Energy Storage Opportunities After the Market Carnage 16 comments
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Last week was one for the record books and reminds me of the old adage that while history never repeats itself, it frequently rhymes. As I watched the carnage unfold, I couldn’t help but think back to October 1987 when I cleared SEC comments on a client’s registration statement during the week before Black Monday. As a direct result of that market break, the client’s planned IPO didn’t get off, the client and its underwriter both went broke and I didn’t get paid. So it was an expensive education that’s paid for itself many times over during my career.
The market is always fickle, often brutal and occasionally downright vicious. But it’s periods of maximum market ugliness that give rise to the greatest opportunities for astute investors. I think it was Rothschild who first said that the time to buy was when there was blood running in the streets. Today, Buffett follows that same time-proven philosophy and gets spectacular results. But he also looks beyond the surface of current events to get to fundamental causes and conditions and then invests based on the fundamental trends.
The recent financial crisis has been widely blamed on lax lending practices coupled with extreme leverage. Its direct cost may well be north of a trillion dollars and the indirect cost to investors will likely be a multiple of that amount. While I don’t want to seem cavalier about a trillion dollars, I believe the recent carnage pales in significance to a far more insidious and ongoing crisis in the price of imported oil that has run up over $540 billion of incremental costs since 2004, is currently running at a $250 billion per year clip and shows no signs of abating – ever. At least with the financial crisis, a big chunk of the bailout money will remain in the domestic economy. When it comes to imported oil, the money leaves the domestic economy permanently and ends up in the hands of countries and companies that most of us wouldn’t classify as particularly friendly. On balance, I have to wonder whether the recent financial crisis wasn’t really just a symptom of a deeper and more pervasive oil price crisis.
Regardless of where you come down on the cause and effect relationship between the recent financial crisis and the long-term oil price trend, it is generally agreed that high oil prices will be the primary driver of long-term growth in alternative energy investments. It is also generally agreed that cost-effective energy storage will be a fundamental enabling technology for the more widespread adoption of alternative energy solutions. So by depressing stock prices in the energy storage sector, the financial crisis has created a temporary dislocation in a market that is ruled by a completely different set of fundamental market drivers and should be heading in the opposite direction. In my view, the energy storage sector currently provides a target rich environment for investors who want to position their investment portfolios for maximum benefit from the inevitable long-term growth in alternative energy.
The following table provides summary information on some of the energy storage companies that I’ve been tracking publicly for the last few weeks and privately for a couple of years. The current version excludes both Electro Energy and VRB Power Systems because they have recently announced significant problems that threaten their continued existence. It divides the companies into established manufacturers and developing companies, and focuses on some key statistics that I believe are useful indicators of short- to medium-term growth potential. Click to enlarge:
In the established manufacturers category, Exide and Enersys appear to have tremendous upside potential because they are trading way below their 50- and 200-day average prices and can expect to be revenue leaders as the energy storage sector begins its inexorable march from $20 billion to $100 billion in annual revenues. So while their current price to historical sales ratios of 0.16 and 0.45, respectively, are very low in comparison to the ratios seen in most industries, their current price to anticipated sales ratios rapidly become miniscule. So I have to believe that as the market recovers and the A123 IPO and other events draw investor attention to the energy storage sector, Exide and Enersys will both represent low-risk opportunities for medium-term gains of 100% or more.
Another noteworthy entry in the established manufacturers category is Hong Kong Highpower, a manufacturer of NiMH batteries that earned $1.2 million on second quarter sales of $19 million. HPJ went public in October 2007 through a reverse merger and its trading volume and other statistics indicate that the company is still flying below everyone’s radar. While it is very difficult to predict the amount of time that investor awareness work for a company like HPJ will take before the stock grabs the market’s attention, when the stock starts showing up on investor radar screens the short-term growth potential can be huge. I would not be at all surprised to see HPJ enjoy price gains of 200% to 400% over the next 12 to 18 months.
In the developing companies category, Beacon and Axion are my favorites in terms of upside potential. Just last week Beacon announced that it had commenced utility grid frequency regulation testing with an array of 10 commercial scale (100 kW/25 kWh) flywheels. I believe this development is enough to move Beacon out of the advanced R&D project stage and into the transition manufacturers stage; which should result in a significant price premium over its historical averages. Likewise, Axion is building out fabrication capacity for commercial quantities of the electrode assemblies used in its PbC batteries, which offer the cost advantages of lead-acid batteries and the longer cycle lives and higher recharge rates of more exotic chemistries. Moreover, Axion is in the same position as HPJ, a solid company with attractive prospects that’s still flying below everyone’s radar. Like HPJ, I would not be at all surprised to see Axion enjoy price gains of 200% to 400% over the next 12 to 18 months.
