Q3 2009 Earnings Call

November 3, 2009 5:00 pm ET

At first glance, Best Buy (BBY) and Maxwell Technologies Inc. (MXWL) appear to have little in common. The latter makes ultra-capacitors, which are small battery-like devices, while the former is, of course, the giant electronics retailer.

I have two main thoughts on Thursday's market.

The first is that the bull market is healthy as a horse, and it will remain healthy until enough people stop arguing with it, questioning it and simply denying it.

I've been blogging about pure-play energy storage device manufacturers since July 2008. By mid-November I'd assembled a short list of thirteen pure-play public companies that accounted for almost 25% of the $30 billion global battery market. Frankly I was shocked to learn that major battery manufacturers like Exide (XIDE) and Enersys (ENS) that report billions in annual sales carried tiny market capitalizations when compared with far riskier technology development companies like Ener1 (HEV) and Valence Technology (VLNC) that would be little more than rounding errors on the big boys' financial statements.

As I focused on the obvious valuation disparities, it became clear that the market was paying huge premiums for companies that are developing cool energy storage devices and heavily discounting companies that manufacture objectively cheap energy storage devices. My belief at the time was that the cool companies were likely lose ground while the cheap companies were likely to gain ground. My original peer group comparison table follows (click on the image for a larger view).

Last Friday I published "Battery Investing for Beginners" as an introductory piece for investors who don't know much about the energy storage sector but are interested in learning more because of the hugely successful initial public offering by A123 Systems (AONE). Since the article was well received and there seems to be a good deal of reader interest, I've decided to continue the theme with a series of articles where I'll try to build a contextual framework for the industry and show where various types of energy storage devices and their manufacturers fit into that framework. Since I don't want to spend too much time replowing old ground, I'll rely on hyperlinks to my earlier blogs and third party source documents.

I'm a lawyer, not a journalist. My undergraduate degree was in accounting with a solid base of hard science. I've spent the last 30 years working in securities law where most of my work involved small natural resource or technology development companies. I'm not an engineer or scientist, but my chosen field of practice requires me to understand the science well enough to explain it. My foundation in the energy storage sector dates to 2003 when I took on a client named Axion Power International (AXPW.OB) that was organized to develop a novel energy storage device that's half lead-acid battery and half supercapacitor.

Maxwell Technologies Inc.'s (MXWL) (Analyst Report) steadily rising revenue and improving cost structure is in-line with our expectation of break-even in the final quarter of fiscal 2009. Maxwell Technologies develops, manufactures and markets energy storage and power delivery products for transportation, industrial telecommunications and other applications and microelectronic products for space and satellite applications.

However, its future performance will improve mainly through strong ultracapacitor sales growth. The company generates a significant portion of its revenue from ultracapacitors (43% in the first half of fiscal 2009). In the recently concluded second quarter of fiscal 2009, ultracapacitor sales grew 58% year over year, compared to 34% growth overall. Maxwell's cost structure will also improve due to its gradual shift of production to China.

My favorite automotive investment today is a company in the component business that I mentioned here briefly two weeks ago. Its name is Maxwell Technologies (MXWL), and its products are ultracapacitors that use static electricity to store and release electrical energy and do it much more quickly than batteries ever can. These ultracapacitors are used today in a variety of industries, including telecom and aerospace, but their biggest potential lies in the automotive market, which is rapidly turning to hybrid and electric vehicles that can make great use of the technology; in fact, they’re already being used in buses in China. The company is not yet profitable, but analysts are predicting profits for 2010. In the second quarter, revenues grew 30% to $24.8 million, while the loss per share shrank to six cents.

As for the stock, it hit 15 in late July, and has been digesting that gain since, building a base around 13. Selling volume has been minimal, suggesting that the action is dominated by institutional position-building and not distribution.

Not long ago, I was having a discussion with some friends about real estate when the focus drifted to Cape Cod housing prices, which had plunged in the 2007-2008 real estate collapse. The consensus among the group was that prices would eventually rebound, and that patient owners and investors would come out OK. And that was no surprise. Most people tend to extrapolate the future from the past … and for most of our lives, real estate prices have gone up.

Then up piped my brother-in-law the geologist, commenting, “10,000 years ago Cape Cod wasn’t there and in 10,000 years it’ll be gone again.”

In August of last year I wrote an article titled "Grid-based Energy Storage: Birth of a Giant." Over the last 12 months I've written a series of follow-on articles that discuss the principal classes of manufactured energy storage devices and the companies that are making or planning to make products for smart grid energy storage applications. My entire archive of articles on the energy storage sector is available here.

One of the biggest problems I've encountered over the last year has been a dearth of reliable third party information that can help investors understand the breadth and depth of the business opportunity, and sift through the frequently contradictory claims of energy storage device manufacturers that plan to target the smart grid as a principal market. Since energy storage investors are generally well-informed and frequently opinionated, most of my articles have lengthy comment streams that round out my perspective and are usually more interesting than the articles themselves.

Q2 2009 Earnings Call

August 06, 2009; 05:00 pm ET

The next couple months are shaping up as a time of extraordinary change in the energy storage sector. Events that will drive the change include:

• Press reports indicate that the Department of Energy will be ready to announce it's preliminary decisions on the allocation of $2 billion in ARRA battery manufacturing grants sometime this week;
• We've seen numerous reports on automaker's plans to begin manufacturing PHEVs and EVs in limited volumes for testing and demonstration purposes;
• New tailpipe emission standards in Europe and accelerated CAFE standards in the U.S. will effectively compel the widespread adoption and rapid roll-out of stop-start and mild hybrid technologies by all major automakers;
• Advanced Battery (ABAT) acquired manufacturing facilities for electric two-wheeled (E2W) vehicles and is diversifying its operations with a sharper focus on the Chinese market;
• Beacon Power (BCON) received a conditional commitment for a $43 million DOE loan guarantee that will be used to complete a 20 MW flywheel energy storage project in New York; and
• A123 Systems filed another amendment to its SEC registration statement, which indicates that they're still on track for an IPO sometime in September.

