Opportunities in Energy Storage Stocks

Groucho Marx once quipped: "If we had some eggs we could have eggs and ham, if we had some ham."

In 2008, Groucho would probably work in the PR department of an alternative energy company where the logic often follows a similar path and the hype over advanced research projects, prototypes and vaporware can be intense.

I don’t mean to belittle the solid work that is being done by emerging companies in the alternative energy sector, but investors need to understand that there is a well-defined path from R&D to commercial production and there are several different classes of non-commercial devices that can accurately be called prototypes, including:

• Development Prototypes: Built for proof of concept and laboratory testing to optimize designs, evaluate reliability and estimate performance under specified operating conditions.
• Alpha Prototypes: Built for internal testing and evaluation using the same materials as a proposed product, but with non-commercial fabrication processes.
• Beta Prototypes: Built for comprehensive internal and external evaluation of full-featured devices that are built using well-developed fabrication processes.
• Pre-production Prototypes: Built in small volumes using final manufacturing processes to refine production methods and provide limited quantities of products to lead customers.

The development path for every new device must pass through all four of the prototype stages before it can proceed to commercial production on an assembly line. Until a new device is manufactured on a commercial scale assembly line, it cannot be properly referred to as a product. In an earlier post I noted that hard experience proves:

A PhD working in a well-equipped laboratory can always generate test results that are vastly superior to the best results one can expect from a factory staffed by high school graduates; which is why R&D companies rarely survive the transition from research to manufacturing.

To put it a little less delicately, the landscape of every technology-based industry is littered with laboratories, test equipment, prototypes and related detritus of disruptive and world changing technologies that didn’t survive beyond the prototype stage.

Like Howard Carter when he opened King Tut’s Tomb, I have seen “wondrous things” in my career including nano-scale lasers that disintegrate tissue without burning, monoclonal antibodies with noble metal tags, diamond electronics and a host of other bleeding edge R&D projects that stopped dead when amazing science crashed into the realities of industrial engineering. In my experience, the science rarely fails but the transition to a commercial product fails with alarming frequency. Without both, you can’t have a going concern.

A couple weeks ago I published a list of pure-play energy storage companies that seem well positioned for the rapid growth I foresee in the energy storage sector. The original list was broken down into categories based on the amount of time that their existing and proposed products would take to deliver stored energy. Today, I’m going to reorder the list and do a brief subjective analysis of the state of business affairs at each company. I know I’m wading into deep and troubled waters here and there will be room for honest disagreement, but I think this post will help clarify the situation for readers who are not financially or emotionally wedded to a particular technology or company.

Established Manufacturers. My established manufacturers group is limited to pure-play energy storage companies that reported more than $40 million in annualized product sales during the most recent fiscal quarter. Five of the companies made money and the other three lost money. The following table provides summary valuation metrics for each of the eight established manufacturers:

click to enlarge images

The table excludes A123 Systems ($8.7 million in Q-1 product sales) because its stock will not be quoted until after a planned IPO this fall. It also excludes Valence Technologies ($11 million in Q-2 product sales) because Valence had a negative stockholders equity of ($68.4 million) at June 30, 2008 and I classify it as a troubled company.

This eight-company group of established pure-play manufacturers accounts for about a third of the global market for batteries. The balance comes from a handful of large lead-acid battery manufacturers that are privately held or part of diversified concerns like Johnson Controls (JCI) and a plethora of Asian industrial giants. As the market comes to grips with the reality that sales of energy storage systems are expected to soar from $20 billion to as much as $100 billion over the next several years, I believe the established pure-play producers will likely see significant increases in both revenues and valuation ratios; which should make the current prices look like bargains when the scope of the expected changes becomes more evident.

The five profitable manufacturers carry P/E ratios that are reasonable based on historical earnings and do not carry big premiums for the immense growth potential in the energy storage sector. While I am less fond of the companies that are losing money, Maxwell seems to be faring better than the other two and it is the only manufacturer that focuses on supercapacitors. So if I wanted to build a personal portfolio of established companies in the energy storage sector, I think I’d probably stick with the five profitable manufacturers plus Maxwell.

Transition Manufacturers. My transition manufacturers group includes two pure-play energy storage companies that have not reported substantial revenue in the past, but expect to introduce and begin selling new products during the next twelve months. Since it is difficult to compare transition-stage companies based on pure financial metrics, the table reflects the book value, market prices and adjusted market capitalizations of the companies I would classify as transition manufacturers:

Ener1 is completing development of a lithium-ion battery that it plans to manufacture for use in electric vehicles (“EVs”) and plug-in hybrid vehicles (“PHEVs”). Through 2007, Ener1’s activities were focused on basic R&D. In early-2008, Ener1 delivered three pre-production prototypes (27 kWh each) for testing in the Th!nk City EV. The battery packs reportedly met all performance specifications. Ener1 has built a 92,000 sq. ft. manufacturing and testing facility for its EV batteries and plans to begin manufacturing before year-end. Since Th!nk plans to sell its base EVs and then lease the batteries under a separate contract with the buyers, I have not been able to find a reliable estimate of Ener1’s proposed selling price or the effective cost per watt-hour (“wH”) of its battery packs. However, buyers of Th!nk vehicles will be able to choose between optional battery packs manufactured by A123, Ener1 and a Swiss manufacturer. So I would expect Ener1 to offer its batteries at a competitive price and incur production costs that are roughly comparable to the $1.50 per wH that A123 incurs to manufacture smaller-format batteries in China.