I’m still an unrepentant bear over the prospects for manufacturers of large-format Li-ion batteries. Li-ion is a great technology for small-format applications where size and weight are mission critical constraints and battery cost is a minor slice of total product cost. But the consensus of informed opinion on the issue still holds that Li-ion batteries are far too costly for vehicles and other large-scale applications. (link: http://www.reuters.com/article/GCA-GreenBusiness/idUSN1527538820080916) There has been lots of happy-talk about future cost savings in Li-ion manufacturing and I’m sure we’ll hear more of the same in comments to this article. But for all the reasons I’ve outlined in my earlier Seeking Alpha articles that explore the cost issues in greater detail, I remain convinced that significant manufacturing cost savings in the Li-ion niche are not likely to materialize any time soon. Since the established and developing Li-ion manufactures have significantly higher price to sales ratios and generally trade at prices that are not big discounts from the 50-and 200-day averages, I view the upside potential as limited.
Disclosure: Author holds a long position in AXPW.OB and is a former director of that company.
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This article has 16 comments:
Do you any thoughts on the suppliers of raw materials to this sector, like SQM for lithuim, LYN for rare earths, or others?
So the batteries are here, and now it's just a matter of getting production up and prices down. Given the huge global demand for ultra fuel efficient vehicles, I don't see how this CAN'T happen. And the lithium shortage scenario is a canard. Lithium is one of the most abundant elements on the planet, and market forces will fill future demand.
In the final analysis, I don't know enough about global lithium reserves to make an intelligent judgment. If you do, congratulations. When somebody can show me a consensus that lithium reserves are not an issue, I may get comfortable. But when a whole lot of people who are a whole lot smarter than me can't agree, the safest thing I can do is stand on the sideline till the dust clears.
It amazes me how Chysler kept this under wraps, almost like it was a "Black Project."
One model is an extended range mini-van, that goes the first 40 miles all electric, then a gas assist engine kicks in to run the range up to 400 miles on 9 gallons of gas. Chysler will also have a "city-car" as well as a fully electric sports car that goes from zero to sixty in 5 seconds, and will recharge in 4 hours using a 220 volt hookup (8 hours for a 110 volt line). There are even more models, I think nine in all.
Electric vehicles are already here and the Chrysler announcement is proof that way more are coming!
Watch this video and let Bob Nardelli, CEO of Chrysler, sway your opinion some.
The auto companies will sell a lot of electric cars because there are a lot of people who will make poor financial choices for the right status symbol. I just believe that the number of people who can afford to pay a status premium will be a small percentage of the total population. Joe Lunchbucket is not going to buy an EV unless and until the economics and performance numbers work for him. That glowing future is a long way off.
I feel the same way about Li-ion batteries. The best estimates I've seen say that 75% of product cost is raw materials and the other 25% is labor, overhead and profit. There seem to be lots of unanswered raw materials availability questions. More importantly, Moore's law does not apply to basic chemistry and I'm convinced that anyone who is looking for quantum leaps in a 20-year old technology is delusional. So the only way I see for Li-ion battery prices to fall significantly is if somebody finds a way to ignore the basic laws of chemistry or some clever geologist finds immense new raw materials reserves in our back yard.
First of all, I hope you are wrong too. (regarding LiIon) Secondly, please try and remember where you heard or saw the battery material cost % #'s and provide a link. Even with cobalt, materials wouldn't be that high of a %. Check this link and especially the comments.
www.autobloggreen.com/.../
Last but not least, good luck and investing to all interested in this subject.
I saw the reports of Mr. Grassheimer's statements when he made them. But without a whole lot of backup information on where the raw materials will come from and why the prices will decline, I have a hard time accepting everything that's said as gospel. I guess it comes from too many years of dealing with small companies that have high hopes for cost reductions that don't materialize.
The global trends for commodity prices have been sharply higher for several years and Jim Rogers tells us we haven't seen anything yet. The reports I've read on lithium resources say that once we burn through the South American resources, more processing will be required to get to a useful raw material. Between global trends in commodity prices and the fact that more processing is usually more expensive, I have a hard time believing that materials costs will fall sharply.