So now seems like a good time to update the relative performance of the individual energy storage stocks I've been writing about for the last year.

All of the movement toward renewable energy and slicing carbon output represents a profitable opportunity for investors. One Green stock I particularly like because it has a dominant position is a product that is used in solar and wind power systems as well as hybrid vehicles.

Infocast’s Storage Week was all I had hoped it would be, and more. While I thoroughly enjoyed serving on three discussion panels and was warmly received by roughly 250 attendee...[T]he most important value for me came from the opportunity to hear four days of high-level presentations by industry executives, national thought leaders and policymakers who repeatedly stressed that:

• From a utility perspective grid-based energy storage is the functional equivalent of an instantly dispatchable generating asset;
• The combination of wind assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
• The combination of solar assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
• When it comes to grid-connected energy storage, cost, reliability, maintenance and cycle life will be the primary decision drivers.

Consensus was that an optimal smart grid configuration will need storage capacity equal to at least 5% of peak system load and areas that rely heavily on intermittent renewables like wind and solar will need a higher capacity to maximize the value of those assets.

San Diego, California-based Maxwell Technologies, Inc. (MXWL) added another feather to its distribution network. On Monday, July 13, it signed a global distribution agreement with Texas-based privately held electronic component distributor, Mouser Electronics, Inc. Mouser will distribute Maxwell's ultracapacitors ranging from 2.5V to 125V.

The deal is mutually beneficial for both the companies. By adding Mouser's global distribution network, Maxwell would greatly augment sales of its BOOSTCAP ultracapacitor products. Mouser's global network through print and online catalogs caters to more than 270,000 customers spread over 170 countries.

By Jon Kolb

Maxwell Technologies (MXWL) reported its financial results for the 1st quarter of 2009. The net loss for the reported quarter was $3.0 million, or $0.13 per share, compared to a net loss of $5.6 million, or $0.28 per share, in the comparable 1st quarter of 2008.

I didn't learn about normal bell shaped curves in kindergarten but I developed a pretty solid understanding of the concept by the second or third grade because at report-card time A's were worth a quarter, B's were worth a dime and C's had no value at all. By the time I reached college I was chasing the right hand tail of the bell curve on my own initiative. Law school and the competitive nature of my profession merely pushed my drive for the right hand tail up a notch.

Old habits die hard, so I still tend to chase that right hand tail of the bell curve in almost everything I do. The only real exception is investing where 30 years of experience has taught me that the most successful companies are the ones that sell products to the 95% of the population that don't command $200,000 salaries. There are companies like LVMH that have a great business catering to the elite, but they're not in the same league as Target (TGT) and Wal-Mart (WMT).

Last month I wrote about a very smart plan the DOE developed for $4.5 billion in smart grid grants authorized by the American Recovery and Reinvestment Act of 2009 ("ARRA"). I was particularly impressed that the DOE's plan created a functional public-private partnership where grants would be available to companies that could raise matching funds from private sources, but would be denied to companies that could not attract substantial private sector funding.

While I hoped a similar plan would be adopted for $2 billion in ARRA battery manufacturing grants, my research was hindered by a broken link at www.grants.gov that wouldn't let me download the Funding Opportunity Announcement ("FOA"). Late last week, a reader sent me a copy of the FOA and I was delighted to learn that the same guiding principles will apply to ARRA battery manufacturing grants.

Q1 2009 Earnings Call

May 5, 2009 5:00 pm ET

After devoting several months to articles on arcane technical and economic issues that normal investors should not have to endure, I declared a cease fire last week and advised readers that I was done with technology and planned to focus on more interesting topics like the future of the energy storage sector and making money from energy storage investments. I've spent enough time discussing trees. Now I want to evaluate the forest and show investors how to position their portfolios for the coming of cleantech, the sixth industrial revolution. I hope old friends and new readers alike will find the change refreshing. I know I will. I began blogging in July of last year and have concentrated on manufactured energy storage devices and the companies that make them. In a series of 55 articles to date, my fundamental premise has been that:

• Manufactured energy storage devices are just plain boring;
• Energy storage stocks have historically traded at "rust belt" valuations;
• As we enter the cleantech age, the market will discover that energy storage is a core enabling technology for many classes of alternative energy; and
• As the market adjusts to the new realities, valuations in the energy storage sector are likely to soar.

Since July, market interest has developed faster than I expected and it's beginning to look like my predictions of rising tides and investment tsunamis may have undershot the mark. Just on Friday, Energy & Capital ran a headline story that screamed "Advanced Energy Storage: It's Worth Billions." Others like it appear regularly. This is a great time for astute investors who are seeking alpha, but the window of opportunity is closing.

In connection with this week’s launch of their new “What Matters” website McKinsey & Company published a pair of essays that should be of particular interest to alternative energy investors. The first essay, “Electron-Democracy,” describes the coming smart grid as a system that will be built outward from a core of centralized power plants, but increasingly be supported and stabilized by incremental energy flows between small producers and consumers that can respond nimbly to market demand with lower capital costs and more robust protection against disruption. Putting the pieces together, the authors suggest that:

“. . . the distributed grid might look like this: intermittent wind and solar power generation would be complemented by load-supplementing fuel cell plants, in much the same way that peak power and base load power plants interact today. Electric vehicles [EVs], plug-in hybrid electric vehicles [PHEVs], and batteries would serve as grid energy storage when excess energy is being produced.”