Review Primer for energy storage companies - lesson # 1

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Valuation Primer For Energy Storage Companies – Lesson #1 | Alternative Energy Stocks

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Valuation Primer For Energy Storage Companies – Lesson #1 John Petersen

I frequently observe that market valuations in the energy storagesector have been wildly distorted by electric vehicle hype that hasnothing to do with business fundamentals. Last February I wrote an articlethatcompared Exide Technologies with Ener1, but obviously didn'tquite get to the meat of the matter. Since both companies reportedearnings on November 4th, this seems like an opportune time to be moredirect in the comparison and present a brief primer on valuations inthe energy storage sector.

Since a lot of investors never get beyond stock price movements, thefirst graph presents a simple price performance comparison of the twocompanies over the last year.



The second graph comes from my quarterly tracking data and compares therelative market capitalizations of the two companies since September2009. For novices, market capitalization is calculated by multiplyingthe total number of shares outstanding by the price per share, whichserves as a quick estimate of total stockholder value.



The following table compares the balance sheet fundamentals of the twocompanies, their income statement performance over the last twelvemonths, and some important per share valuation metrics. The figuresshown for Ener1 give pro-forma effect to an October 1st transaction wherethe Ener1 Group bought 6.7 million Ener1 shares for $23.7 million in cash and an October 25th transaction where Rockport Capital Partners exchanged 10.2 million shares of Series B Preferredstock in Th!nk Holdings for 4.3 million Ener1 shares.



I understand that Ener1 (HEV) isdeveloping a way-cool lithium-ionbattery technology and Exide (XIDE) isso yesterday with its stodgylead-acid batteries, but let's get real here. Even if Ener1's plant wasfully funded and operational, and it could sell 60,000 EV battery packsper year at $1,000 per kWh, its revenues wouldn't be half of Exide's.If you believe the happy talk about collapsing lithium-ion batteryprices, the expectation is more like a quarter of the revenuepotential. Since falling prices have a nasty tendency to squeezeoperating profits, I don't see any chance that Ener1's bottom lineincome will be anywhere near Exide's over the next five years.

It's no secret that I see far more downside risk than upside potentialin the plug-in vehicle market, which will supposedly be one of Ener1'sstrong suits. It's also no secret that I see huge upside potential andvery little downside risk in batteries for automotive stop-start systems,which will almost certainly be a strong suit for Exide given its relationship with Axion Power International (AXPW.OB).When presented with a choice between betting ona weak business model or a strong business model, I'll take the strongbusiness model every time.

Investing is a cruel dollars and cents business and the market value ofa share of stock is supposed to represent the risk adjusted discountedpresent value of anticipated future returns. Even if you assume thatEner1 will be smashingly successful, it's risk adjusted discountedpresent value can't hold a candle to Exide's. The dynamic may change inthe future, but for now there is simply no comparison if your goal isto grow an investment portfolio.

Next week I'll go through the same drill with A123 Systems (AONE) andEnersys (ENS).

Disclosure: Author is a formerdirector of Axion Power International (AXPW.OB)and holds a substantial long position in its common stock.

Posted by John Petersen on November 6, 2010 06:26 AM | Valuation Primer For Energy Storage Companies – Lesson #1

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How are you deciding on each pair of battery companies for side-by-side comparisons? In other words, why didn't you compare AONE to XIDE and HEV to ENS instead?

Posted by: Tom Konrad | November 6, 2010 11:35 AM

It's actually a bit arbitrary. Exide and Ener1 both reported earnings this week and are the second most valuable companies in their sub-sectors. A123 and Enersys both report earnings next week and are the most valuable companies in their sub-sectors.

Posted by: John Petersen | November 6, 2010 11:41 AM

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Alternative energy and climate change investment funds, part II

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Tom Konrad CFA

Choosing the best green energy mutual fund.

In part I of this series, I looked at the costs and expenses of eight Climate Change and Alternative Energy focused Mutual Funds.  I concluded that four out of the eight, the Firsthand Alternative Energy Fund (ALTEX), the Guinness Atkinson Alternative Energy Fund (GAAEX), the Winslow Green Growth Fund (WGGFX), and the New Alternatives Fund (NALFX) each cost roughly 1.5% more in terms of expenses and trading costs per year than the typical Climate Change or Alternative Energy focused Exchange Traded Fund (ETF), with the other four costing 2.5% or more per year than the typical ETF.  I've included my chart of estimated total costs below.  Click on the chart for a link to the previous article containing a full explanation of the costs shown.

