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John is a lawyer and accountant with over three decades of corporate finance, due diligence, M&A advisory and related legal services for manufacturers, innovators and investors in the energy storage and renewable energy sectors. Over the last eight years John has earned a global following for... More
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  • Why I Focus On Peer Group Comparisons 17 comments
    Jun 24, 2012 6:25 AM | about stocks: AXPW

    I was born in November 1951, which meant that I was younger and smaller than most of my classmates all the way through grade school and I high school. I played football on the peanut squad during my Freshman year in high school because I was 115 pounds soaking wet and nobody under 125 could play with the big boys. I got used to thinking of myself as smaller and that self-image as the "small kid" carried all the way through graduation when I stood 6" 1' and tipped the scale at 185 pounds.

    My self-image did not keep up with changing realities. I see the same thing happening today among Axion Power (NASDAQ:AXPW) stockholders.

    Most of my quarterly updates include a version of the following table that compares a variety of valuation metrics for the companies I track. The ones I focus on most intently when trying to evaluate the potential of different companies are Market Capitalization and Market Premium. I'll explain more after the table.

    (click to enlarge)

    Market Capitalization is nothing more than the share price multiplied by the total number of outstanding shares. It's a measure of a public company's weight if you will. The importance isn't so much the absolute number as how that number stacks up against your peers.

    Market Premium is the positive or negative difference between financial statement book value and Market capitalization. It's usually a good proxy for the value the market places on a company's technology, customer base and other intangible assets.

    Based purely on the market capitalization metric, Valence Technologies (VLNC) is twice the company Axion is even though its stockholders are so far under water that they need pressure suits. The market premium associated with Valence's technology is $140 million.

    Based purely on the market capitalization metric A123 Systems (AONE) is 5.5x the company Axion is even though their business is teetering on the brink and they just closed a $50 million debt round that will be perpetually convertible at an 18% discount to market no matter how low the market price goes. The market premium associated with A123's technology is only $34 million, but they've been having a tough time of late.

    Based purely on the market capitalization metric Maxwell Technologies (NASDAQ:MXWL) is 5x the company and before their recent price collapse was 12x the company. The market premium currently associated with Maxwell's technology is $75 million.

    The market premium associated with Axion's PbC technology is $17 million.

    There is nobody in the storage sector with a customer or an application that can hold a candle to Axion's relationship with Norfolk Southern.

    There is nobody in the storage sector that's ever had a potential customer like BMW stand up at an industry conference and tell the entire world "This is the kind of performance you need to deliver if you want our business over the long term."

    There is nobody in the storage sector that's ever had a company like General Motors take second billing on a DOE grant application.

    Axion may not have the financial statement bulk of an A123 or Maxwell, but it's head and shoulders above the crowd when it comes to technical merit, patent protection and first tier customers who wrapped their arms around the PbC technology before there was a PbC product.

    It's also head and shoulders above the crowd when it comes to keeping its head down and its mouth shut while doing the work with an incredibly small burn rate. Take a hard look at the TTM earnings column.

    Four years ago Axion was the scrawny Freshman that deserved to play ball on the peanut squad. A lot has changed since then but many of us still think we don't deserve better because market dynamics have been so hard on the stock price.

    Take a good hard look at the peer group and figure out where you think Axion's market capitalization should be. Then divide that number by 113 million to calculate your target price. It's a fascinating exercise.

    I apologize for sounding like one of the cheerleaders who never paid attention to me in high school because I believed myself too small for the football team, but it's about time somebody woke up and smelled the coffee.

    Disclosure: I am long AXPW.

    Stocks: AXPW
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Comments (17)
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  • bazooooka
    , contributor
    Comments (3688) | Send Message
    Great analogy. Axion will surely turn heads when the recruiters watch this kid play under the bright lights. Does sure seem that our value should be 5x higher. Football starts come Summer's end, maybe Axion will be viewed as varsity player by then too.
    24 Jun 2012, 02:11 PM Reply Like
  • iindelco
    , contributor
    Comments (10233) | Send Message
    Great article John.


    It's nice to see these metrics laid out in a spread sheet so that they can be digested as a group. You get a much different view when you step back and look at the forest. Some will begin wonder what they saw in their tree and some will get greater assurance that their foliage looks better than ever.
    24 Jun 2012, 02:25 PM Reply Like
  • D. McHattie
    , contributor
    Comments (1844) | Send Message
    Thanks John. I find this brief analysis very helpful and digestible. Helps to clarify the thoughts.


