I have commented about various articles on Seeking Alpha but have yet to write mine of my own. I have found it exceedingly easy to offer criticism but something entirely different to write an original, well-thought out article. I don’t hold myself out to be an expert, an investment guru, or the next Warren Buffet, although he is a hero of mine. Also, more often than not defer to John Petersen, who I consider to be an expert on the energy storage sector. If you will allow me the opportunity, I would like to offer my thoughts/investing rationale for the energy storage sector. And let’s go ahead and put my disclosures in the first paragraph, so you know ahead of time the companies, I have chosen to invest in and will be predisposed to view more favorably. They are Active Power, Beacon Power, and ZBB Energy. Please don’t be sore if I haven’t mentioned your favorite company, which may be just as good, or better than my choices. Also before making any investment, you should thoroughly research each company on your own because you can easily lose everything in a small company like the ones mentioned in this article. As an investor, I try to look at two major sources for ideas “The Goal” managing by the constraint and energy storage is the constraint for smart grid deployment, forget what you have heard about all the smart meters and communication devices, and “The Intelligent Investor” to find opportunities where Mr. Market overemphasizes positives and negatives, causing huge, unnecessary swings in stock prices.
Beacon Power is a company that I have been following for a while and recently decided to purchase the stock. I think a lot of people misunderstand flywheels because the value proposition is not limited to saving energy. The most important concept for energy storage investors is the cost/kwh and as long as the cost is too high, utilities will choose to waste energy rather than store it. However, the smart grid needs regulation to deal with varied sources of energy. As part of my rationale, I like the high speed flywheels to resolve those issues, even though it ranks very high with the cost/kwh.
I depend on the US Department of Energy and the Sandia National Lab for a good part of my technical analysis. If I am going to invest in a product, I need to listen to someone who has tested it and may have some future regulatory oversight. This is by no means a golden seal of approval but an important first step to choosing a company whose products could gain acceptance by the utility industry. One report behind my rationale for purchasing Beacon Power was authored by Imre Guyk, Project Manager, Energy Storage Research US Department of Energy, entitled: “Frequency Regulation using Fast Energy Storage”. According to the report, the market opportunity for flywheels is significant: “At present only one company, Beacon Inc, has pioneered this technology. Their business plan calls for company owned merchant plants to sell regulation directly to the ISO rather than selling or leasing the technology to individual utilities. ISOs are the obvious market for selling ESS frequency regulation which can be sited anywhere in the region. In fact CA-ISO has already agreed to buy such ancillary services when available. Contacts with ISO-NE, PJM, and NY-ISO indicate similar willingness. Beacon plans to have their first expandable 1MW plant on line in 2008. It is estimated that 100MW of ESS can eliminate 90% of the frequency excursions in California. Beacon estimates that the regions where appropriate ancillary markets are already established represent a $600M business opportunity annually.” Here’s the link, if you would care to read the report as well, http://www.oe.energy.gov/DocumentsandMedia/Project_FrequReg_Paper.pdf
As an investor of Beacon Power, I also have concerns, which I am watching closely and deserve mentioning in my blog. First, the number of outstanding shares is very high and a recent dilution caused the stock to suffer a 20-30% hit. Second, the company won’t generate any significant revenue until late 2011, currently at price/sales of 93.35 and enterprise value/revenue of 91.96. Third, getting through this period without future dilutions will be challenging, including the capital needed for the second stimulus project in Chicago. Finally, management seems to be more focused on the technology side, while ignoring the mundane business of running a company. A couple of good examples are special share purchase arrangements and recent dilutions. Both events were poorly received by investors and could impact minimum share price requirements for exchange listing. I would also like a more well-known audit company sign-off on the financial results. However, I feel these risks are outweighed by the future annual revenue potential. Also, as facilities are completed, dilution will be offset by new stockholder’s equity. Not to mention, the Chicago stimulus award comprises a 50% grant, bringing in $24 million of new equity to investors, which is roughly 37.5% of current market capitalization. I think management needs to do a better job explaining this to investors but they are probably pretty swamped right now. In short, I was too afraid of being late to the party and decided to invest now, warts and all. Annual revenue of $600M would go a long way to resolving these issues, especially for a company of this size.
Another stock I own is Active Power, which manufactures low speed flywheels, primarily used for UPS systems in data centers. I am excited about the current level of revenue generation, roughly $40+ million annual and climbing, while gross profit is finally starting to improve. I am really excited about two ratios, the price/sales of 1.61 and enterprise value/sales of 1.52. The company sells their products in various international markets, notably CleanSource is the only UPS system approved by the U.K for a 100% tax credit on the energy technology list. While I am concerned with the recent trend in cloud sharing and data center consolidation, Active Power recently announced a multi-megawatt order with Terremark, one of the leaders in data center outsourcing. This company just keeps on announcing new orders and is handily offsetting revenue loss from Caterpillar, which I suspect was fairly low margin business. One of John’s old articles talks about the possibility of scaling this technology to smart grid applications, although I suspect this isn’t a major priority for Active Power’s management right now. I also like the opportunity to piggy-back on bets in energy efficiency, technology, cloud sharing/data center outsourcing and international markets. There are risks, namely the chief concern impacting all small companies right now, which is limited availability to credit markets. This makes it more likely that dilution could be in the company’s future. However, if management is able to lower costs, improve margins and sell more systems; the potential for share price appreciation is staggering, given the current market cap, shares outstanding and future cash flows. There are a number of white papers worth reading on Active Power’s website, touting the reliability and energy efficiency, inherit in their uninterrupted power supply systems.
The last stock I own is ZBB Energy, which manufactures zinc bromide flow batteries. I have followed this company for a few years now. It started out as a research company surviving on government grants from the Australian government. ZBB eventually drew attention of Pacific Gas & Electric and has received quite a few international orders. The company is run very conservatively with a careful eye on dilution, a very rare quality for a start-up, even though the CEO recently stepped down, rather than retire due to tax issues. I see this development as a positive, rather than a negative because it shows controls worked very well, limiting the impact to the company. As someone who spent a year in audit, I really like to see good controls, working as they should, it gives me greater confidence. The company recently received special loan terms for expansion, through Wisconsin’s implementation of the federal stimulus. The big question remains whether the company can improve their sales network and secure larger orders in the future. It seems as though they are on the right track with orders from Likusa, SEI, BC Hydro and relocation services for PG&E. Also, valuation is very attractive at price/sales of 8.54 and enterprise value/revenue of 7.32, given the small capitalization. I will continue to monitor momentum and developments in their relationship with Eaton. I like this solution because it represents the lower middle or the upper lower range for cost/kwh. Also, one might suspect, costs will go lower with higher volume and efficiency.
Disclosure: Long ACPW, BAC, BCON, ZBB
Disclosure: Long ACPW, BAC, BCON, ZBB
Disclosure: Long ACPW, BAC, BCON, ZBB