Five Principles for Gaining an Edge in Alternative Energy and Climate Change Stocks

With even the least expensive mutual fund under the most generous cost assumptions costing a full 1% per year more than a typical clean energy ETF, the mutual fund managers will have to demonstrate considerable investment skill to justify the expenses. 

In general, it's very difficult to generate returns that beat the market, let alone returns that beat the market by an average of more than 1.5% per year.  This is the general argument against active management: active managers come with costs, but the average active manager will produce average returns.  If you agree with this argument, the best choice is to stick with a low cost, passively managed fund such as one of the sector ETF.

There are reasons to disagree, however.  The Alternative Energy sector is not yet well understood by most investors.  On one hand, a large portion of the population still denies the reality of Climate Change and is blithely unaware of Peak Oil.  On the other hand, we have a contingent of true believers, who understand both Climate Change and Peak Oil, but who are blinded by the unrealistic hope that Alternative Energy will allow us to replace fossil fuels without fundamentally changing the way we live. 

Both groups will almost certainly be proven wrong, and the investment manager who today understands how the economy must adapt to accommodate Alternative Energy should be able to outperform the mass of investors who either think nothing is happening, or think that Peak Oil and Climate Change can be "fixed" with cheap solar and electric cars.

I've been writing for years about what the real alternative energy future will look like, as opposed to what we might hope it to be.  Here are some basic differences from the wishful thinking scenario:
To accommodate variable Wind and Solar, we need a more robust electric grid.All energy will become more expensive, so investing in energy efficiency and conservation is essential.Biofuel production is a commodity business, and the big winners are more likely to be the owners of the feedstock (biomass and waste) than the biofuel producers.Expensive fuel (including expensive batteries) will lead to shifts away from the personal car and towards alternative transportation solutions.Solar will be a large part of our electricity mix in 20-30 years, but that probably won't benefit today's Solar stocks.Alternative Energy Sector Selection

If I'm right about these principles, then a successful money manager in Alternative energy will have a fairly small investment in Solar stocks, and larger investments in Energy Efficiency stocks, biomass stocks, alternative transportation, and the electric grid.  Unfortunately, there are not standard definitions of what constitutes stocks in each of the various Alternative Energy sectors, but over the last few years Charles Morand and I have built up a fairly comprehensive list of Alternative Energy stocks categorized into thirty subsectors.  I used this list, along with my knowledge of the companies and online company profiles to break down the eight mutual fund's holdings into twelve of the most commonly owned sectors.

The results are shown in the chart below.

Returning to my five principles for gaining an edge in Alternative Energy and Climate Change stocks, the easiest to apply is #5: a low allocation to Solar.  Of the four funds with relatively reasonable costs, the Firsthand Alternative Energy Fund (ALTEX), the Guinness Atkinson Alternative Energy Fund (GAAEX), the Winslow Green Growth Fund (WGGFX), and the New Alternatives Fund (NALFX), both ALTEX and GAAEX have high allocations to solar stocks. 

Applying the Principles

That leaves only the Winslow and New Alternatives Funds as worthy of serious consideration.  Checking principle #1, we note that both have about 7% of their portfolios invested in Electric Grid stocks, a slightly higher proportion than most other funds.  While this does not lead to a preference, it does help bolster the case that these fund managers may be adding value. 

Principle #2, which I consider the most important of the five principles, calls for a high allocation to energy efficiency and conservation.  The Winslow fund has a strong emphasis on Green Building which I did not see in any of the other funds, and many Green Building stocks contribute to the Efficiency category (they also contribute to "Other" since much of green building does not have to do with energy.) 

Principle #3 calls for a low allocation to biofuel producers, but a high allocation to Biomass and Waste (which falls under the Environmental/Recycle category in the chart.)  This would seem to lead to an added advantage for the Winslow fund, but a review of Winslow's Environmental/Recycling holdings shows that most of these are metal recyclers.  The New Alternative's much smaller holdings in this category are mostly focused on sewage treatment.

Principle #4 calls of a larger allocation to alternative modes of transportation.  The Winslow fund has a much higher allocation to Transportation and Batteries (7%) than the New Alternatives Fund (2%).  A closer look at the specific holdings show that the Winslow Fund's largest holding is Rail supplier Wabtec Corporation (WAB) at 3.5%, while New Alternatives' transportation allocation is the result of small slices of conglomerates most likely purchased for exposure to other sectors.  For instance, both funds have stakes in Smart Grid and Smart Transportation company Telvent GIT SA (TLVT).