Axion is developing a lead-acid-carbon battery/supercapacitor hybrid that it plans to offer as a low-cost upgrade for the conventional lead-acid batteries that are currently being used in a variety of industrial applications. Through 2005, Axion’s activities were focused on basic R&D. Since early 2006, Axion has focused on developing and refining manufacturing methods for the carbon electrode assemblies used in its PbC products. Two years of performance testing on pre-production prototypes have shown that PbC batteries have longer cycle-lives, higher power and faster recharge rates than conventional lead acid batteries. Axion recently manufactured several hundred pre-production prototypes that have an aggregate storage capacity of 225 kWh. These pre-production prototype PbC batteries will be used for a grid-connected utility upgrade deferral demonstration project that will be installed in New York later this year. Planned automated equipment additions for its electrode fabrication line are expected to increase Axion’s manufacturing capacity to 1,000 units per day by the first quarter of 2009. Since PbC batteries will be marketed as low-cost upgrades for industrial lead-acid batteries, Axion believes a broad base of likely customers for its PbC batteries already exists and its future will not depend on a limited number of potential customers.

Axion plans to sell a low-cost upgrade into existing industrials market while Ener1 plans to introduce an expensive new technology for a new and unproven class of consumer products (EVs). Even the most optimistic market forecasters predict that EV batteries will not represent more than 15% to 25% of the total market for energy storage devices for several years. So from a pure business fundamentals perspective, I think Axion’s PbC batteries have greater potential for rapid sales growth and lower risks of commercial acceptance than Ener1’s Li-ion batteries. Additionally, the lead-acid subsector has not received the intense media attention that has driven valuations in the Li-ion subsector for several years and Axion is relatively unknown despite a solid five-year track record. I believe that a rising tide lifts all boats and Ener1 will probably do very well over the short term. But experience tells me the biggest percentage gains from a rising tide are experienced in low-profile boats. In the interest of full disclosure, I’m a former director of Axion and a substantial stockholder, so my view cannot entirely free of bias or self-interest.

Advanced Research Projects. My advanced research projects group consists of pure-play energy storage companies that either have major technical hurdles to overcome or have no defined prospects for substantial product sales during the next twelve months. Since it is almost impossible to compare advanced research projects based on financial metrics, the following table reflects the book value, market prices and market capitalizations of the two companies I would classify as advanced research projects:

Altair is developing a lithium-ion battery that it plans to manufacture for use in EVs and electric utility applications. Through 2007, Altair’s activities were focused on basic R&D. In early-2008, Altair delivered two pre-production prototypes (250 kWh each) to AES Corporation for validation testing in frequency regulation for electric utilities. In mid-2008, Altair also delivered 47 pre-production prototypes (53 kWh each) to Phoenix Motorcars for use in a high-end EV roadster. While available information on the performance of these prototype systems has been spotty, Altair has reported that safety questions resulted in the cancellation of the Phoenix contract and performance data from the frequency regulation project will not be available for two or three years. While Altair has expanded its research and prototype fabrication facility from 30,000 to 70,000 sq. ft., it has not disclosed whether commercial manufacturing facilities are part of that expansion or announced any plans to begin manufacturing products for a specific customer. Since Altair’s manufacturing capabilities are unclear and it has no identifiable customers for commercial products, I think it is most appropriately classified as an advanced research project although some will undoubtedly argue that it belongs in the transition manufacturers class.

Beacon has spent several years developing a sophisticated flywheel energy storage system that it plans to use in company owned facilities that will be connected to the electric grid and provide frequency regulation services. If its company owned facilities are successful, Beacon plans to sell flywheel systems to others. Since inception, Beacon’s activities have focused on basic research and prototype development. Beacon has built and demonstrated beta prototype flywheel systems (2-kWh and 6-kWh) that were sufficiently successful to garner regulatory approval for a proposed company owned frequency regulation facility in New York State that will provide 5 mWh of storage and up to 20 MW of frequency regulation power for up to 15 minutes. Beacon’s SEC reports indicate that its frequency regulation facility cannot be built until it develops and tests a pre-production prototype (25-kWh/100-kW) of its flywheel system and fabricates 200 units for incorporation into the project. Due to the complex engineering issues that arise whenever a developer attempts to increase the capacity of sophisticated mechanical system, I am unwilling to assume that Beacon will be able to scale-up its flywheel prototypes to the required size and begin manufacturing operations during the next 12 months.

In the advanced research projects group, I think Beacon is probably the better opportunity. Altair has fine chemistry and some impressive prototype test results, but its’ pre-production prototypes were objectively expensive and it is far more difficult to increase the efficiency and reduce the costs of chemistry than it is to increase the efficiency and reduce the costs of a mechanical device. I don’t believe Beacon has an easy development path, but I think the path entails less risk than Altair’s.

Troubled Companies. My troubled companies group consists of pure-play energy storage companies that seem to be encountering significant business or financial difficulties.

