market performers will be manufacturers of objectively cheap energy storage products. Vinod Khosla is fond of reminding investors that "The most important thing to remember is economic gravity — the cheapest thing ends up winning." Mark Twain once quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he made the cheapest cars. Microsoft didn’t make the best operating system; it made the cheapest operating system. Xerox invented and then failed to commercialize more cool technologies than I can even begin to count. Examples of the fundamental economic reality that cost trumps coolness are too numerous to mention. When you cut through the energy storage hype and drill down to business fundamentals, I have to believe that investors who want market beating returns in the energy storage sector should be focusing on companies that make cheap products.
DISCLOSURE: Author is a former director Axion Power International and holds a large long position in its stock. He also holds small long positions in Exide, Enersys Active Power and ZBB Energy.
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This article has 26 comments:
ticker csgh which has been trading over a million
shares lately.
Thanks Tom B
Tom, CSGH reports that it is a large producer of cobaltosic oxide and lithium cobalt oxide (anode materials for lithium ion batteries) and has the second largest cobalt series production capacity in the PRC. They also also provides substitute products including lithium iron phosphate (LiFePO4). It has roughly 53.5 million share outstanding and made $0.16 in the year ended May 31. At yesterday's closing price, the P/E is about 12, the P/S is about 1.4 and the P/B is about 1.6. Those metrics are within the range for the other Chinese battery manufacturers I mentioned in Part 2. I don't talk about CSGH because they're more of a materials company than a battery company.
I'm sure you've seen the reports that early generations of lithium ion batteries had problems with explosions and fires while the newer chemistries were safer. The materials CSGH manufactures and sells are primarily used to make the explosion and fire prone classes of batteries.
I'm a bit of a skeptic when it comes to foreign companies that list their shares in the U.S. but have all of their operations elsewhere. It's done all the time but I've always found that my foreign clients have less respect for US law than my US clients. When I add in the fact that I don't truly understand the business culture in Asia, I tend to shy away from the Chinese companies that trade in the US. The combination leaves me very reluctant to say too much, either positive or negative, about the China class.
Saft - among the best there is.
Polypore
Wilson Greatbatch
BYD
Chloride
Next: most of the companies that you selected are cheap because they are mediocre to lousy companies. That is not to say that there arent' frothy valuations for A123 and many of the Chinese small cap battery companies, but the valuations of the some of the companies that you think look cheap, may indeed by overly generous, to say the least. Certainly Enersys is a great company, but the rest of your picks get grades of 'C' through 'F' in terms of quality stocks.
Very few people got rich buying and holding Ford, Chrysler and GM stock.
They bought Duesenberg, National, Apperson, Jewett .... instead.
Hindsight is golden and "all that glisters is not gold."
Saft is French and doesn't report to the SEC - but it's a great company.
JCI does report but is far from being a pure play.
BYD does not report and is far from being a pure play.
Polypore is materials not batteries.
Wilson Geatbatch is too diversified
Chloride Power is English and doesn't report to the SEC.
A wider net would include more worthy companies, but significantly complicate comparisons.
carey_jim, diversification is always a very good idea. Pick one and the odds are you'll pick wrong. Pick several and the odds are that at least a couple of them will work out, particularly if they have a billion dollar sales book to start with.
This works well in a situation where prospect generators flood in because of a particularily good strike; current example Underworld; extremely difficult to do 'Due Diligence' but armed with a low price across the board you multiply your gains X fold.
PS. This also works well with horses but remember to do your math as apart from the winner, all the others are losers.
Nice to see A123 up the last four days even though the DOW and Nasdaq were down the last four days. Nice to see Axion trade strong (for Axion anyways) with another 10,000 shares changing hands after the close, plus it ended the week with 2 up days. Exide down three of the last four days. HEV down slightly for the week but closed up today. Volumes on all the stocks were close to typical, so I think it's a safe guess to say I don't think the frenzy has started yet.
But I will end off with saying it's nice to see A123 up, that bodes well for everyone. Maya, I think you would have lost the $ 17.00 by the end of October bet. I hope you will anyways. If A123 falls, that will hurt everyone. I don't think anyone has a better superficial feel good story than A123. After all, if Zenn Motor can have a market cap of $ 150,000,000 based on a roll of scotch tape, 3 thumb tacks and a photocopier, it's not hard to justify A123 at $ 20.00 plus.