Conclusion

If I had to pick one fund to outperform because of its well chosen energy sector exposures, it would have to be the Winslow Green Growth Fund (WGGFX).  That said, I believe the Winslow Fund only has a slight edge over the New Alternatives Fund (NALFX), and for someone who planned to own the mutual fund for at least a decade, I think NALFX's lower ongoing expenses would give it the edge in long term performance.  For an investor planning to hold one of the mutual funds for less than ten years, I think the Winslow Green Growth Fund is the best choice.

Of course, the least expensive way to get exposure to the right energy subsectors is by using individual stocks.  I will continue this series with a look at individual stocks from these mutual fund portfolios and use them to build an Alternative Energy and Climate Change portfolio at much lower cost than investing in any of these funds.  Such a portfolio should be able to take advantage of the fund managers' stock picking skill, but with greater emphasis on the energy sectors most likely to outperform.

DISCLOSURE: No Positions.  GAAEX is an advertiser on AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

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Axion power and BMW report impressive performance test results

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Axion Power and BMW Report Impressive Performance Test Results | Alternative Energy Stocks

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Axion Power and BMW Report Impressive Performance Test Results John Petersen

After seven years of cautious disclosures about the development status,performance and market potential of its serially patented PbC®battery technology, Axion PowerInternational (AXPW.OB),in conjunction with BMW (BAMXY.PK), hasfinally releasedimpressive performance test results that show why the PbC battery is a superior choice forautomotive stop-start applications. Concurrently, Axion released a white paperthat discusses stop-start battery requirements in detail and offerssome hints about the PbC battery's potential for use in other emergingenergy storage markets.

The presentation and the white paper do not show small, incrementalgains like you would normally expect from new developments in a150-year old technology like lead-acid battery chemistry. Instead, theyshow that compared to a top quality AGM battery the PbC batteryprovides:
10 times the dynamic charge acceptance;5 times the cycle life;Stable round trip energy efficiencies in the 85% range; and30% less weight.The details of the presentation and white paper are complex, but theresults can be quickly summarized with two simple graphs. The graph onthe left tracks the dynamic charge acceptance of an AGM battery overtwo years of simulated use in a vehicle equipped with a stop-start idleelimination system while the graph on the right tracks the dynamiccharge acceptance of the PbC battery over four years of simulated use.Where the AGM battery graph shows that the charging rate plummets andthe time needed to recharge the battery soars within months after thebattery is placed in service, both values remain stable for the entireduration of the PbC battery test.



In a recentreport on the battery market for micro-hybrid vehicle applications,Lux Research stated that most automakers believe flooded lead acidbatteries are "inadequate" for stop-start applications. It alsoobserved that AGM batteries are "barely suitable" for high performancestop-start systems. In light of early European experience with stop-start systemsand the new test data from Axion and BMW, it looks like the PbC will bethe best battery choice for automakers that want to optimize theperformance of their stop-start systems and minimize exposure tobattery-related warranty claims. After all, it's senseless to upgrademechanical systems in an effort to conserve fuel and slash CO2emissions, and then handicap the new systems by using batteries thatcan't handle the load.

For more information on the market forces that will drive rapid globalimplementation of stop-start idle elimination technologies, my blogarchive at Seeking Alpha is a great resource. You may also want tovisit  EV Insights forthe recorded version of a recent conversation I had with Jack Liftonand Gareth Hatch.

Axion began development work on the PbC battery in late 2003 and in early2006 it bought the manufacturing equipment of an old-line batteryproducer in a foreclosure sale. While Axion paid $700,000, replacementcost estimates were an order of magnitude higher. For the last fouryears, Axion has primarily used the plant as a prototyping facility forPbC batteries. Nevertheless, its permitted capacity is 3,000 batteriesper day and the installed equipment includes two flooded batteryproduction lines and one AGM battery production line.

The principal research and development work on the PbC battery isfinished, but the device is not yet available as a commercial product.Axion built a first generation fabrication line for the carbonelectrode assemblies that are the heart of the PbC battery in 2008 and2009. Based on lessons learned from the first generation line, Axionhas upgraded or replaced several workstations on the first generationline and designed a second generation line that should be operationalin the first quarter of 2011. With two electrode fabrication lines,Axion should be able to produce electrode assemblies for about 250 PbCbatteries per shift, or 150,000 PbC batteries a year with a three shiftoperation. Its existing AGM battery line has enough idle capacity tofully absorb electrode production from the first two electrodefabrication lines.

