Alternative Energy Storage and Blood in the Streets 30 comments
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It looks like my September 22nd article Energy Storage Opportunities After the Market Carnage was a little bit premature. But before getting into the details of how the energy storage sector is faring on October 12, 2008, I need to apologize to ZBB Energy Corp. (ZBB) because I incorrectly reported that they were late in their SEC filings in my September 1st article Opportunities in Energy Storage Stocks. My mistake was simple. I missed the fact that ZBB has a June 30 a fiscal year and its next report wasn’t due until the end of September. The company filed its annual report with the SEC a few days later and appears to be in solid financial condition with 18 months of operating cash. I am sorry for the mistake.
ZBB is a transition stage manufacturer of zinc bromine flow batteries and the clear leader in the “hours of discharge time” product class. Their pre-production prototypes are priced in the $600 per kWh range and will compete primarily with pumped hydro and compressed air storage. There is no question that pumped hydro and compressed air will be the technologies of choice for utility-scale diurnal storage installations. But when it comes to small-scale storage for homes, businesses and remote villages, flow batteries like ZBB’s are likely to be the best choice. Given its financial strength, cost advantages to users, tax credit eligibility in solar installations and strong position in a critical energy storage niche, I think ZBB has solid upside potential.
The last three weeks have been an extraordinary period in the energy storage sector. Despite the worst market conditions in 20 years, Warren Buffett invested $230 million in a Chinese battery company; Altair Nanotechnologies (ALTI) and Beacon Power (BCON) announced equity injections of $10 and $7.9 million respectively; and A123 Systems amended the registration statement for its upcoming IPO. Collectively, these events point to tremendous fundamental strength in a sector that has taken a harder hit than most over the last six months. They also support my core premise that energy storage is likely to be the next major investment trend as global demand for rechargeable batteries grows from $20 billion to $100 billion.
While the last six months have been tough for the entire market, many stocks in the storage sector have been absolutely savaged. Since April 11, 2008, the Dow has fallen 35.9% and the Russell 2000 has declined 27.7%. In comparison, storage sector stocks have plummeted an average of 52.2%. The following table identifies the pure play U.S. equities in the storage sector and provides summary data on their six-month performance and current valuations.
click to enlarge
I cringe when I think back to October of ‘87 when financing dried up across the board and the market collapsed. Microsoft, Intel, IBM and Apple all fell by roughly 50% over the space of a month. But once the bloodletting subsided, the smart money moved rapidly into the IT sector and the information age began in earnest. For reasons that I’ve discussed in earlier Seeking Alpha articles, I believe we are entering a new economic era where alternative energy solutions will slowly but certainly reduce our dependence on oil, gas and coal; and the basic technologies that are essential to a post-hydrocarbon economy will become pre-eminent. Since energy storage is an enabling technology that makes many other alternative energy technologies work better, I’m convinced that the sector will thrive as the world economy recovers and moves forward.
In the last six months, established lead-acid battery manufacturers including Exide (XIDE), Enersys (ENS) and C&D (CHP) have been beaten down to the point where they are trading at insane price to sales ratios in the .10 to .29 range. The overriding concerns seem to be risks in the automotive market, potential environmental issues and a persistent rust belt image. In my view, each of these concerns is overblown. The automotive OEM market is only a fraction of the total market for lead-acid batteries and the markets for automotive replacement batteries and non-automotive applications will remain robust regardless of what happens in Detroit. Likewise, the recycling rate for lead-acid batteries is approaching 99% and new developments like the lead-carbon “PbC Batteries” from Axion Power (AXPW.OB) promise to reduce lead content by 40% or more while improving power, cycle-life and recharge rates. It’s easy to dismiss lead-acid batteries as “old-tech” because they’ve been the gold standard in energy storage for the last 80 years. But with capital costs of $150 to $200 per kWh they are the cheapest energy storage solution by a wide margin and that fact alone will make them the first choice when regular guys go shopping for energy storage devices.
The advanced battery sector has also traded down to surprising levels over the last six months and established manufacturers including Ultralife (ULBI), China BAK (CBAK) and Hong Kong Highpower (HPJ) are sporting relatively low price to sales ratios in the .44 to .59 range. These companies may be expensive compared to the lead-acid group, but they’re cheap compared to the overall market.
