Maxwell Technologies: Entering The Next Phase

Summary

• Maxwell Technologies has been pointing to 2018 as a critical year in terms of starting to transition into the automotive sector more, but they are not alone in the quest.
• With the convertible debt raised in 2017, 2018 and 2019 will see more investment in expansion.
• Improving returns for shareholders will become less about the promise and feasibility of the technology in the future and more based on execution in the present.

The ultracapacitor maker Maxwell Technologies (NASDAQ:MXWL) reported on 2017 results last month, and after digesting some of what was mentioned on the earnings call and taking a look at trends, an updated view is warranted, although I will plan to wait until later in the year to address valuation specifically. Ironically, as it turns out, I'm not the only one who thinks now a good time to check in on the name, for just as I was putting the finishing touches on this article, fellow Seeking Alpha contributor Stephen Simpson has also published his updated view, which I would recommend to anyone interested in Maxwell. For the uninitiated, an ultracapacitor is an energy storage solution that can supply relatively high amounts of power that is both dispersed and recharged fairly quickly, but thus far has not been developed to be able to store and supply energy as batteries do, in which the power is dispersed more slowly. A reasonable explanation of the basic idea of the technology can be found from this YouTube video.

Maxwell has been proclaiming the promise of this technology for years as a key component of solving energy storage problems, especially as alternative energy sources (such as wind) are coming online at a faster rate and transportation is becoming more heavily electrified. For all the years of promises, shareholders have had relatively little to show for it; those who took the buy-and-hold approach five years ago would have seen big gains in 2014 that were short-lived; otherwise it has been a pretty range-bound investment for the last two years, in the midst of a massive bull market generally, and certainly not keeping pace with its quasi-peers in battery technology.

MXWL data by YCharts

Plenty of reasons explain why - over-dependence on both a single geographic market (China) and a single line of business (buses) stands out in particular. But in investing, the past is not necessarily prelude, and management is increasingly confident that new windows of opportunity are starting to open faster.

Competitive Landscape

If those opportunities are real, then of course others will go after them as well, and Maxwell is far from alone in this product category. As far as its competition goes, it is worth noting a few of them to see the general common threads; some are privately held and are either middle or late stage venture firms that are not yet profitable or cash-flow positive and simply operate on a generally smaller scale than Maxwell. Others are not easily accessible to American retail investors, or are buried deep within industrial foreign conglomerates. However, there are occasional new entrants as well, as the possibility for improved performance could come from any of them. To help give a sense of them, here are some other companies with ultracapacitor products, to give an idea of the range of stages of development and commercialization (all except the final one are listed in Maxwell's 2017 10-k).

• Ioxus is a privately owned company based in Oneonta, NY; it has been around for just over ten years, starting actual production and sales in 2009. According to Crunchbase, Ioxus received its most recent round of funding to the order of $6.5M in February 2017, and to date has raised ~$81M; though smaller than Maxwell, it is competing for Asian business.
  
• Skeleton Technologies, a private Estonian company, has also been named by Maxwell as a competitor. From the data available publicly, it has raised ~ €44M, having received €15M one year ago. It is slightly newer than Ioxus, going back to 2009, but has expanded rapidly, and brought new production capacity online in Germany in 2017. It specifically touts its patented "curved graphene" technology as its key advantage in the market in terms of performance, as well the fact that it covers the entire value chain in-house, both the sourcing of the carbon and of course the production process. The company is known to be keen on gaining traction in the automotive market, and has generated some buzz towards that end.
  
• LS Mtron is one division within the LS Group of South Korea, itself spun out from the LG Group (known perhaps in the United States for its consumer electronics like smartphones and televisions). Within LS Mtron, alongside tractors and other pieces of industrial equipment, there is ultracapacitor business, and Maxwell continues to list the company as a competitor. South Korea also is home of Vina Tech, which according to its English website might trade on the KONEX exchange for small and medium-sized businesses in Korea (as I don't know Korean, I wasn't able to quickly locate a ticker or any other way to identify whether it still might trade on this exchange). Another Asian competitor listed by Maxwell, Samxon, is likewise a single division within the broader Man Yue Technology company of Hong Kong, which trades on the Hong Kong Exchange. With the historic importance of the Chinese bus market to Maxwell, its own acquisition of Nesscap (a South Korean company), and the demise of the attempt by the Chinese fund SDIC to take a large stake in Maxwell last year, all these hint at the significance of the Asian markets and degree of competition.
  
• Finally, Pascal Boulanger founded NAWA Technologies in 2013 in southern France. The company has received solid recognition as a promising start-up and is starting to get mentioned with some of the other names on this list. It has recently expanded its production capacity and has realigned its management team to focus on generating revenue. It has raised over €13M and is aiming to roughly double that level of investment soon. NAWA is clearly one of younger entrants in the industry, but not necessarily one to be ignored.

Why Maxwell, and why now?

With the variety of competition and level of investment being poured into energy storage and distribution solutions at the moment, Maxwell may not necessarily stand out. A few reasons why an investment in Maxwell might separate itself, however, are its size, focus, and capitalization.

1. While a market cap of $215M is certainly not massive, Maxwell is a large player in the sector, and it certainly dwarfs several of its competitors. That scale allows for certain effectiveness in competing on cost; for example, according to the latest 10-k, it already outsources "the assembly of our 60 mm diameter large cell ultracapacitors, and subsequently, assembly of large cell-based multi-cell modules as well as assembly of our mid-size D-cell ultracapacitor products and D-cell-based multi-cell modules to contract manufacturers based in China," and with the Nesscap acquisition it gained a production facility in South Korea. From a labor cost standpoint, then, Maxwell should be able to remain on a relatively even playing field with some its Asian competition. Its size also allows for efficiencies from volume in the supply chain of the necessary raw materials. From what is known about Maxwell's competition, several of the other firms are simply small enough that they are not yet ready to challenge Maxwell for actual customers.
   