Valence manufactures and sells Li-ion batteries for diverse applications including portable appliances and electric vehicles. At June 30^th, Valence had sufficient liquidity to pay for roughly six months of anticipated losses, but it also had a ($68 million) deficit in its stockholders’ equity. In its Form 10-Q for the period ended June 30, 2008, Valence reported $10.8 million in sales, including $4.2 million to Tanfield; $4.2 million to Segway and $2.4 million to other customers. The Form 10-Q also reported that Valence had suspended sales to Tanfield, which will presumably have a negative impact on future revenue. Since a principal shareholder owns the bulk of Valence’s debt and redeemable preferred stock, the large balances due may represent a smaller risk than they would in the hands of unrelated third parties. But a cursory review of the financial statements is not encouraging.

ZBB designs, develops, manufactures and sells zinc-bromine flow battery systems that can be used by utility companies, renewable energy generators and commercial and industrial customers. The core component of ZBB’s systems is their ZESS 50 energy storage system, which has a rated discharge capacity of 50 kWh and can deliver up to 36 kW of standby power for periods of one to several hours. Since 2005, ZBB has delivered pre-production prototypes ranging from 50 kWh to 500 kWh to several users but the level of annual product sales has remained low and relatively stable. ZBB does not have any obvious constraints on its ability to increase production to meet increased demand. ZBB has neither filed its quarterly report for the period ended June 30, 2008, nor offered an explanation for the delinquency. This is not encouraging.

VRB designs, develops, manufactures and sells vanadium-redox flow battery systems that can be used by utility companies, renewable energy generators and commercial and industrial customers. The storage systems produced by VRB generally have relatively high storage capacities and are designed to deliver the stored electricity over a period of five or more hours. Since 2005, VRB has delivered pre-production prototypes ranging from 25 kWh to 120 kWh to several users but the level of annual product sales has remained low. At June 30^th, VRB had sufficient liquidity to pay for roughly three months of anticipated losses. On August 27^th, VRB announced plans for a rights offering to existing stockholders and the creation of an independent board committee to evaluate go forward strategic options. These are not encouraging developments.

Without a good deal more information than I currently have access to, I’d be inclined to stay away from the troubled companies.

The Road Forward. Over the next couple years, I think the sex, blood and media hype in the energy storage sector is likely to focus on the battle between A123, Ener1 and possibly Altair for supremacy in the EV markets. I also think the most impressive revenue growth is more likely to be concentrated in the established manufacturers group, Axion and possibly ZZB and/or VRB if they get their acts together. The established products may not be as hot and sexy as the Li-ion glamour girls, but there is significantly less technical and market acceptance risk. To paraphrase Groucho: “If we had safe, reliable and cost effective Li-ion batteries, we could have electric vehicles that go a hundred miles between charges, if anybody wants to pay a premium for a vehicle that can only go a hundred miles.” For potential energy sector investors, I remain convinced that it all boils down to a choice between today and someday.

Disclosure: Author holds a long position in AXPW.OB and is a former director of that company.

Comments

[NOWHEREMAN:]

Environmentalists have labored for decades to remove Lead from all products regardless of use.

Now Axiom comes along and wants to massively increase the amount of lead exposure in the environment. I assume the vehicle batteries will make current products look like miniatures.

Be thankful for the lack of Media Coverage. The introduction of more lead exposure regardless of benefit will not fly in this Green oriented society.

This is just my opinion, since Many great ideas have died on the vine because of the "sacred environmental cow". Solutions using non toxic materials will be the Key to acceptance. I just can't see our current mindset accepting more Pb.

2008 Sep 01 04:39 AM

[John Petersen:]

Actually, the facts are:

1.Axion batteries use 40% less lead than traditional lead-acid

2008 Sep 01 04:58 AM

[John Petersen:]

2. There are hundreds of millions of lead-acid batteries in use in the USA, and something north of 98% of them are recycled for use in new batteries and create no adverse environmental impacts.

3. There is considerably more environmental hazard in exotic battery materials that cannot be recycled.

Lead that is released into the environment is a major problem, which is why we've used lead-free fuels for years and lead-based paints are now illegal. But lead-in a sealed device that does not end up in a landfill because it's too valuable to throw away has no adverse impacts.

The objections to lead-acid batteries on "environmental grounds" are knee-jerk reactions to the word lead rather than rational responses to a real problem.

2008 Sep 01 05:05 AM

[John Lounsbury:]

Energy storage technology is at the very core of the future of transportation. It is also important, allbeit less critically, for developing electrical generation technology in general. Those who make the right investment bets here may well outperform the investment returns of the solar, wind, biofuel and distribution system investors.

The big problem? Finding the right investments.

2008 Sep 01 11:26 AM

[nakedjaybird:]

John - excellent article. You just upped the average for SA significantly.

And so goes the world of electrochemisty.

2008 Sep 01 11:53 AM

[John Petersen:]

I just got the attached e-mail from somebody who uses Valence batteries and think it worth passing along:

John,

My company uses Valence Technology Batteries in one of our newest attractions which is called Cyber Sport. Valence was the only company who was able to ship us a production model battery to test on our new bumper car (and at a reasonable by comparison price). Not only did it perform well, it did exactly what the specifications said it would do. Do you know how rare that is? Before we made our final commitment to Valence, I talked to the head of purchasing for Segway and he confirmed that Valence was delivering on all their promises.

