Energy storage, a tough year and a mixed quarter

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Energy Storage, a Tough Year and a Mixed Quarter John Petersen

Quarterly updates are among my least favorite tasks because they focuson where the energy storage sector has been instead of where it'sgoing. I still haven't developed a presentation format I like, but itfeels like things are heading in the right direction. Reader commentsand suggestions on how I can make these updates more useful are alwaysappreciated.

The 12-month performance for the energy storage sector was dismal andthe only companies that currently trade above their September30, 2009 closing prices are Active Power (ACPW)and Enersys (ENS).Most othercompanies in the sector are way down for the year. While softeningmarketsfor Exide Technologies (XIDE)and Axion Power (AXPW.OB)can be attributed to fund liquidations arising from the 2008 crash,most of the softness seems to arise from nagging uncertainty over whatthefuture holds. A number of companies seem to have turned a corner duringthe third quarter, but sector performance in general canonly be described as mixed.

The big winner for the quarter was Altair Nanotechnologies (ALTI),whichwas weak at June 30th but recently announced plans to sella51% interest to Canon Investment Holdings for $49.8 million andexpand into China. The big loser was C&D Technologies (CHP),whichwas struggling at June 30th, recognized an intangible asset impairment$60 million in the quarter ended July 31st, and then negotiatedanagreement in principle with certain noteholders that willconvert $127 million of debt into equity and give the noteholders a 95%ownership stake.

The Altair and C&D transactions won't close until the fourthquarter, but for purposes of this article I'll treat both as done dealsand work with rough pro forma estimates. I'll also adjust the data forother companies as necessary to reflect financing transactions thathavebeen reported since the date of their last quarterly reports.

The following table provides a quick summary view of stock priceperformance in the energy storage sector for the last twelve months andfor the third quarter of 2010.



For the more visually inclined, the following graph tracks thecomposite price performance of my five categories of energy storagecompanies over the last year.



The history part is pretty straightforward. Now it's timedust off the crystal ball and take a look at how things are shaping upfor thenext few months. Since my undergraduate degree was in accounting, thenumbers are the first place I go when trying to discern the probableshape andsize of future events. The following table provides summary dataon a few financial metrics that I like to emphasize in anyforward-looking analysis.



For companies with a history of losses, the first number I focus on isworking capital. If a company can't cover a year's losses and make itsplanned capital investments with available funds, it will almostcertainly be forced to seek new equity or debt financing and that canbe very difficult in a turbulent capital market. The five companiesthat have clear working capital issues are identified with a red X inthe working capital adequacy column.

A second keymetric is the difference between a company's market capitalization andits book value,which is commonly referred to as blue-sky. Public companiesnormally trade at a premium to their book value because intangibleassets like proprietary technologies, human resources, industryexperience, customer relationships and the like usually have norecognized balance sheet value. When the blue-sky premium is out ofline on the high side, it's a warning flag. When the blue-sky premiumis out of line on the low side, it can hint at substantial upsidepotential. While peer group comparisons aren't always reliable, theycan provide useful guidance.

Many investors spend a lot of time obsessing over quarterly results,but I believe trailing twelve-month numbers provide a more reliablepicture of how a company is performing because they smoothquarter-to-quarter changes in the business cycle and make it easier tospot companies that are performing better than their stock. Since itslast quarter was disappointing but the company is solidly profitable on a trailing twelve month basis,I believe Exide Technologies (XIDE)will be a surprisingly strongperformer over the next nine months.

The next twelve months will be turbulent times in the energy storagesector as manufacturers introduce a variety of transportation productsand ramp up demonstrations of large-scale stationary storage products.I expect good things from Axion Power (AXPW.OB)as its PbC technology advances from successful laboratory testing withautomakers to on-road fleet testing in stop-start systems. While it's adecidedly unpopular position, I think cars with plugs will have a hardtime meeting lofty market expectations. If the initial productintroductions are not a smashing success, companies that makelithium-ion batteries could falter. While their working capital valuesare terrible, Beacon Power (BCON)and ZBB Energy (ZBB)seem to have more upside potential than downside risk and may be goodspeculations at current prices.

While my experience and personal investing preferences are in thelead-acid subsector, one could make strong to compelling argumentsabout the investment merit of each company I track. The challengesfacing some are daunting, but the potential markets for their productsare enormous. The information technology revolution was typified by aseries of technologies that dominated the market then faded toobscurity. The cleantech revolution in general and the storage sectorin particular will be very different because the best any company canhope for is a technology that will dominate a substantial market niche.In information technology, investing was like the hunt for the greatwhite whale. In cleantech, it will be more akin to hunting in a herd ofelephants.

The last year has been has been very tough on the energy storagesector, which is down 40% while the broader market indices are up 10%.The sector seems to be turning a corner as the shape of events over thenext couple years become more obvious. Once the corner is turned, Iexpect the sector to outperform the broader market and become amega-trend that will endure for decades. The sector is on sale for nowbut it won't be for long.



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 October 1, 2010 02:54 AM | Energy Storage, a Tough Year and a Mixed Quarter

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