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Arotech Caught Up In Fuel Cell Frenzy

|Includes:Arotech Corporation (ARTX)

Arotech (NASDAQ:ARTX) is an Ann Arbor, MI-based manufacturer of simulation software and lithium battery products for the security, defense and law enforcement sectors. I wrote bullishly about ARTX here and here. In my most recent article, written in November, I called for a target price of $3.25, representing a 60% gain from the then prevailing stock price. Today ARTX is at $5.25.

Most of that gain has occurred within the last month. Why? It is the part of the business that manufactures lithium batteries. Batteries and fuel cells have hit mania like popularity with investors. Have a look at names like PLUG, BLDP, FCEL and QTWW which ran between 20% and 80% last week. That's right, last WEEK.

Arotech's battery division is the smaller part of its business, contributing in the most recently reported quarter only $5.5 million of revenues and $100,000 of EBITDA. Paltry though that may be, it is still better than most of its bubble brothers mentioned above, at least in terms of EBITDA.

But batteries are batteries and the market is going crazy for batteries. It has all the appearances of a bubble with hot money pouring into the sector turning over share floats with incredible rapidity. And while ARTX is a peripheral player in the space, at best, it has been caught up in the hype and the result is a stock price that is well ahead of itself.

ARTX should report full year earnings shortly. I would guess a number of $0.25 is near where they will come in at. That puts trailing PE at 21x, expensive for a lower margin manufacturer that has provided flat EBITDA guidance for the soon to be released fourth quarter.

ARTX has, in my opinion, got ahead of itself. I expect any cooling off in the over-heated fuel cell space to similarly affect ARTX' share price. Further, the expected earnings report should also sober up investor expectations. I see more considerably more downside than upside from here, and would advise caution on this name at this point, a reversal from my earlier bullish stance.

Disclosure: I have no position in ARTX

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

Stocks: ARTX