A123 Systems: So Much Promise, So Many Questions

 |  Includes: AONEQ, GE
by: Benzinga

By Steven Ansfield

Common sense and past performance tell us that when oil spikes, alternative energy solutions companies do well. The opposite is true in the case of A123 Systems (AONE). On a day when NYMEX oil futures are hitting a 52-week high, shares of A123 Systems are hitting an all time low ($5.82).

Few companies have stoked as much euphoria as this manufacturer of lithium-ion battery cells. A123 Systems certainly has the pedigree of a tech darling: It is on the front lines of the green-tech revolution; it is the product of the world-renowned minds at The Massachusetts Institute of Technology (MIT); it has been the benefactor of Department of Energy (DOE)/United States Advanced Battery Consortium (USABC) contracts; and has heavyweight investors such as Alliance Capital, GE (NYSE:GE), Motorola Ventures, Sequoia Capital, and Qualcomm Ventures (just to name a few) in its back pocket. This company is a lock to skyrocket right? Maybe not.

When A123 went public in September 2009, it inspired visions of easy profits and growth. On its first day of trading, the stock jumped from its IPO price of $13.50 to close at $20.29. Within two weeks the stock had more than doubled, hitting a high of $28.20. That day, however, was the last time the stock would see over $25.25, as a selloff quickly ensued while investors took profits.

An unending string of disappointing earnings reports since has resulted in numerous selloffs, and has left the company dangerously close to the ominous sub-five dollar level.

The most recent earnings report cited supply disruptions emanating from the earthquake in Japan as reasoning for disappointing results. Bears have roughly cut the stock in half since then, as Wall Street tends not to be understanding of external events or excuses. That is a lesson executives of this company need to learn quickly, as this recent report was the third time in a row A123 has cut guidance and seen its shares decimated as a result.

Rising debt, diminishing cash balances, operating basis losses, and a high cost structure only add to the woes of a company that hasn't reported positive earnings since going public.

With all that being said, the company itself, along with investors, may very well have a bright future in front of them. With gasoline prices sure to vault over the $4 level soon (already a reality in some places), the rush to alternative energy and hybrid vehicles will once again be back in full force. As we have all seen before, when gas prices spike, so does public anger toward the government and at big oil.

A “green resolution” will surely come out of Washington in the very near future denouncing the price surge and reiterating the need for alternative energy and a move away from foreign oil and oil-related products.

Enter A123 Systems. The usability and advanced technology of its products cannot be denied. As it stands, A123 has built and deployed more lithium-ion hybrid systems for transit buses than any other company in the world. The savings resulting in the use of its products are staggering. New York City, for example, saves 30,000 gallons of fuel in the life of one bus and stops 300 tons of co2 from being released into the atmosphere.

Even with 1500+ units currently on backorder, there's still much room to grow should the government get serious about energy savings. 74,820 buses are in active service in the public transportation arena. 440,000 public school buses transport 24 million children to and from school every day. These are major markets yet to be fully tapped and could provide huge windfalls should the company get its act together and start streamlining its business practices.

The ever expanding market of US hybrid passenger cars as well as the sorely outdated US electrical grid also provides substantial growth possibilities for A123 to expand its influence and, most importantly, its balance sheet.

This is a pivotal time for the A123. It can either be relegated to the substantial tech junk pile, or it can succeed in moving this country into the “green” Promised Land. Time will tell.

(An attempt was made to contact the company to discuss and answer relevant topics and questions. Unfortunately no one could be reached for comment.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.