Energy Storage: A Turbulent Q2 Foretells Major Changes

by: John Petersen

The second quarter was a turbulent period for investors in the energy storage and vehicle electrification sectors. Johnson Controls (NYSE:JCI), C&D Technologies (OTC:CHHP) and the enchanted, mystical, gravity defying Tesla Motors (NASDAQ:TSLA) were up a little. Everybody else was down as fear, loathing and uncertainty ran rampant and the congenital birth defects of EVs and batteries to power them proved to be insurmountable obstacles for all but St. Elon of Palo Alto, the patron saint of expensive toys.

While the second quarter wasn't pleasant for most of the companies I track, I draw some comfort from the timeless words of Barron Rothschild who advised 18th Century investors to "buy when there's blood in the streets, even if the blood is your own" and Warren Buffett who advised 21st Century investors to "be fearful when others are greedy and greedy when others are fearful." The following table tracks price performance in the energy storage and vehicle electrification sectors for the second quarter of 2011 and the twelve months ended June 30, 2011.

6.30.11 Performance.png

There were any number of events that troubled the market deeply during the second quarter including news that:

  • Th!nk Motors was heading into bankruptcy for the third and final time, which was disastrous news for its principal stockholder Ener1 (NASDAQ:HEV);
  • Altair Nanotechnologies (NASDAQ:ALTI) was having problems closing a strategic investment from Hong Kong;
  • Valence Technology (VLNC) was going to lose its sole supplier status at Smith Electric Vehicles;
  • The unburdened cost of goods sold at A123 Systems (AONE) kept climbing instead of plummeting;
  • Exide Technologies (XIDE) had decided to recognize $35 million of refinancing and restructuring costs in the fiscal year ended March 31st instead of carrying some of those costs into the current year;
  • China Ritar Power (OTC:CRTP) had decided to terminate its SEC registration while other China-based companies with US listings wallowed in a fog of suspicion spawned by aggressive short sellers; and
  • Giggles over the prospect of using $1,000 per kWh batteries to store 10¢ per kWh electricity for the grid began to be heard from the utility sector.

My candidate for the most surprising event of the quarter happened a few days ago at JCI's 2011 Power Solutions Analyst Meeting. While JCI was the biggest recipient of Federal lithium-ion battery manufacturing support in the summer of 2009 when it shared a $299.2 million grant with Saft, JCI recently filed suit to dissolve that joint venture because Saft wants to stay focused on electric vehicles while JCI wants to look elsewhere for greener pastures. JCI is quick to observe that all automakers are developing a range of alternative energy powertrains, but it used the following graph to emphasize its view that the overwhelming majority of alternative powertrain vehicles produced over the next five years will use simple, cost effective and fuel efficient stop-start idle elimination systems.

6.27.11 5-year.png

It doesn't take much graph reading skill to see that cars with plugs won't even be speed bumps compared to the huge global market for stop-start systems.

As I review the stock price performance table I see a lot of risks and precious few opportunities. For reasons discussed in other articles I believe Ener1 is nowhere near done bleeding and Valence's market capitalization is unsustainable. While I'm not a fan of the lithium-ion battery producers, A123 is starting to look interesting because financing transactions that were fundamentally positive beat its market price into the ground.

Active Power (NASDAQ:ACPW) has backed up a little and is now a mere 238% gainer since I recommended it at $0.72, but its management is executing well and there seems to be a lot more room to the upside.

In the lead-acid group most analysts are looking for a 25% upside in JCI, but I think the real sleeper stock is Exide. They bit a bullet and took about $35 million of one time charges in the last quarter of the fiscal year just ended, but that merely cleared the decks for future profitability. More importantly, they provided revenue and operating earnings guidance for the first time since emerging from bankruptcy. If their guidance is even close to accurate, it will come as a huge surprise to market watchers who got used to nothing but pain as Exide completed a multi-year restructuring. I won't be surprised by a double or even a triple over the next year.

I'm more confident than ever in Axion Power International (NASDAQ:AXPW) because the quirky market dynamics that forced the price down while the company was announcing world-class relationships with giants like Norfolk Southern and BMW seem to be coming to an end. The expected announcement of an important DOE grant for an Axion led team that includes a major US automaker, a research university and a national laboratory may be a tipping point. The DOE had planned to make the announcement last week and is apparently running late. Depending on which rumor you choose to believe, the news should be forthcoming sometime in the next two to four weeks.

For the last three years I've been cautioning readers that the market was acting like a voting machine in response to hype and that once reality set in, the lead-acid sector would represent unparalleled opportunity for long-term growth. The group has done well so far, but the real fun is just getting ready to start. Investors are finally realizing that the alternative energy revolution will take decades to unfold and the early winners will offer cheap solutions that conserve energy instead of cool solutions that waste huge volumes of non-ferrous industrial metals in the name of conserving a little oil.

In early March I created two hypothetical portfolios and funded each of them with $25,000 imaginary dollars. My long fuel efficiency portfolio that includes JCI, ENS, MXWL, XIDE and AXPW is down 10% at $22,502. In comparison, my short vehicle electrification portfolio that sold ALTI, AONE, HEV, TSLA and VLNC is up 35% at $33,906. My plan is to let both hypothetical portfolios run till September 6th and then prepare a six-month report.

Disclosure: Author is a former director of Axion Power International (AXPW) and holds a substantial long position in its common stock.

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