I have since done a fair amount of research on Valence and have even researched some of their patents. Based on what I found, it appears that Valence secured the first Lithium Phosphate patent and just prior to Dr. Goodenough . Carl Berg isn't dipping into his own pocket out of charity. He more than anyone knows who is going to win this game.

Based on my personal experience, Valence is the only one who can deliver the technology and holds the vast majority of the key patents. Even if the big boys develop their own batteries, they will more than likely have to cut big checks to Valence (or at least that's my thought on the matter).

Since we started working with Valence I personally have bought stock in the company. It may take another year or two before everyone realizes who is in the driver seat with this new technology, but sooner or later Valence is going to be collecting on its patents.

The new CEO is also the real deal. I don't think you will see many outlooks that aren't achieved. In fact, my guess is that he will always try to project lower than the actual results going forward.

Thanks for taking the time to read this,
Jim

2008 Sep 01 01:16 PM

[Urbane Gori...:]

Lead acid batteries are eminently recyclable and that is the practice today. That's why there is a core charge at Kragens for your car battery. However, compare that to the lack of recycling functions with flashlight batteries, lithium ion batteries and those nifty little screw in replacement flourescent lights which include a small amount of mercury. These all end in the landfill.

jegan ;-)

2008 Sep 01 02:06 PM

[Jim Kingsdale:]

Groucho may have said what you ascribe to him or not but you probably meant to quote Lewis Carroll who wrote: if we had jam we could have a peanut butter and jam sandwich if we had peanut butter.

2008 Sep 01 02:23 PM

[firboy4:]

Great article!!! It's the only one I have ever saved to my computer for future reading, since I can't possibly take it all in at once. I sent it to others too for them to read if they wish. Thanks!

Oh, and thanks to Jim too, for telling us about Valence. I'll be watching that company too.

2008 Sep 01 03:02 PM

[searcher:]

Valuable contribution to us all, thank you. Hybrids increase your options and I have a particular 'bug' about concepts involving capacitance.

2008 Sep 01 04:10 PM

[Y EV:]

Actually ElectroEnergy EEEI is the only domestic producer of Li 18650 cells. They have a production facility in Gainsville Florida. The stock is very very cheap and they have great potential if they can get financing quickly.
PS. I invest in Alti for longterm growth and eeei shorter term.

2008 Sep 01 06:33 PM

[nakedjaybird:]

Sep 01 04:37 PMuser211108 - i read the nyt aricle you mentioned. Basically, it just lists the roadblocks people keep thowing in the way of getting the right things done.

As I have said in other blogs, the grid needs to be beefed up and expanded, and also provide for solar and wind hook-up. And I grossly stated that high power transmission lines are probably within 25-50 miles of any future installation.

Take a look at where all the hydro installations are (Grand Coulee Dam in the middle of nowhere is the equivalent of 8 (eight) 1000 MWe nuc plants. No look at the rest of the hydro locations west/midwest/southeast... etc. As for nucs; we have over 100 1000 MWe plants scattered around the US - few states without - most state are less than 200 mi in one direction or another. Then there is the coal - everywhere??

So, the grid problem is just a bunch of roadblocks (policy/politics/regul... - we have the technology and wherewithall to improve it and expand it immediately. Report abuse
nakedjaybird
Sep 01 09:20 PMYou know, in the NYTimes article, a FERC member member is quoted saying we need an "INTERSTATE TRANSMISSION SUPERHIGHWAY SYSTEM" - he is so right.

And where they should run that grid is alongside/between/abov... the US Interstate hiway system that exists. And then, put the electrified ferries on steel-wheeled rails in the same space. Then we simply take the cargo off the diesel (biodiesel hybrid) trucks and ferry it electrically powered by solar and wind - that's a good role for solar and wind.

Centainly takes the wind out of the sails of the contras that continually talk about balancing the grid.

This idea solves two if not three problems at the same time. Since the Gov't steamrolled for the interstate highway system, let them steamroll for electrifying it. Simple. The right of way is there. Who's going to argure?. Yes, I know, someone will.

And what's the distance between interstate hiways? Do they go thru wind mill and solar land, and do they eventually move right into cities, and go thru where all the people are. DUH??

I hope someone in FERC reads this.

Help out, guys. I'm like solarPV on a native hut, with a microwave, color TV, cell phone, but connected to no one.


Report abuse
nakedjaybird
Sep 01 09:27 PMOh yes, and wireless internet!

But I'm as helpless as all the steers running around me and that just reminds me of Washington DC every time I look at them and feed them. And what do I get in return - about the same stuff - let me help you city folks, it's hot, wet, sort of like putty, and smells like shit. If it looks like, smells like, feels like, it probably is.........yup!

Happy Memorial Day to all the Vets and all those enjoying the freedom they have provided in the US and worldwide - regardless of the naysayers.

2008 Sep 01 09:34 PM

[Mayascribe:]

Hey Folks!

Hope you all had a terrific Labor Day Weekend!

To those of you who have followed all of John Peterson's articles, by now you know that I have had many issues with what he's written before, and I will freely admit, I have, to my best knowledge, only been wrong once. John has been wrong (or, better yet, wildly biased) many times.

But, it's late and I've had a robust barbeque weekend.

Tomorrow, after the "bell," I will respond to this latest article.