Axion has no debt and enough cash to support its planned demonstrationactivities in automotive, stationary and rail transportationapplications through 2011. It does not, however, have sufficient financing orproduction capacity to support a full-scale commercial rollout of thePbC battery. Such a rollout would require about $75 million in fundingfrom grants, loans or stock sales to increase electrode fabricationcapacity to a million units per year and cover associated workingcapital requirements.

The first use of future electrode capacity additions will be to bringAxion's AGM line up to full capacity. Excess electrode production willbe sold to Axion's manufacturing partners Exide Technologies (XIDE)and East Penn Manufacturing, two of the largest battery companies inNorth America. Over the long term, Axion intends to focus on electrodemanufacturing and sell its electrode assemblies to industry partnersthat own and operate existing AGM battery plants. The PbC electrodeassemblies have been designed to work as plug-and-play replacementcomponents in any AGM battery plant and Axion's business model has beendesigned to leverage existing global manufacturing capacity whilegiving its partners an opportunity to sell a premium co-branded productto their existing customers.

From late 2003 through early 2007 I was a director of Axion and I’vewatched the PbC technology progress from the laboratory prototype stageto a pre-commercial product that has drawn a surprising amount ofinterest from automakers, railroads and developers of wind and solarpower installations. While we originally expected to start at thebottom of the food chain and work our way up as the PbC technologymatured, it's hard to complain about too much attention from first tierenergy storage users. At this point the remaining challenges relateprimarily to industrial engineering refinements and completing therigorous validation and performance testing that first tier usersalways require before they write a purchase order. In light of the BMWtest results, I'm convinced the only open question is "When?"

Over the last year market forces that had nothing to do with Axion’sbusiness fundamentals or the PbC battery's performance havebrutalized its stock price. The stock currently trades within spittingdistance of the price paid by several highly regarded institutions lastDecember. As an understanding of the new performance data begins tospread, I think the upside potential is significant. For moreconservative investors, a solid alternative play on the PbC technologyis the stock of Exide Technologies, an Axion partner that I think isfundamentally undervalued.

Disclosure: Author is a formerdirector of Axion Power International (AXPW.OB)and holds a substantial longposition in its common stock.

Posted by John Petersen on November 24, 2010 07:44 AM | Axion Power and BMW Report Impressive Performance Test Results

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Comments

The graphs aren't really readable... can you provide them in higher resolution, perhaps one after the other?

Posted by: Tom Konrad | November 24, 2010 09:16 PM

Not withstanding the fact that the battery itself could still fail the evaluations, that $75M is (has been) the most bothersome piece of the investment puzzle. With all this talk of austerity, this coming year will be hard on companies that have depended on public grants for any part of their growth and/or development.

1) Is it possible, or likely, that these grants be withdrawn?

2) With banks seemingly unwilling to lend to small business, is it possible, or likely, that a development partner like Ford Credit extend a loan? Almost an in-kind trade (plus interest)?

3) If stock is issued to cover capital expansion, would it wind up being even more dilutive to the now feeble stock price?

It seems Axion has reached a "chicken or egg" state of existance. Can't fill an OEM order with the facility that exists now and probably can't secure a loan without a visible account recievable in the near future. With one more year of cash to burn, would it be reasonable to figure that by June of 2011 an investor might need to decide to buy or bail?

I know I worry about the small details too much.

Posted by: DRich | November 24, 2010 09:41 PM

Tom, I'd thought about making the graphs larger and decided against it because they're not really "information rich." My hope is that anybody who wants to study the graphs will download the presentation and white paper, which provide all the detail you could want.

DRich, at 150,000 batteries per year, Axion's revenue would be $30 to $40 million, which might not ensure profitability but would get darned close. There are also any number of high-end vehicle models that could be served with capacity of 150,000 batteries a year.

The breakdown on my $75 million figure is $50 million in PP&E and $25 million in working capital. Assuming it would all have to be financed in the capital markets is a little harsh, but I prefer harsh assumptions.

Tom Granville has already said that he won't build out electrode capacity without a solid order book. I can't imagine Axion getting to a point where it has to fill orders for one or more automakers but is stuck with a stock price in the current range. It's been easy for the market to ignore Axion during the silent running phase. Road testing with one or more automakers will be much harder to ignore, particularly if other demonstrations in railroads and stationary also get some traction.

Posted by: John Petersen | November 25, 2010 12:08 AM

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