Review Primer for energy storage companies - lesson # 1

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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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Comments

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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