I will say this, though, John Peterson has come a long, long way in his understanding of the coming importance of battery storage, and he is to be commended for his efforts.

But still... Check back tomorrow, or the next day, and I will do my best attempt to show you facts.

Get your hard hat on, John! At least now you know what's coming!

2008 Sep 01 11:07 PM

[NOWHEREMAN:]

Thanks to all concerned, I am enlightened every day by at least one one of these posts. I have little bits of knowledge on almost every subject.

This means "I'm ignorant on the overall picture most of the time". However, let me look at a Chart and I can usually poke holes into whatever assumptions are made based on same. Charts have around for many decades. They have fixed formations and definitions relating to each formation. Trying to identify the formation as it unfolds is akin to forecasting the weather. You not only have to be good, you have to be lucky.

I now have a few more to look at, Valence and EEEI. If they are public.

But I still stand by the Pb opinion. Mention Lead to the Media and they will try to crucify you. Coal is bad, lead is bad,bad,bad. Extending its usefullness is not the currently accepted direction which is its entire elimination.

But, thanks again for the info.

2008 Sep 02 02:40 AM

[John Petersen:]

I look forward to hearing from you May and in a break from past practice, I'll take the time to respond. I would ask you to remember that performance and price claims only count if they show up on a company's website or in its SEC filings. And to help us out, I would like you to explain why Ener1, with no sales or manufacturing history, is worth almost as much as SAFT and more than Ultralife, Advanced Battery and China BAK combined.

2008 Sep 02 02:47 AM

[jjason:]

I did not see one dividend yield in the whole article.

It seems to me that all these companies are speculative investments.

2008 Sep 02 07:18 AM

[NOWHEREMAN:]

EEEI and VLNC: EEEI has lost 99% of its value over the last 4 years, if they hadn't had a 1 for 5 recently, it would be trading below 20 cents. The chart sucks. The only thing it has going for it is a slight increase in positive money flow starting about 4 months ago but that appears to be waning also.
I rate it as very highly speculative, for bottom fishers only.

Vlnc looks like its in a channel. A lot of buying power was wasted when it was unable to punch through $5 a few months ago. I would consider a purchase below $3. Money flow is positive even as it continues to drop. The problem it has is the same as all others in this niche, it is in the alternative energy camp. It loses luster with oil.

2008 Sep 02 09:45 AM

[Ricknplano:]

Thank you for another excellent article. As relates to Axion, you mention a marketing focus on industrial replacement batteries. I would also expect a market niche particularly appropriate for a battery with long cycle life and fast recharge ability would be garbage and delivery trucks with regenerative breaking. These vehicles do not have weight or size critical requirements (removing two of the primary lithium advantages) and the cost advantage versus lithium lies with PbC. Traditional lead acid batteries do not have enough energy density or power and do not recharge fast enough and have shorter lives in this kind of harsh use environment. Even Firefly carbon foam does not have near the cycle life and do not re-charge nearly as easily as PbC.

Besides the industrial replacement market, where do you see the best opportunities for the PbC technology?

2008 Sep 02 10:02 AM

[John Petersen:]

I think the simpler question is what would I eliminate as likely markets for the PbC.

First, I don't think the PbC will work in pure battery powered EVs, but then I don't think anything will work in pure battery powered EVs unless the buyer is willing to drop $100 K for a toy that only gets 100 miles, and can only get that if you don't heat or cool the car. Great in Phoenix and Madison.

Second, I hope the boys stay away from starting, lighting and ignition because supplying parts for the automobile market has about as much future as selling a commodity to WalMart. You may get a sales volume but you'll never get a reasonable margin.

2008 Sep 02 10:39 AM

[NOWHEREMAN:]

John, what AXPW needs is a heavy volume breakout above $2. I have added it to my insider transaction mailing list.

While I have doubts about its acceptance by the Greens, I have no doubts about the amount of consistent money flowing into the company's stock even as it has gone down.

The downward wedge is very long as is the support line. When the upward breach occurs is imprecise, at best. I would rather miss the first 10-20% then commit to an extended stay below 2.00.

I try not to let "feelings" intrude upon investment opportunities. Charting excludes emotional attachments.

2008 Sep 02 10:52 AM

[John Petersen:]

I've always admired people who truly understand charting, but found the art less than reliable on small volume stocks like Axion. That being said, the current convergence of the 10, 20, 50 and 100 day weighted moving average prices is very encouraging. I agree with your thoughts that a break out above $2 would be very positive.

I learned years ago that if management makes the business their number one priority and announces milestones when they're passed, instead of when they're created, price follows volume (which has been trending up nicely for Axion) the stocks mature naturally and the companies usually avoid the frenetic market activity one often sees on the OTC. We lawyers have what Al Pacino called "the ultimate inside pass" in The Devils Advocate. But that kind of in-depth understanding is only good for judging long-term potential.

Finally, I'm a lousy trader. I do real well buying at $1 and $2 and selling between $10 and $20, but short-term trades always seem to lose me money.

2008 Sep 02 11:21 AM

[NOWHEREMAN:]

Agreed, my time horizon is indefinite as long as fundamentals support the investment. I rarely invest for less than 1 year, usually at least 3-5.

I admit to selling early if a stock goes up 400% in less than 6 months.

