Folks! jarkutz wrote an excellent article about Axion Power International. Just as when I first sought Seeking Alpha to publish my intitial Axion summation of the June 20 Investors' Conference, jarkutz learned that Seeking Alpha chooses to not publish any articles about stocks priced under $1.00. Upon discovering this fact, jarkutz approached me to have his article lead off a new Concentrator. I could not resist such a generous offer.
Below is jarkutz's article.
Axion Power: The Buy Of The Decade
I want to start by clearing away a few things so no one is confused. I am not an expert financier (I know a little), I am not a battery tech geek (I know a little) and I am not John Petersen (I do know him). So why am I writing an article on a stock I have limited credentials on? I believe I have a unique perspective that comes from being a non-believer to an AXPWgelical.
Axion Power Finances:
I am starting with their finances because this one aspect many retail investors over look, and their finances alone make a compelling case to buy the stock now, considering a 30M market cap.
Start off with debt, their only debt reported on their most recent 10K is made up of grants and one $500k loan held at 3% interest backed by the equipment purchased. This means no one owns there products, patents, and assets other than the shareholders.
At their New Castle, PA plant, they have two traditional lead acid battery lines that can produce 2000 batteries a day. Running at only 80% capacity at $50/battery that is a potential revenue of $20M/Year. The same plant also has the capacity to produce 1000 AGM batteries at $120 each producing revenue of $24M at just 80% capacity. Running their current plant at 80% capacity would produce $44 Million a year in revenue and roughly $6.6M in gross profit. Their hard assets are equal to $13.3M. If you factor in their New Castle plant they bought for $700K on foreclosure that would easily account for the remaining shareholders equity of $17.5M (current Market cap at 30.8M minus 13.3M in hard assets).
You may have noticed I have not mentioned any income thus far being derived from their proprietary PbC Battery technology that will potentially be a disruptive technology. It is no less than extraordinary that I just justified buying the company at the current market price on finances alone, and I did not even need to mention what the company is all about...the PbC battery, which holds extraordinary growth potential.
Axion Power's Technology and Business Model:
Axion Power's technology is their proprietary negative carbon electrode. A battery manufacturer will substitute their negative lead based electrode in standard AGM batteries with Axion's carbon based electrode. Sort of like intel selling chips to computer manufacturers. The battery is the computer, the chip is the electrode. A common bit of confusion for a lot of people watching Axion Power is that they believe Axion wants to be a battery manufacturer and therefore should be doing everything traditional battery manufacturers do to sell their product, i.e. publish technical spec, list cost, etc. The problem with this is Axion does not want to be a battery manufacturer, they only want to sell their electrode to battery manufacturers, but in order to do that they have to prove the PbC is a better battery to existing OEM's. So in the short term, they have to make the battery for demonstration and testing purposes, but the last thing they want to do is put existing battery manufacturers (their future customers) into a corner by publishing technical specifications or pricing too early. The beauty of this is they will not be in competition with anyone and they will be making the highest margin possible since no one will be able to make their electrode without infringing on their patents. I think Buffett might call that a moat.
Axion's recent White Paper does however show categorically the superiority of their PbC technology over existing VRLA/AGM batteries (www.axionpower.com/Profiles/Investor/Inv...=) The White Paper illustrates how their PbC battery shows 10x-20x higher Dynamic Charge Acceptance after 2-9 months and 5-10x shorter charge after 2-9 months than VRLA/AGM. Both of these performance matrices are essential in Stop/Start idle elimination. For further reading on micro-hybrids and Stop/Start idle elimination, you can check out John Peterson's article here seekingalpha.com/article/297511-micro-hy... and Johnson Controls highlights their forecast for the industry in their Power Solutions Analyst Day here www.johnsoncontrols.com/publish/us/en/in....
Axion Power's Current Testing Markets:
Their are several markets very conducive to Axion's PbC battery technology where they have made major in roads and are in testing for over two years.
1. Automotive: Axion Power has been testing their PbC battery with BMW (since 2009, as well as "several other European OEM's"). GM: "We are currently moving to in-vehicle testing with numerous OEM's," is written in Axion's recent application for a grant from the DOE with GM as their partner. This is no small feat, considering how notoriously slow-paced the automotive industry moves when pursuing new technology.
2. Rail: Norfolk Southern testing in their NS999 (since 2009)
3. Power Grid/Energy Storage: PJM and Viridity (www.marketwatch.com/story/axion-powers-p...)
They are dealing with the largest market movers in each industry (keep in mind they are currently trading for around $30M.)
Axion Power's Market Dynamics:
Everyone knows the economic market conditions for the past three years have made the markets more than unstable and micro-cap stocks on the Bulletin Board surely were not spared the knife when it came to funds looking to cut out risk. The past 18 months have been extremely tumultuous for the market dynamics of Axion Power. Quercus Trust, a large fund that invests in green technology, was the first to begin selling off their 18M share (including warrants) position looking for liquidity to help support other companies in the fund that were not able to stand on their own feet. From here on out rule 144 of the SEC limits the amount of shares Quercus can continue selling. Other than in the third quarter of this year, Quercus has been a very responsible seller accounting for only 10% of the daily volume. Special Situations is another fund that has been selling, driving downward pressure on the share price very hard. In their 13G filing as of Sept. 30, Special Situations had 3.1M shares left. Since then, total volume for sellers has been ~5M shares, considering the very aggressive selling coupled with the lack of bad news (on the contrary the news has only gotten better) that has taken place over the past several weeks we (Axion Concentrators seekingalpha.com/instablog/228383-mayasc...) believe Special Situations is all but out of the picture. My belief is that myself as well as many of the other Axion Concentrator commentors have done the bulk of the buying. Considering that we all believe it to be a 5-10 bagger stock, most of those shares are in what can be termed "strong hands" and unwilling to sell at any price below a multiple of 5 from the current cap.
Axion Power's Coming Capital Raise:
Back in March, Axion announced a shelf registration to sell stock to raise $18M -$28M. Without any expansion Axion can last as a going concern until the end of Q2 2012 without any additional funds. On the most recent conference call Thomas Granville, the CEO of Axion Power, said they had been offered financing but not on terms acceptable to them. The growing consensus is that Axion Power will wait to do a positive press release causing the price to rise and then do the capital raise.
Axion Power's Risk/Reward Profile:
The two major risks that could create a bad outcome are the capital raise and worst nightmare scenario that the PbC does not gain any market acceptance in any of the markets it has been testing in for over two years now. If the PbC does not get market acceptance in the next six months, then they would not have to build out additional manufacturing capabilities and they would only need to raise the $18M on the low-end of the shelf registration. Not terrible considering they can still produce at least $44M in revenue and 6.6M in gross profit with their existing plant. They would not have to pay taxes because of NOL carryover from their previous years and no need for R&D expenses, both of which would increase their net income. If Axion does receive commercial orders for their PbC before Q2 of 2012, thereby confirming the PbC market acceptance, they should have no trouble raising capital, considering they are getting offers for that already. In addition, the price should spike since there are a lot of people who are aware of this stock thanks to John Petersen, but the majority are not willing to buy in now because of doubt surrounding the PbC's commercial viability. Once that doubt is put to rest through a commercial order from one or any of the first tier OEM's that are testing it. The share price should finally begin reflecting the true market potential of this disruptive technology.
I have a hard time believing their is a better risk/reward profile currently in the market. I want to thank John for a lot of the information that I then confirmed with my own due diligence as I would assume anyone reading this article would do.
I want to again thank jarkutz for a wonderful article!