I remain convinced that Li-ion technology has been over-hyped by rainbow stew visionaries who foresee a day when there’s an EV in every garage. But the reality is that the Pickens Plan is the only short-term transportation alternative that accommodates both existing infrastructure and the preferences of the driving public. Moreover, at prices of $1,500 per kWh, advanced Li-ion technology is far too expensive for widespread use by regular guys and it is not likely to get much cheaper. I’m intrigued by Warren Buffet’s plans to manufacture EVs in China and can see how the cost of a Chinese EV might be attractive, but companies like Altair and Ener1 (HEV) that plan to make me-too lithium-titanate products in North America to compete with established Asian lithium-titanate products like Toshiba’s SCiB line are in for a long hard road.
In the last couple weeks, Beacon Power has made tremendous progress between its fabrication and testing of a 1 mW/250 kWh flywheel array and its receipt of a financing commitment for a utility-scale frequency regulation project. The details of Beacon’s frequency regulation project remain sketchy so it’s hard to draw clear cost-benefit conclusions. But the progress is impressive and I think the stock bears watching.
I expect a successful IPO from A123 Systems to be watershed event. If A123’s IPO comes together before Thanksgiving, it will draw market attention to the energy storage sector in a new way and force investors to think about energy storage as a fundamental enabling technology for the coming age of cost-effective alternative energy. The resulting high tide of investor sentiment should lift all boats and the biggest gainers should be the boats with the lowest profiles.
As the market begins to understand the critical importance of the storage sector, established manufacturers like Exide, Enersys, C&D, Ultralife, China BAK and Hong Kong Highpower should see stock their prices surge upward from the current range of .10 to .59 times sales. While I do not expect to see valuations in the 5 to 6 times sales range one frequently sees for solar cell manufacturers, I believe the cream of the energy storage stocks have minimal downside risk and substantial upside potential. In the transition manufacturers class, ZBB, Axion and Beacon each occupy attractive niches with no direct Asian competition. Since their market capitalizations have been beaten down with all other sector participants, I think current prices for these stocks are all attractive entry points.
We have seen blood running in the streets of the storage sector for six months. If the last three weeks are a reliable indicator, the smart money has begun moving into the storage sector in a big way. While I’m not a prophet and have learned an important lesson about trying to call market bottoms, my optimism about the future of the energy storage sector remains at an all time high.
“In America we get up in the morning, we go to work and we solve our problems” (from The Lost Constitution by William Martin). I believe current and future solutions to America’s energy storage problems are going to make a lot of careful and diligent investors very happy.
Disclosure: Author holds a long position in Axion Power International (AXPW.OB) and is a former director of that company.
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This article has 30 comments:
The amount of the shares in the float is increasing as insiders divest, short sellers may be in there but Mega has either sold or divested almost a million shares most to below market buyers.
A return to "normal" conditions will not include loans to startups or new technologies. What grants can it go after?
I'm curious.
"Our New Castle, Pennsylvania facility has a permitted manufacturing capacity of 3,000 batteries per day and has operational production lines for both sealed and flooded lead-acid batteries. The ability to produce both types of batteries in a variety of sizes enables us to target our excess capacity at high-margin products which experience smaller levels of demand compared to conventional battery products, such as deep cycle industrial batteries, classic and racing automobile batteries and other products that support specialized niche markets. Over the next 18 to 24 months, we plan to exploit the manufacturing capacity deficit in the lead-acid battery industry by producing these high margin lead-acid products while we complete development of our PbC technology. As additional capacity comes on-line in the broader industry, we plan to transition our manufacturing focus from lead-acid products to our reduced-lead, enhanced-performance PbC products."
Unless you are willing to assume that there will be no standard LAB sales, Axion will not run out of cash in mid-2009.
Given my past relationship with Axion, it would be very dangerous for me to speak in detail about the future. My only goal in this series of articles is to help raise the visibility of a critical sector and the key players in that sector.
Is this because you're broke? Or, are you just waiting to make your move after the "bottom" hits. Well, it already hit for Exide (XIDE). I got in @ 4.26/share last Thursday. And I'm in it for the long haul (i.e. no adrenalin junkie day trading stuff on this stock).
Further, your insinuation about the rainbow (in your mind, I'm sure...) "morons" believe that all cars will have lithium ion batteries within the near future (half decade). I highly doubt any of your readers believe this as much as I believed what you wrote about a month and a half ago about a $100,000 car wrapped around a $75.000 lith battery. I guess you failed to acknowledge who it was that told you the Ener1 600 pound lith battery is going to cost about $17,500. Yet, in a recent article you did mention this price.
