Long Lasting Fuel Cell Batteries: Why I'd Buy Mechanical Technology

Wouldn’t it be nice to get a month out of your cell phone battery without having to recharge? That may sound far fetched. But it’s the kind of mileage you could see from fuel cell-based batteries in a few years. The futuristic battery is based on what’s called direct methanol fuel cell technology [DMFC]. An Albany, NY-based company called Mechanical Technology (MKTY) has a version of the battery that can last for over 90 hours.

Plus it probably won’t blow up in your lap.

Of course fuel cells, like many other kinds of “alternative energy,” are one of those areas that hold plenty promise -- and let down -- for investors. So if you buy shares of Mechanical Technology, limit your exposure and be prepared to think long term.

“This is one of our most speculative stocks,” agrees Edward Guinness of the London-based Guinness Atkinson Alternative Energy Fund [GAAEX], which holds the stock. “We are in it eyes wide open coming up against crunch time. The problem is it they are nearly a year and a half from hitting a revenue upswing. The next 18 months are going to be key.”

But like Guinness, I’ll give Mechanical Technology the benefit of the doubt as a speculative play -- because insiders have been buying the stock.

In November insiders purchased $262,000 worth for $1.81-$2 right before the stock shot up to nearly $3. Then chief executive Peng Lim bought $20,000 worth in the pullback in late December. You can get it even cheaper now at around $1.80.

I’d be a buyer, for the following reasons.

Strong partnerships

Mechanical Technology is developing fuel cell batteries with several high-profile partners, including the Duracell division of Gillette, the cell phone maker Samsung, and the U.S. Air Force and the Army.

It has a low-powered battery for consumer applications (called Mobion-1) that packs a lot more power than standard lithium-ion batteries – the kind you use now. One problem: The battery is still too big.

Mechanical Technology is also developing high-powered versions of this battery for use by the military (Mobion-30) in applications like satellite communications systems.

The company is in the demonstration phase for each. But it hopes to be selling the military batteries in 2008.

End of the road for lithium-ion

Makers of lithium-ion batteries been cramming more and more energy into smaller batteries, and they’ve pushed the limits. The result has been exploding batteries – which recently lead to a massive laptop battery pack recall by Apple (AAPL) and Dell (DELL).

The whole affair heightens the interest in fuel cell batteries, believes Rodman & Renshaw analyst Amit Dayal. Besides, portable digital gadgets will continue to demand more memory and computing power to handle more complex tasks. This calls for more power – and fuel cell batteries may be the answer.

Pure methanol

Mechanical Technology develops fuel cells in its MTI MicroFuel Cells division. Rodman & Renshaw’s Dayal thinks the company’s direct methanol micro fuel cells are superior to those of competitors because they run on pure methanol, which means they produce more power. The batteries operate on a small cartridge of methanol, and they can be “recharged” instantly by putting in a new cartridge.

Bigger potential upside

With a market cap of just $55 million, Mechanical Technology looks like a better deal than competing plays like Medis Technologies (MDTL) which has a market cap ten times the size.

“There is significantly more upside in Mechanical Technology if this does take off,” says Guinness.

Cash burn
By a rough calculation, Mechanical Technology seems like it could go a year or more without another dilutive capital raise. It looks Mechanical Technology used up about $13 million to $14 million in cash in 2006.

As of early November the company had $5 million in cash. It also held shares of Plug Power (PLUG), which the company helped found, worth $11.6 million. It December, it raised $10.3 million by selling stock to RG Capital Management based in the Cayman Islands.

While the MTI MicroFuel Cells division burns cash, the company also has an instruments division that produced $1.7 million in revenue in the third quarter, an increase of 19%. The company has no debt, and it has a tax loss carry-forward of about $46 million.

Mechanical Technology may announce a new partnership in the private sector this year, and the Department of Energy could increase funding for alternative fuel cell technology. It expects sales in the military sector to start in 2008.

The bottom line: These kinds of alternative energy plays often flame out – so be careful with position size. But the recent round of insider buying suggests this company is one of the safer ways to get exposure to what could be a big deal in consumer electronics a few years down the road.

Disclosure: Author has no position in above-mentioned stocks.

Comments

[Jeffrey Todd:]

Thankyou for a great review But? I did stats on Seekingalpha for the last 6 months. Using spread sheets and entering long/short calls published in SeekingAlpha Ifound some trends, You would have been ahead investing in (SPX) and buying long on short calls. In fact if you had shorted long calls in SeekingAlpha you would be up 29% since Oct 2006. Most of the returns on the short side were in energy.

I feel too many publishers are making calls with their own site and promotion of their products in mind. This is too bad. If one reads IBD and follows stocks in the news or stocks with high ratings, these are the stocks profiled in SeekingAlpha. Not the time to buy.

I'll bet SeekingAlpha won't publish this article. That's ok I have my own site.

2007 Jan 19 05:04 AM

[huangjin:]

MKTY was $5 a share not long ago. And Rodman & Renshaw have a little stink on them.

2007 Jan 19 01:53 PM

[Dave Huntsman:]

As a (former) shareholder in MKTY, I've gotta tell you, this 'analysis' is painfully shallow. It turns out that there is a real reason the share price is at bottom: the MKTY fuel cell product is- at the moment- vaporware. There is not a single DMFC product- anywhere- that is in any way, shape, or form operational - or that is on a clear path to become so. Not a single one. That is, in fact, the reason I sold my shares in MKTY three years ago...and went into MDTL: when it became clear that, technically, the MDTL technology and product was real - and MKTY's was not. MDTL itself has been the only one to openly acknowledge that an in-place, DMFC for lithium battery replacement is currently beyond the state of the art - for anyone. That is what lead them to the current, successfully-executing course: of a long-life, high-energy, fuel cell based portable power pack (up to 30 hours of recharge equivalent time). The current result: a couple million in orders; the pre-pilot line filling initial orders, and the first full-up line now being assembled, to be operated by Celestica in Ireland.

To promote a company while forgetting to note there is no true product - of that type, from anyone - and that the technology truly doesn't exist yet in 2007 to make it so, is just a tad off the mark, don't you think?

2007 Jan 21 10:58 PM