Here is a company that you might want to keep an eye on and advise your following about?
www.westernlithium.com/
evworld.com/article.cf...
I like to see A123 performing well because so far they seem to have done a pretty good job managing expectations. The market seems to understand that revenue growth over the next couple years will be limited by capacity on the manufacturing side and they're picking up a lot of sales in the grid markets. These are all good things.
One of the big problems in storage is that it's never been seen as a sector and there are no generally accepted valuation metrics. That's part of the reason why Exide trades at 0.2x sales and A123 trades over 20x sales. I don't ever see a cheap sustainable company like Exide trading at parity with its cooler cousins, but a spread that's two orders of magnitude wide seems excessive.
Don, there's a lot of merit to investing in raw materials producers rather than raw materials users, but I think that trying to comment on different but related sectors would be more than I could keep up with. The article you linked is intriguing but does highlight our need to broaden our thinking about what our needs are and how those needs can best be served. It's one thing to know for certain that major change is coming and another entirely to describe the future. The only thing I can say for sure today is that all classes of batteries will be critically important to that unknown future.
While this may apply in theory to the pure investor mentality, I don't think it does the job as far as providing the investor with a platform where he/she can put faith into the equation. Without the dynamic of faith - the whole sector is reduced to a few basic sound bites from bloggers like yourself, who rather than investigate thoroughly new ventures, prefer to rely on third party reports and hyperlinks to your previous articles.
I hope you don't take this personally, but I find your columns less interesting when you focus soley on "investment metrics" and don't
delve into the actual stories behind the companies you champion. I think most people want to know about the actual company philosophy and what products they are involved in.
I really like your articles with investment metrics, it was an earlier version of this article that started me reading your articles.....
Don
Without delving deeper into the geology of Western Lithium deposit (ie overburden and ease of processing) i note that their cut-off grade is 0.2%Li and I couldn't tell their average grade. This seems to approximate to Galaxy resources is australia which reports in Li2O (cut-off 0.4% Li2O, average grade 1%)
So it seems that there are Li mining juniors out there. As Li concentrate is historically a low value product, I don't think much exploration has occurred, so these hard rock deposits are likely to be replicated globally.
As far as vision of future of transport goes, the Project Better Place white paper seems about the clearest to me...
The real challenge for me is keeping it light enough for the financially oriented and deep enough for the technically oriented.
Maybe it's me that needs to find another blog that covers this kind of territory, but so far I haven't found one. If anybody knows of one please post a link here!
1. They have taken steps to cut operating costs
2. It is almost certain they are about to get the big SATCOM-On-The-Move contract whose announcement has been pending for some time (ULBI even said they've already shipped the cables to the contractor and their 10-Q says 'we don't believe it is a situation of IF we are going to get the contract but WHEN)
3. They are going to have close to $200mm in revs this year, which isn't bad for a company w/ a market cap lower than $100mm.
Anyway, just seems like that stock is oversold here relative to other battery companies.
Thoughts?
Many of these companies have inherent risks attached to them in terms of balance sheet strength, technology etc. Would a better play be SQM..the supplier of the lithium
Peter, it's hard to argue with the logic that raw materials suppliers will prosper as the industry develops. I don't get into analysis of miners because it's an entirely different industry, but that's merely recognizing my own limitations.
I really enjoy reading your posts and hope you continue to impart your wisdom, or point us in another directon for future posts. I have a couple of questions for you. I am really trying to play the smart grid, intelligently. I don't understand enough to understand, which renewable energy sources will be successful. However, I am certain smart grid solution provider (s) will be a very profitable future, well into the future.
I find myself following the smart money (institutional investors), insider buys, and government contracts. The most promising technologies seem like they will be coming from Active Power, Beacon Power, and ZBB. Do you have any inkling about who the major players will be in that space over the next 3-5 years? Am I on the right track, or way off base? Also, what's the early warning signs that a company, won't be able to deliver the growth into the future?