And, just as the price of that "imaginary" plug-in battery has dropped so does my continuing belief that you are NOT to be relied upon for any judgement concerning this industry. And, now I have Warren Buffet on my side! I'm intrigued how you intimated that lith cars will work in China, and not here in the USA!
I completely marvel that in this soon-to-be rocket sector you've taken no other position then on the stock of which, I'm guessing, you mostly own because you did your legal work in exchange for Axiom shares.
The real crux of this sector, investing wise, is that there are going to be many stocks that move up, quickly, no matter who gets elected. That includes lead acid, as well as lithium and, I'm hoping, Beacon Power, too.
I'm right now easing in for the long term. I suggest you do the same before the multiples disappear.
For better or worse, the general market sentiment on Li-ion is overdone. It's a great technology for a lot of applications, but there is no battery technology that makes economic sense in a pure electric vehicle. That's why I keep pointing to Pickens as the only rational transportation choice.
In a comment dated October 4th I said:
"So even the most optimistic price estimates I've seen takes you to about $17,500 for the batteries in a small bare bones EV. Joe 6 pack will never be able to pay that price and Joe Mercedes wants his luxury. So the only real buyer is Joe Celebrity who can and will spend $50,000 for a spartan but green status symbol."
I have also previously said that the $17,500 estimate that people keep throwing around is inconsistent with the pricing I've seen out of the UK which has the Think City at 20,000 pounds with another couple hundred pounds a month for the battery.
Ener1 is deliberately avoiding talk of pricing so that they can stay competitive with A123 which lays out $1.53 per watt hour in cost of sales. Until I see something contrary in a public release, I don't believe the $17,500 number because it is so far out of line with competitors.
Buffett is talking about making the whole thing in China with local labor. He may be able to pull off a product that works. Time will tell. You are never going to see Chinese economies of scale in Indianapolis.
While I got some Axion stock for work, I also have a pile of my own cash invested. Check out my Forms 3 and 4.
In the final analysis you and I agree on everything except two Li-ion companies that I think are grossly overpriced. But I wouldn't expect you or anyone else to buy or sell a stock based on my opinion. Do your homework and feel free to disagree. But let's not make this personal.
What I have been doing in this forum is to try to let others know a differing opinion exists, with a different investment angle. I absolutely believe that lithium batteries will make large in roads in this country in the coming years. But, this would be more in a gas/lith powered automobile, as well as fleet vehicles. These types of vehicles require very little infrastructure change. Where as, the plug in vehicles going large would require a huge infrastructure change...which, I believe will happen, but not likely in the next 15 years, and by then lithium likely will be cost prohibitive; no doubt in this mind by then something else will be coming forth.
Why? Because most everything that moves will be electrically powered, whether from solar, wind, natural gas, geothermal, tidal, nuclear, or, yes from those dirty coal and oil companies.
One thing I know we both agree on is that this sector is going to be very interesting from a growth standpoint here forward.
P.S. I don't own any HEV, right now. That should make you smile!
This is a great sector that's ripe with opportunity. But we are not likely to see the performance gains and price declines in batteries that we see in IT because batteries are a materials based business rather than a knowledge based business.
The far future tech that has me personally slathering is the founder of Swatch who is working to integrate solar and hydrogen fuel cells. But that's a long way from being a business.
Batteries are a Materials based business and as such should move inversely to basic materials. Unfortunately, Batteries are also an Alt. Energy business which moves in tandem with the cost of energy. A recessionary environment reduces the need for energy and as the number of vehicles produced drops so do the number of batteries used, inventories increase and prices for the traditional battery drop. The cost saving has to be upfront to the car maker in this kind of competitive environment.
There are always 2 sides to any "good" story. I have yet to see anything about the other side. The one involving Cash Burn or the total lack of Insider Buying at these depressed prices or the selling involving a Beneficial Owner who has either Sold on the Open Market or Disposed of 945,000 shares at less than Open Market prices.
I said some time ago that I would not even consider AXPW unless it broke above $2 on heavy volume. I do not own the stock nor do I expect to own it. Heck, its way too low to short. Buffett is certainly not interested and neither are any of the Foreign auto makers who have made commitments to other Technologies most of which involve lithium.
Oh, BTW, Toyota is introducing Hybrids with roof installed solar panels.