2008 Sep 02 02:13 PM

[NOWHEREMAN:]

BTW, who is Mr. Averil?

2008 Sep 02 02:17 PM

[John Petersen:]

Bob is one of the original founders of Axion, a member of the board and chairman of the technology committee. Until the Quercus Trust invested $18 million in Axion earlier this year, Bob was the biggest single investor.

Bob is a mechanical engineer who was a prolific inventor of orthopedic implants, mainly artificial joints. Over the course of his career Bob founded three companies to develop, manufacture and commercialize his inventions. He sold the first company to 3M, the second to Zimmer Holdings and the third to Stryker. To say that Bob is one of the best manufacturing managers in the country would be an understatement.

I know a number of guys who have pulled off the hat trick of inventing a medical technology, taking it through the FDA, doing manufacturing start up, getting a start on commercialization and then selling out to a Fortune 500 company before retiring to the beach. Bob liked the process so much he did it three times.

2008 Sep 02 02:44 PM

[John Petersen:]

Bob is my hero!

2008 Sep 02 02:45 PM

[Mayascribe:]

Hello John,

I will respond in more than one reply.

The first one is this simple: After close today, Ener1 closed down 33 cents to $7.13. Even with this 4.42% loss this day, Ener1 is still (including the April 08' reverse 7:1 split) up 363% from one year ago.

Axion closed today @ $1.80, down 18% from one year ago when a share could be obtained for $2.20.

To all your readers: Which stock do you want?

Yes, Ener1 has been volatile since the April reverse split, wandering between the high $5's and low 8's. This volatility has enabled my portfolio to now own 2/3's of the shares with house money!

I will now excuse myself and go into Ener1's website to listen to the conference call I listened to before in August, where I did hear that Ener1's 600 lb. plug in vehicle is going to be sold to the Th!nk vehicle for $17.000, not the $75K, 1000lb. battery you talk about.

I do want to say one thing before I go and do further research. Congratulations on making the front page of Seeking Alpha. I mean that!

2008 Sep 02 06:47 PM

[billymadisun:]

do you know anything about Mphase Technologies, and their SmartNanoBattery?

2008 Sep 02 10:44 PM

[Mayascribe:]

John, I went into Ener1's website and tried to listen to the August 14th "Investors Presentation." Unfortunately, (under the "Presentations" tab), it would not download, even after I updated my Acrobat reader from version 8 to 9.. I also looked at the "transcript" that was not a transcript, but rather more of a bulleted summation of the presentation.

This is most infortunate, not only for you and your research, but also for your readers, who may trust your opinions in making a decision on whether or not to invest in this sector, but also which company(s) to invest in, or just wait.

Being a media credentialed person, maybe you can call Ener1 and ask for a copy of the August 14th transcript, or go to their website to the "Request Information" tab.

What I will say is what I know I heard during this presentation:

Ener1 has two batteries now developed, one weighing 600 pounds, which is a plug-in, and one that weighs 40 pounds, which is intended for HEV's. Here's what I'm positive about; the Ener1 600 lb. battery is the battery that is going into the Th!nk City vehicle. Here's what I'm nearly positive about; that the end cost to the buyer of the city vehicle will be in the mid-to-upper $30's, including the battery. Either way, this is a far cry from the $100k car you're talking about that has a $75K battery in it.

On Ener1's website they talk about their new Indianapolis plant and how they can generate 150k batteries per year, generating in excess of 450MM in revenue (see below). This makes mathematical sense and is in line with what I heard during the Investors Presentation. But the question arises, what about the 40 pound HEV battery?

As you may by now know, I've been following this company since last October, and nowhere have I read about any leasing program for the battery, and would like to know where you got that information. Maybe we'll both be eating crow on this one, albeit for different reasons!

Further, in looking at Ener1's website, I read this: "1) Capacity for 450 MM revs from current capacity in Indianapolis-further capacity to be added. 2) Revenue Visibility - 70MM minimum next 2 years, plus x2 potential development in contracts in 2008 (assuming one major contract & no tuck-in-aquisition), base case - fully funded into the middle of 2010.

Perhaps the above will help you with Ener1's valuation.

I do not want this to be a "Nyah-nyah-nyah, I have the better stock," thing. But throughout all of your articles you seem dogging Ener1, while touting Axiom, which you freely admit your vested in. I can somewhat understand how your technical analysis does not add up. But, I think that you hold an underestimation of what $4.00 gasoline did to this country.

I have now listened to three Internet conference calls given by Ener1. The thing that sticks to me most, just in front of Ener1's spick and span-clean balance sheet, is what CEO Charles Gassenheimer has repeatedly said: "The problem will not be for the demand for Lithium Ion batteries, but rather the supply."

This means that there's plenty of room for all companies, provided they have a cost competitive product, to make huge revenues in the next few years.

The companies this investor likes: Obviously, Ener1, and CBAK, and A123 (looking forward to thast IPO). I firmly agree with the Lith-ion companies that you don't like, and am somewhat curious about the others. I also own a bunch of JCI, but not necessarily for the battery aspects.

