Maxwell Shareholders Could Finally See Some Rewards For Their Patience

Summary

• Maxwell has had a difficult time generating consistent revenue, but upcoming launches in the auto, grid, and rail markets should put the company on a track toward double-digit revenue growth.
• Maxwell's dry battery technology is an exciting call option that could position the company as a player in one of the biggest cost drivers for electric vehicles.
• Modeling and valuing Maxwell involves a lot more guesswork than normal, but today's price seems to offer double-digit annual return potential.

Maxwell Technologies (NASDAQ:MXWL) hasn't been the easiest stock to hold over the last few years, as the promise of the company's ultracapacitor and dry battery electrode technology has been offset by significant revenue volatility and numerous false starts in what were supposed to be exciting growth markets. With all of that, the shares have lost about 20% of their value over the last three years and have spent most of the last year between $5.50 and $6 (with excursions down to $4.50 and up to $6.50 along the way).

Maxwell remains a tough stock to value, as there is little more to go on than a handful of design wins and potential end-market developments. That said, I think the company deserves more credit than it gets for "keeping the lights on" and using opportunities like the Chinese hybrid bus market to fund R&D and product development in areas like auto electrification, renewables, mass transit, and grid management that could start to pay off in the next couple of years.

The Auto Opportunity Is Starting To Take Shape

Maxwell management has long talked up the potential for the company's ultracapacitor products to play a meaningful role in the emerging electrification of passenger vehicles. I'm not talking specifically about electric vehicles (though that is a part of it), but rather the wider adoption of electricity-driven features/systems like stop/start motors, electronic active suspension, electronic supercharging, brake recuperation, energy storage, and various power assist systems.

Maxwell has had some design wins in the start/stop segment for some time, helping build a small toehold for the company in the auto market. Along the way, the company added some high-end business with electronic stabilization, and now, the company is looking at 14 design wins in stabilization and ADAS backup ramping up relatively soon and the possibility of additional new OEM awards in the near future.

The auto market is almost certainly the biggest addressable opportunity for the company right now. Ultracapacitors offer rapid energy delivery that batteries cannot match, making them well-suited to applications like start/stop, stabilization, power assist, and so on. Consumers are going to start seeing these features (and the introduction of "mild hybrids") become more and more common on new vehicles over the next two to five years, opening up what management has estimated is a $1 billion addressable market opportunity.

How this opportunity really develops among auto OEMs, tier-one suppliers, and Maxwell still remains to be seen, as auto manufacturers are notorious for pushing back hard on price with their suppliers, and Maxwell partners like Continental (OTCPK:CTTAY) can be counted on to get their cut. Nevertheless, if Maxwell can establish itself as a go-to partner and a key component within these emerging electrification systems, this could become a $100 million/year business for Maxwell within the next decade.

Wind Remains Worthwhile, While Grid Is Just Emerging

Maxwell's wind business has always had its ups and downs, challenged by both volatility in new installations (often a consequence of government subsidy programs) and competition for turbine content. Nevertheless, wind turbines remain an attractive option for renewable/green energy capacity deployment and Maxwell's ultracapacitors are an attractive option for powering pitch control systems that are essential to safe and efficient wind turbine operation. Looking ahead, Maxwell's opportunity here continues to be influenced significantly by the pace of new deployments, as well as emerging opportunities to retrofit older turbines.

An emerging opportunity to watch is in grid storage. One of the key challenges for utilities when adding renewables to the grid is managing the inherent volatility of solar and wind power generation. While battery-based systems have gotten most of the attention in this area, it is not an "either or" competition between batteries and ultracapacitors, and Maxwell's ultracapacitors can play an invaluable role in storing power and managing peaks and valleys in output.

With a new grid product slated to hit the market around midyear, I expect this opportunity to start delivering revenue for Maxwell relatively soon, and given the numerous mandates around the world for green/renewable generation, this could become a significant business over the next decade. I would note as well that this (grid stability/management) is one of the prime growth opportunities that ABB (ABB) has identified for its own grid business, and ABB has been a customer of Maxwell's high-voltage capacitors (as have Siemens (OTCPK:SIEGY), GE (GE), and Mitsubishi). As more utilities look to modernize their grid and incorporate more renewable generation, Maxwell has a real opportunity to generate meaningful revenue.

Other Opportunities More Like Call Options

Although I expect auto electrification, wind power, and grid management to be the prime drivers for Maxwell, they're not the only potential revenue sources for the company's ultracapacitors.

The company has been working with China's CRRC-SRI for a few years now, primarily on ultracapacitor-based regenerative braking systems for trains. Maxwell looks to be on track for a 2018 product launch, with the possibility of real revenue in 2019 and beyond. I'm cautious about expecting too much from this business too soon, as train equipment orders in China can be volatile and hard to predict, but I nevertheless believe that rail markets could generate 10% or more of Maxwell's ultracapacitor revenue within five years - making it a valuable contributor behind autos and wind power.