A depression may have been avoided, the Recession is still with us and it may be deep.
Stock should be bought and sold based on a thorough understanding of detailed disclosure documents. Blogs like this one can help investors narrow the number of documents they need to wade through, but I'd be horrified if I thought people were buying or selling anything based on a sentence or two that I wrote.
Now, Since you appear to be rather intelligent and have a nice presentation style, many might take your words at face value instead of going to AXPW's website and doing their own research.
Is it possible that the massive drop in value could have anything to do with the equally massive increase in the number of shares outstanding vs anything else?
"The advanced battery sector has also traded down to surprising levels over the last six months and established manufacturers including Ultralife (ULBI), China BAK (CBAK) and Hong Kong Highpower (HPJ) are sporting relatively low price to sales ratios in the .44 to .59 range. These companies may be expensive compared to the lead-acid group, but they’re cheap compared to the overall market."
Small company markets are difficult and it's easy to get to high volatility when a stock trades between 5,000 and 50,000 shares per day. It's equally dangerous when a small company trades an average of 540,000 shares per day. That's a casino, not an investment.
In fact, you will be paid for their return. Zpower.
The whole sector got slam dunked, as did Solar, wind, oil, Nat. gas, Yes indeed but AXPW was the one singled out by the short sellers, And when it approached $1, not a single insider took the opportunity to buy more shares.
IMHO, this is what happened: someone wanted to sell a large number of shares, someone else was willing to buy all of them at certain price. Unfortunately that price was way below the market value. So insiders were asked to stand aside as a few sellers took the shares down. 3 large, for AXPW, blocks were unloaded and picked up at exactly the same price and a block of 750,000 shares was divested all by Mega C. After those transactions were completed, the stock rebounded.
Think this doesn't happen? or Maybe it happens only to the poor little downtrodden AXPW? Got news for you, After 9/11, Disney was tanking. When it got to around $17, someone big received a margin call and had to sell fast. I think the Block was 15 Million shares and it changed hands a couple of dollars below the market. Disney hasn't been that low since.
I've seen it happen many times, it used to happen frequently under the Specialist System. When Forced Selling occurs, whether its Hedge Fund Redemption or Mutual Fund Redemptions or Margin Calls, what ever, All the Lemmings rush to get out at the same time and no sane person will stand in the way until its over.
Meanwhile, AXPW will have a really difficult time to recover because there are hundreds of investors waiting to sell it as it approaches the area that they bought it. They will want to break even. $1.70 to 1.90 will be an area of resistance.
This is not rocket science, This is normal investor psychology; please, please let me breakeven.
No self respecting short seller would bet against a stock that trades an average of 6,000 shares a day because there's no money in it. There are people who play silly games like selling 100 shares just before the close, but there are no significant short sellers.
I see that Axion has a proposal to increase the authorized shares from 50MM to 100MM at the upcoming annual meeting. Fully diluted the outstanding shares are currently at almost the full 50MM authorized.
This can only mean the company is either actively planning to issue more shares or at least have that option available should cash needs require it.
If another 50MM shares are issued, at whatever price, then the existing holders are diluted. The question is always whether the cash raised is enough to offset that dilution. Looking past that I am trying to see what that means to an investment in Axion stock.
If I wanted to buy Axion today at $1.50 and hopefully roughly triple my investment, a reasonable expectation for a speculative investment, then I would be hoping for earnings sufficient to, at some point in the future, support a $5 stock after the company starts really producing product and revenues. Assuming a conservative market price of about 10 times earnings then we need net earnings of about $0.50 per share to support a $5 stock. If there are potentially 100MM shares outstanding then we will need net earnings of about $50MM. To get $50MM net earnings with a 10% net margin on sales we need sales of $500MM. If our wholesale per unit price is $250 per battery then we need to sell 2M batteries per year or about 8,000 batteries per day. First, is there sufficient market to expect that many sales? But if so, can Axion build that many batteries or even that many PbC electrodes.
If I understand correctly the capacity limit of the current manufacturing facility is 3,000 per day. I suppose earnings can come from licensing agreements but my understanding of the companies objective is to make the PbC electrodes at their facility and ship them to others. Unless additional factories can be bought or built I do not see where there is enough physical capacity to get the sales to make the stock significantly higher than the current price. Where do you see the additional revenues developing? I am open to your explanation, just curious and cautious. I want to understand where the revenues will come from and how we get from here to there.