    25 Jun 2012, 10:14 AM Reply Like
  • Mayascribe
    , contributor
    Comments (11198) | Send Message
    Thanks, John.


    One of these days the sellers will be done selling. We may get a bump before the next cap raise, hopefully a news driven bump, maybe several. We may even see the sellers done selling before the cap raise.


    But next year, when the raised funds will be dedicated and project oriented, I can see the stock really taking off.
    25 Jun 2012, 12:16 PM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » I have to believe that several good things will transpire between the now and the time that Tom needs to unwrap his brass knuckles for price negotiations. I'm absolutely convinced that the sellers will be long gone by then. I'm betting that the price ramp starts in Q3 and the pendulum doesn't stop it's swing to the upside until Axion is overvalued by a margin that's roughly equal to today's undervaluation.
    25 Jun 2012, 12:31 PM Reply Like
  • AlbertinBermuda
    , contributor
    Comments (872) | Send Message
    JP I hope you are right.


    Q3 is a week away!
    25 Jun 2012, 02:21 PM Reply Like
  • H. T. Love
    , contributor
    Comments (19570) | Send Message
    John: I liked your "Peanut Squad" analogy. I remember being flattened by a very large Samoan when I tried out for football in Hawaii as a kid.


    I'm surprised I didn't get something broken as I let my determination outweigh my common sense as I determined I would tackle him head on while he had a full head of steam up.


    My build, weight and speed were definitely wide receiver in nature and I paid the price for matching that against a fullback build.


    A good article that should get fence-sitters thinking about risk and reward scenarios.


    I should have thought about that in Hawaii, come to think of it! :-)P


    25 Jun 2012, 03:47 PM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    Thanks for sharing how you figure it.
    I was born in 52, 6 ft., 175 lbs. and managed the football team my freshman year. Never thought I was tall or big til I moved to Japan for 15 years.
    26 Jun 2012, 07:26 AM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    I reread your article several times in an effort to get my head around it. I hope you don't mind if I ask a few questions as a novice for better understanding. I'll do them one at a time.
    First this is one of the key tools you use on a regular basis to quickly evaluate changes in companies potential survival.
    Do you run these calculations regularly on stocks you are following?
    26 Jun 2012, 08:36 AM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    Second Question or confirmation.
    This is one of the tools you use to evaluate companies. You also look at other information about the company, such as customer base/news reports/etc., as part of your overall analysis?
    But this is one of the key tools you use.
    26 Jun 2012, 08:44 AM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » It's a very handy tool to keep a quick summary of where companies stand so that you can compare comparable top line numbers among peers. I update my pricing every week and my financial statement metrics every quarter.


    I'm particularly fond of comparing working capital and stockholders' equity against market capitalization because it's a great indicator of stock prices that are too far out of line with the peer group, both on the upside and the downside.
    26 Jun 2012, 08:47 AM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    Red Flags go up when you see a company like Tesla whose ratios are so out of whack.
    It would appear that they are great at raising money but have little chance of meeting the expectations of the investors. Especially when you combine this data with potential market share, production potential, etc.
    26 Jun 2012, 08:59 AM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    Can you give a quick non-battery example of your analysis, like Google or Facebook so I can see it in a more common context?
    26 Jun 2012, 09:01 AM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » Let's look at Apple, the company Tesla compares itself to:


    $142.4 B TTM sales
    $38.6 B TTM earnings
    $18.7 B working capital
    $102.5 B stockholders equity
    $533.7 B market capitalization
    $431.2 B market premium


    P/S - 3.8
    P/B - 5.2
    P/E - 13.8
    BS/B - 4.2
    26 Jun 2012, 09:50 AM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    Thanks, very good example.
    26 Jun 2012, 11:17 AM Reply Like
  • Mseekingalpha
    , contributor
    Comments (66) | Send Message
    In the short run a company will have ups and downs not related to their ability to deliver a product. But successful companies, even though small, keep their noses to the grindstone. And they have a balance of other factors (not raising too much capital, correct market demand estimations, etc.) that ultimate leads to their success.
    And sound management provides that and not just hype?
    26 Jun 2012, 09:08 AM Reply Like
  • nakedjaybird
    , contributor
    Comments (2853) | Send Message
    Right on John - let's hope some bully doesn't come along and successfully kick some sand in AXPW's face.
    26 Jun 2012, 12:52 PM Reply Like
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