I'm less bullish on the commercial truck engine start opportunity, and it is not something management seems to talk about anymore, or at least not nearly to the same extent as a couple of years ago. There's still growth potential here, and Maxwell's ultracapacitor-based system still offers meaningful benefits over battery-based systems, but commercial truck operators are often slow to adopt new technology, and the size of this market opportunity is modest next to autos, wind/grid, and even rail.

Last come opportunities like hybrid buses, backup power, and other smaller opportunities. Maxwell had a pretty good business providing ultracapacitors to Chinese hybrid bus manufacturers, but the subsidy incentives have gone away as the Chinese government has prioritized other options. This business could still perk up from time to time (both in China and elsewhere), but it is likely never going to be an important driver again - and that's okay, it provided some valuable revenue to Maxwell and helped it fund quite a bit of product development, but the margins were increasingly unattractive.

Dry Electrode Technology Is A Major Call Option

I also have to discuss, at least briefly, the company's ongoing efforts to develop and commercialize its dry battery electrode technology. An outgrowth/repurposing of technology used in its ultracapacitor business, management has announced that it successfully completed its proof of concept stage with 10% better energy density (300Wh/kg) than comparable wet electrode options. Maxwell has been working with an auto OEM and tier-one supplier in the proof of concept phase and is looking to invest meaningful capex to support further development.

Management believes it can get its battery technology to a density of 350Wh/kg or more by the early 2020s at a cost of less than $100/kWh, although it's unclear to me if that refers to the price of the battery pack or just the cells (GM (GM) claims that the cells for its Bolt cost $145/kWh, while overall average EV battery pack costs are a little above $200/kWh currently). Further out, Maxwell is talking about densities of 500Wh/kg or higher, as well as solid-state technologies.

If the company can hit these targets, it could find itself becoming a player in one of the key components (and cost centers) of electric vehicles. Exactly what role it will play is still unclear to me, though. It doesn't take huge capex to support an electrode manufacturing operation (and electrodes are currently about 50% of the cost of a battery), but it may prove to make more sense for Maxwell to license its technology/processes to established battery manufactures. By the same token, if this technology is really as good as advertised, it could make sense for an EV battery player like LG Chem to just buy Maxwell.

The Opportunity

Modeling Maxwell today involves a great deal of guesswork, and a lot of the arguments between investors about the company's future revenue and margins boil down to "uh huh versus nuh uh", as there aren't much concrete data to work with right now. Given what major auto suppliers like Continental, Valeo (OTCPK:VLEEY), and BorgWarner (BWA) have been reporting and projecting, the vehicle electrification opportunity is real, but Maxwell's role is most definitely uncertain. Likewise with grid stabilization - I think ABB and Siemens have made it clear that this will happen, but whether it includes Maxwell ultracapacitors has yet to be proven.

For my part, I do model long-term revenue growth of over 10% a year out to 2027, with ultracapacitor growth driving the large majority of that. I'm looking for 20%-plus annual growth in auto ultracapacitor sales over that time and around 7% growth in wind and 15% growth in rail, but given that management doesn't give much detail about present-day revenue breakouts, I want to be clear and honest that these are estimates built atop best guesses.

On the margin side, I do believe the addition of Nesscap will allow the company to in-source more of its ultracapacitor manufacturing, improving gross margins and allowing for more manufacturing leverage/scale down the line as ultracapacitor sales grow. I think gross margins could approach 40% in five years, and that may actually prove conservative. I expect GAAP operating breakeven in around five years, with mid-to-high teens margins further down the road and low double-digit FCF margins.

I do not include Maxwell's battery opportunity in those numbers. Instead, I model the value of the battery technology more like I would value a biotech stock, including assumptions about the addressable market (vehicles times electrode ASPs), market share, likelihood of commercial success, and scenarios with Maxwell as a manufacturer or as a licensor.

All told, I think today's price on Maxwell offers low double-digit annual return potential, and that's including about $1.50/share in value from the battery opportunity. That potential value contribution swings wildly, though, based on different assumptions about Maxwell's share of value, market share, and so on, but that $1.50 figure is driven by an estimate of a 25% chance of a little over $300 million in revenue in 2028.

The Bottom Line

If Maxwell's dry electrode battery opportunity goes nowhere, I think the shares could still generate a total return in the high single to low double-digits. That's not too exciting relative to my hurdle rates, but then that assigns zero value to the battery opportunity and could be too conservative on the ultracapacitor revenue and margin potential. Either way, I think these shares are worth a second look from aggressive investors who can afford to take the risk of sizable losses. Maxwell's development path has been rocky and winding, but I believe those efforts are about to start producing more meaningful revenue, and if that happens, the Street will notice.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long ABB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.