2. For American retail investors, Maxwell is about the only pure-play possibility to choose from among ultracapacitor producers. Others are either privately owned, or difficult to access directly on foreign exchanges and no ADR is available. Even if they were available, such as Panasonic (OTCPK:PCRFF), you are buying into not only an ultracapacitor maker, but an electric vehicle battery supplier as well producer of household personal electronics, and is therefore far from a pure investment in the capacitor technology specifically. Maxwell is focused only on energy storage and delivery evolving from the ultracapacitors.
   
3. Finally, Maxwell's overall balance sheet is generally healthy, with its only debt being the $43M or so of convertible debt issued last year. Revenue grew 8% in 2017 (with the Nesscap assets contributing to much of that), and is forecast to grow again in 2018. Total cash on hand to start the year is just $50M, and some of this cash is going to be put to rather immediate use throughout 2018, specifically to expand production facilities in South Korea and Switzerland. With the new tax rules partially designed to encourage investment spending now (see links for thoughts on the tax impact on cap ex spending and valuations), Maxwell is likely to spend further at its Arizona facility, which is the sole location for the work being done on its dry battery electrode.

About that dry battery electrode...

For about 2 years, the dry battery electrode has been a major point of emphasis for management in its long-term outlook with investors. For context, Maxwell started down this path toward battery applications from the dry materials application the company used for their ultracapacitors, and given the massive market for lithium-ion batteries, offering ways to improve their performance would be a significant market advantage. The constant refrain has been that the year 2018 will be an "inflection point" for the development of the technology, and the implication has been that the opportunity is big enough that it represents a game changer the entire company.(image source: Maxwell Technologies slide)

During the earnings call in February, CEO Franz Fink added a little more detail and color:

In 2017, we materially completed the proof of concept with our collaboration partners to develop and validate high pilot volume dry battery electrode performance... we see a path to energy densities of greater than 350 watt hour per kilogram at a cost that is lower than $100 per kilowatt hour by the early 2020s.... Our confidence is growing that to ultimately achieve these performance and cost goals with lithium ion or solid-state batteries, dry and thick electrodes will be required.

And the company is planning to put its money where its proverbial mouth is, as CFO David Lyle indicated that 2018 capex spending would be between $15 - $25, with the bulk of that figure going to "the scale-up of our dry battery electrode development." As with most any technology, breakthroughs could come from anywhere at any moment, and as I've written previously on Maxwell and Toyota, there is a much broader race underway to advance batteries as the world electrifies more and more, and I do not think it is a stretch to predict an uptick in either consolidation and mergers in the sector. On the earnings call, analyst Noah Kaye with Oppenheimer asked a direct question to Fink on the question of solid-state technology and how that may relate to the dry electrodes, and it is worth quoting both the question and answer at some length (bold added for emphasis):

Noah Kaye

That's extremely helpful. And maybe on the dry battery electrode... I'd like to understand the compatibility of the product that you're developing with some of the other advances in battery technology. We - I've heard a lot about progress by certain car OEMs towards solid-state batteries. You don't need a liquid electrolyte. Basically, does the uptick of dry battery electrode imply or necessitate other advances in battery chemistry? If so, kind of how to think about that?

Franz Fink

Yes, I -- very good question, Noah, I would think slightly different about it.... As we look at solid state, of course, it becomes, in the overall development of solid state, a very different matter because on the one hand you have still an electrode on the cathode side. But as you know, people are moving towards lithium metal on the anode side, and there's lots of problems still to be solved.

At the same time, a dry electrolyte comes in, a solid electrolyte comes in.... But conceptually you can see, like, we are just homogeneously dispersing active material into our dry powder, and then through the process that we have in place, into the whole electrode. You could basically put in solid electrolyte. And if you would succeed today homogeneously distribute or disperse it too, you can easily see on why you would have a very cohesive, nice linkage of the cathode, so that dispersed solid electrolyte over to the anode side of things.... From what we are seeing, no matter what you see in announcements, and you could hear it also from other people, we believe that solid state is a 2025-beyond technology, and that for the next 5-plus years to come, lithium ion and further advancements in lithium ion will be really at the center of the focus and attention.

Conclusion

Maxwell finds itself in a bit of the situation as its competitors; just like Ioxus or NAWA are working now to disrupt ultracapacitors with what they believe are superior products and trying to commercialize those products, Maxwell is sitting at a juncture of moving into commercialization of a product in the dry battery electrode that could become a real pivot for the company. The extent of that transformation would depend on the method in which Maxwell attempts to profit from the dry battery electrode - that is, licensing the technology would look a lot different than becoming a tier one supplier to auto OEM, for example - the bottom line is that Maxwell could wind up a completely different type of company in the next 2 or 3 years. Management senses a real market opportunity and is ready to go after it, rather than play it safe. The track record of delivering on promises is thin, to put it politely, but a few players are going to be situated to move battery technology to a new level, and Maxwell is positioning itself to be in that space. While I am not buying more shares at the current level, I will continue to monitor and update my view on valuation once first quarter numbers are released in a couple more months.

Analyst’s Disclosure: I am/we are long MXWL. 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.

I have no financial stake in any of the companies listed as Maxwell's competitors, however I did work on a student consulting project (unpaid) for the French company NaWa Technologies in the spring of 2015 as a requirement of my MBA degree from the Aix - Marseille University.