Just to let your readers now a little something about CBAK, the world's largest lithium battery maker in China: CBAK, on Friday, August 20th, had a 16MM in registered direct offering (earmarked for building a new computer battery plant); 4.1 million shares @ $3.90/share (read about this on Yahoo! finance). The question one has to ask themselves is this: Would any insiders/preferred shareholders who just bought shares for $3.90 a share sell their shares for less? So there's kind of a built in wall preventing the stock from going below $3.90. I scooped up another 1000 shares today, for $3.968 and I really don't care if it closed @ $3.93. My prediction is that this will all wash out in less than a month and the stock will begin creeping upward.

How can I predict this? Well, the type same thing happened with Ener1, on April 14th. This diluted the shares value, and created a fabulous antry point. The stock has never gone below that $4.95 (warrant share price offering) that April day. I'm very happy with my average share price of $5.61.

Hope this all helps you, and your readers. I'll be watching for your future articles, because, not only am I impressed with your developing knowledge, I'm also impressed with most of the comments. I feel the more I learn about the coming boom in the energy storage sector, the more I can position my portfolio to take advantage of all the eggs and ham!

Keep up ther good work, and, in a kind of kiddingly way, keep dogging Ener1. Drive that stock price down, so I can by more on the cheap!

I have to get back to writing my novel about...guess!

Mayascribe

Page Two: "The Company cu

2008 Sep 02 10:49 PM

[nakedjaybird:]

Sorry mixing up Labor and Memorial Days, if I were American I would keep them straight. We fly the flag for both right?

2008 Sep 02 10:58 PM

[nakedjaybird:]

One begets the other, right??

2008 Sep 02 11:01 PM

[Stephanie G...:]

The lengthy comment about Valence Technology is quite a joke. This is a company that has been touting how it makes the best batteries on Earth for nearly two decades. While it is quite successful in selling shares of stock, it has never been very successful in selling batteries. I won't go into the long, miserable history of Valence overtouting its prospects. That record is well documented for anybody who cares to do some digging. Googling "Valence securities fraud" is a good place to start. A review of their pathetic financial statements is another.

But one comment made in the touting post above bears some rebuttal. The poster claimed that the current Valence CEO (#7 in a long line of revolving CEO's) is the real deal and will be proven to be conservative in his projections. In fact, the current CEO has already proven to be wildly overoptimistic in his projections (just like Valence CEO's #1-6 before him). He touted that the Tanfield "contract" would be worth "$70 million in the first year." As it turns out, Tanfield took delivery of $4 million worth of batteries, didn't bother actually paying for them, and hasn't ordered any more.

Nobody should buy Valence stock with money you can't afford to lose.

2008 Sep 03 12:34 AM

[John Petersen:]

The Ener1 transcript is available right here on Seeking Alpha. The price discussion you recall is at the bottom of page 7 and says:

"Obviously, the direct answer to that is, no, we have not publicly disclose unit pricing mainly because we think we are aggressive on our pricing relative to our competition and we don't want to give them a target. We definitely have given some guidance, and that is that the Think City vehicle, and we understand from Think that they are planning to sell the vehicle at about a $35,000 price point, and the battery is about half to cost of the vehicle. So, at least that gives you some guidance on an average selling price that you can sort of back into a number."

If you do a Google search for Think & Battery & Lease you'll find a ton of articles that say some variant of the following:

"The catch is that the TH!NK is expected to cost a lot when launched in the UK next spring (it’s already on sale in Norway): £14,000, plus £140 a month battery lease charge. This means that when the battery loses efficiency, it can be traded in for free (to the manufacturers ) for a working one."

You can't talk about the battery industry without mentioning JCI. It's a fine company and a big producer for the SLI market. It's also so diversified that I can't put it in the pure-play storage category.

I don't dislike Ener1. But I learned a long time ago that stocks can be undervalued, fairly valued or overvalued. As you pointed out, Ener1's price has increased by 363% over the last year. Experience tells me that the likelihood that it is still undervalued is remote. Axion, on the other hand, has drifted down by about 1/3 over the last year to a level that is less than the unit price a major investor paid in June ($2.10 for a unit consisting of a common share and a $2.65 warrant). A year ago there were reasons for the decline. Today those reasons have all been resolved. All of the other valuation support metrics you talk about for China BAK are also in place for Axion. So while Ener1 has already booked a good chunk of its upside potential, Axion hasn't started yet.

I keep repeating that I'm incredibly bullish on the entire sector. I'm not necessarily a fan of A123 as a company, but they have a major IPO coming up that should generate significant interest for a sector that has been overlooked far too long. That rising tide is going to lift all boats. I believe that the lead-acid sub-sector will do better than the Li-ion sub-sector because it has been unloved for so many years.

Over the next few years, there will be more business out there for battery companies than any of them can handle. A lot of that business will go to the Li-ion producers. But the bulk of it will go to the lead-acid producers because their products are so much cheaper.

Ultimately the goal of investing is to buy low and sell high. For my money the better bet is the beaten down sub-sector; not the one that's been flying high for several years.

2008 Sep 03 01:22 AM

[NOWHEREMAN:]

? to All:

TBoone's CNG beomes National Energy Policy, Which Battery Maker(s) benefit, if any?

2008 Sep 03 12:50 PM

[onequickM4door:]

John,

Your comments around Beacon Power have been fair up till this article.

Can you elaborate on why you lump BCON into the Advanced Research bucket? I'd put it in the "Transition Manufacturers" seeing as BCON will begin earning revenue this year. Are you basing this characterization off of the word "substantial" when quantifying revenues? If so, what are "substantial revenues" in your opinion?

