Monday morning a reader sent me a link to a December 23rd press release announcing that the OM Group, Inc. (OMG) had agreed to buy EaglePicher Technologies LLC, a well regarded name in the battery industry, for $171.9 million, or roughly 1.4x sales. While I overlooked the release during the build-up to Christmas, the transaction is important because it provides a current bright-line reference point for energy storage investors on the difficult question, "what is a battery company worth?"
EaglePicher was previously a unit of Eagle Picher Holdings, a public company that filed a voluntary petition under Chapter 11 of the Bankruptcy Code in April 2005. While I can't find detailed disclosures on the reorganized company's lines of business and profitability, EaglePicher's website describes a variety of battery chemistries ranging from lead-acid to lithium-ion. The company's press release indicates that approximately 60% of revenue comes from its defense business, 31% comes from its aerospace business and the balance comes from medical and commercial battery systems. The EaglePicher acquisition seems to be a logical step in OMG's vertical integration and diversification strategy.
Since the details are limited, it's hard to perform a meaningful analysis of the various factors that give EaglePicher value. Nevertheless, the 1.4x sales number is very interesting because of the huge disparity in price / sales ratios among the 17 pure play energy storage stocks I follow. The following table identifies the companies in my tracking group, shows their December 31st closing price, shows their current market capitalizations, and shows the price / sales valuation ratios reported by Yahoo finance.
While price / sales ratios have little or no utility in evaluating emerging companies that have not yet hit their stride when it comes to product sales, it can be a useful screening tool when comparing established operating companies that have relatively stable sales histories. Based solely on the price / sales ratio from the EaglePicher acquisition, I would conclude that the following companies might be undervalued:
- C&D Technologies (CHP), which trades at 12% of sales;
- Exide Technologies (XIDE), which trades at 20% of sales;
- Ultralife Corporation (ULBI), which trades at 43% of sales;
- Enersys (ENS), which trades at 68% of sales;
- China BAK Battery (CBAK), which trades at 84% of sales; and
- China Ritar Power (CRTP), which trades at 87% of sales.
Investors can't rely on a single metric in making an investment decision. Nevertheless, since the level of investment success frequently has a direct correlation to the initial entry price, knowing how the market price compares with recent real world deals can be very enlightening.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also holds small long positions in C&D Technologies (CHP), Exide Technologies (XIDE), Active Power (ACWP) and ZBB Energy (ZBB).