Thanks.
Likewise, there are so many opinions on what is or is not dilutive financing that I don't want to get anywhere close to that hornets' nest.
In general, I would prefer that this series of Seeking Alpha articles focus on global issues facing the energy storage market. I'm beginning to think that it hurts, rather than helps, when I spend too much time discussing Axion or any other company.
I'll be happy to respond to direct e-mail questions, but I'm going to try limiting my future comments on Axion.
A freebee that I give to all who don't know about this site.
You want to know about Insider trades, go to this site.
The main driver of this company stopped buying shares 2 months ago after buying every month throughout 2008, like clockwork.
John, in this I know much more than you imagine, I was a stockbroker and technical ANALyst for a decade. I know exactly what I'm talking about on AXPW. If it is as you describe, then why wasn't there rampant buying by insiders when the $1 mark was approached?
While the existence of insider buying is a sign of confidence, the lack of buying is generally thought of as neutral because the insider trading laws cut both ways.
It's illegal to sell based on non-public information and illegal to buy based on non-public information. Either one can get you in a world of trouble.
As a former broker and analyst, you'll appreciate the average cash price of $1.15 paid for every common share.
All I'm saying is that after a News Release, after the "quiet" period, Insiders can step in. They aren't even though the stock is at a steep discount. This is what I find disquieting about AXPW.
J3SG will Email you activity, I particularly like the distinction between Direct and Indirect holdings, Option exercise, and automatic buy/sells.
Many thanks for the link and for your excellent insight. My fundamental analysis suggested a tough time getting enough income to justify a stock price much above the present level. The large block sales and sudden withdrawal of insider buying, together with the fundamentals, confirm that concern. And now the plan to increase shares. I will keep a link to Axion but will look elsewhere for investments for the next year or two and then revisit the stock. Best wishes to you in this market.
There is absolutely nothing wrong with AXPW's tech, I'm just concerned that the future will bring forth better tech while AXPW waits for a recovery in the Industries it wishes to penetrate.
Do not you think the post-carbon economy could be nothing but another bubble to invest to?
Dmitry
St.Petersburg. Russia
I also know of a company with a few highly successful pilot projects which is able to produce low emmision, low sulpher refined products at a $28 barrel equivalent.
But since it is being hammered with all of the other good tech out there, I unwilling to part with the symbol until I have a good part of my investment in place.
I am taking a deeper look into A123's S-1, and noticed the following:
"We have had negative cash flow before financing activities of $17.0 million for 2005, $29.1 million for 2006, $56.1 million for 2007 and $13.5 million for the three months ended March 31, 2008. We anticipate that we will continue to have negative cash flow for the foreseeable future as we continue to make significant future capital expenditures to expand our manufacturing capacity and incur increased research and development, sales and marketing, and general and administrative expenses."
Assuming expenses remain constant (even though they plan on spending heavily on R&D, and rightly so), my main concern is that sales will not catch up to the increase in R&D, most likely pushing them to a secondary offering, diluting shares.
Unfortunately I am not too familiar with their products, demand, competition, costs, etc... But my main question is, do you foresee sales to make up for the increase in R&D, and most importantly based on what quantifiable data?
Nonetheless, it looks like the market hype will push the stock price higher at least in the short-term. But I'd be concerned as a long-term investor.
My biggest problem with Li-ion is cost per watt hour. If you divide A123s cost of product sales (prospectus page 7) by their watt-hour shipments (prospectus page 8), you get a rough figure of about $1.50 per watt hour. Lead acid, in comparison, costs about $.30 per watt hour and I think 500% is a big premium to pay for size and weight.
Regardless of its long-term potential, I think the A123 IPO will focus attention on the storage sector in a whole new way. In a rising tide environment I think I'd rather own companies like Exide and Enersys that have $5 or more in product sales for every dollar of market cap.
What are the environmental pros and cons from a legislative point of view in the use of lead-acid vs. Li-ion? (How much safer (environmentally) would the widespread use of Li-ion vs lead batteries be?)
Recycling is a fascinating issue because it has two prongs. The first prong is can something be recycled for safe disposal. As I understand it li-ion has no major disposal risks. The second prong is can recycled materials be re-used for the same products. Here, Li-ion doesn't stand a chance because the recycled lithium is not pure enough for re-use in batteries. Lead from recycled lead-acid batteries, on the other hand, is the primary source of lead for new batteries.