What are the "engineering issues" you see in BCON that would prevent them from ramping up production? Did you attend the Annual meeting in August? From first hand accounts the actual assembly of the flywheels themselves are very uncomplicated and the electronic controls aren't revolutionary by any standards. The biggest hurdle thus far from my two years of deep research on this company has been the actual plant site permitting and realigning the tariff structure in various markets.

My last question is in regards to your statement "Beacon’s SEC reports indicate that its frequency regulation facility cannot be built until it develops and tests a pre-production prototype (25-kWh/100-kW) of its flywheel system and fabricates 200 units for incorporation into the project.". Myself and many others have poured hours upon days of time researching this company and this statement in my opinion, since your presenting yours, is not factual. If what your referring to is the Dept. of Energy loan guarantee program, they don't have to build production units ahead of that approval which is for 80% of the plant construction costs. An important point to bring up on the DOE loan, BCON was the only "energy storage" applicant that was asked to submit a full application.

2008 Sep 03 02:24 PM

[John Petersen:]

To paultant: The short answer is they will all benefit. Frequency regulation in busy systems can require multiple a half-dozen or more cycles per day and for those applications the only thing that makes sense is either Li-ion or a flywheel system like Beacon is developing. Things like peak shaving and upgrade deferral on systems that only have problems a couple times per day are better suited to advanced lead-acid. Batteries will also work for small last-mile diurnal storage (storing at night for use the following day). Large scale diurnal takes something like pumped hydro or compressed air. The real key is that the market is a $100 billion short term opportunity which leaves plenty of room for a large number of tremendously successful companies.

To onequick: I like what Beacon is doing and have a high degree of confidence that they will get to a manufactured product. But they make it clear that a 25 kWh unit that will work in a 200 flywheel array is their commercial goal and as near as I can tell, they haven't made one of those yet. I would love to find out that Beacon is further down the path than they seem to be. But I've never seen a physical device that could be scaled up 400% without dealing with new physical constraints like materials stress, vacuum maintenance, bearing performance and a host of other engineering issues. Beacon could be the exception to the rule but I'm not in a position to make that judgment.

I used $40 million in annualized revenue as the cut-off point for the established manufacturers group. As near as I can tell, Axion and Ener1 are the only transition entities that have a solid shot at those kinds of revenue numbers within 12 months. If Beacon has a reasonable shot at booking $10 million in quarterly revenues by the end of 2009, then they probably belong in the transition group.

2008 Sep 03 04:04 PM

[onequickM4door:]

Thank you for the response. If $40 million was the qualifier for a transition company, than I agree with the placement.

2008 Sep 03 07:14 PM

[onequickM4door:]

Thank you for the response. If $40 million was the qualifier for a transition company than I agree with the placement. I think we're going to have to agree to disagree on the engineering hurdles. I'm not going to be blind to them not having any, but they've done the proper testing to make the next leap in my opinion. After all that's what we're debating is opinions.

Continue the good coverage of this sector as a whole. I agree, lot's of opportunities for good companies.

2008 Sep 03 07:19 PM

[Mayascribe:]

Ah... Did you see what CBAK did after hours tonight? So much for my "creeping up" notions.

2008 Sep 03 08:54 PM

[John Petersen:]

onequick: I'm a disclosure reader and numbers guy who has lots of experience watching engineers succeed or fail, but no ability to second guess them. It sounds like you know Beacon well and have a skill set that I lack. The scale-up issue may well be one where you are in a better position to judge than I am. I just want to see Beacon do well because I think flywheels may have an important role to play.

mayascribe: I generally can't think in terms of less than 6 months to a year so daily numbers are just fun. But if your trading style looks to the daily data, this whole sector is in for several hundred fun days before the dust even begins to settle. I personally favor the beaten down lead-acid subsector, but in the final analysis I think we'll all be comparing the relative size of our percentage gains.

2008 Sep 04 12:09 AM

[John Petersen:]

www.investorideas.com/...

2008 Sep 04 01:46 PM

[mmagogo:]

Super! Great Article!

2008 Sep 06 02:50 AM

[Joanne Verk...:]

John: I have just been made aware of the reference herein to ZBB and the fact that they were late in filing their June 30th 10-Q. Please be aware that their year-end is June 30th, and they have since filed their 10-K without any delay. Please amend the article herein so there is no confusion.
By the way, I do appreciate your intelligent articles on the energy storage sector. They are very insightful and helpful to the investment community. Best regards, Joanne

2008 Oct 08 10:56 AM

[John Petersen:]

APOLOGY AND CORRECTION

Thank you for bringing my incorrect assertion that ZBB was late in its SEC reports to my attention. While I don't usually make this kind of error, I did in this case and I owe ZBB and its investors an apology.

A review of ZBB's recent Form 10-K shows that the company has a financial solid position. Moreover, everything I've read to date indicates that flow batteries like ZBBs are the only game in town for small scale diurnal storage. Given ZBB's financial strength, cost advantages to users, tax credit eligibility in solar installations and dominant position in what I believe will be a critical storage niche, I think ZBB belongs in my transition manufacturer's class and is one of the better values in the class.

2008 Oct 08 11:32 AM