I didn’t learn about normal bell shaped curves in kindergarten but I developed a pretty solid understanding of the concept by the second or third grade because at report-card time A’s were worth a quarter, B’s were worth a dime and C’s had no value at all. By the time I reached college I was chasing the right hand tail of the bell curve on my own initiative. Law school and the competitive nature of my profession merely pushed my drive for the right hand tail up a notch.
Old habits die hard, so I still tend to chase that right hand tail of the bell curve in almost everything I do. The only real exception is investing where 30 years of experience has taught me that the most successful companies are the ones that sell products to the 95% of the population that don’t command $200,000 salaries. There are companies like LVMH that have a great business catering to the elite, but they’re not in the same league as Target and Wal-Mart.
The energy storage sector is undergoing an amazing metamorphosis as the market comes to the realization that a boring old-line industrial sector holds the keys to cleantech, the sixth industrial revolution. Storage isn’t a sexy alternative energy technology in its own right; instead it’s an enabling technology that makes other technologies more reliable, efficient and profitable. This dynamic has encouraged a different class of investors to investigate energy storage for the first time. Unfortunately most of the attention goes to technologies on the right hand tail of the performance and cost curves. In my view, this is precisely the wrong place for investors that want to position their portfolios for the coming of cleantech.
I love quarterly reporting cycles because they provide a great opportunity for a reality check. This quarter, the reality check is even more important because General Electric (GE) just announced plans to enter the energy storage business in a big way and manufacture sodium nickel-chloride batteries for hybrid locomotives and grid-connected applications. Their plan to make batteries that integrate well with their railroad and wind turbine businesses makes great sense. Their choice of a technology that currently falls into the “cool” category but has the potential to become very cheap speaks volumes about what GE thinks a reasonable price point will be. If any company on the planet has a good feel for what everybody needs and is willing to pay for, it’s GE.
I first wrote about this theme in “Energy Storage Stocks: Performance, Cost and Bell Shaped Curves” and expanded on the topic in “Alternative Energy, Regular Guy Stuff and Rainbow Stew” and “Alternative Energy Storage: Cheap Will Beat Cool.” I then spent months delving into some of the more mind numbing aspects of energy storage technologies and the companies that are developing them. In the process, my core thesis that cheap will always beat cool has been diluted by gee-whiz performance claims of exotic technologies that are too expensive for 95% of potential buyers. To help remind readers what matters in business, I’ve put together a simple graphic that overlays an average of the DOE’s estimated current and 10-year projected cost of various energy storage technologies on a normal bell shaped curve. In this particular graphic, there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the projected cost differentials into the context of a normal market.
Investing would be easy if the market prices of stocks were based solely on financial statement metrics. In the real world, however, the baseline financial values are impacted by a wide variety of intangible factors that increase or decrease the value of a going concern. The factors that are typically identified as important include history and experience, existing customer and supplier relationships, human and intellectual property resources and the potential for exceptional growth and profitability. The following table compares the market capitalizations of the companies I track with their tangible financial statement values. The purpose of this presentation is to highlight the implied market value of the non-financial assets the various companies hold and help investors decide whether they believe the intangible premiums are reasonable.
|Cool Emerging Group|
|Valence Technology||VLNC|| $2.06
|Altair Nanotechnologies||ALTI|| $1.26
|Beacon Power||BCON|| $0.75
|Cool Sustainable Group||
|Maxwell Technologies||MXWL|| $8.90
|Advanced Battery||ABAT|| $3.47
|Ultralife Batteries||ULBI|| $7.35
|China BAK Battery||CBAK|| $2.06
|Hong Kong Highpower||HPJ|| $2.16
|Cheap Emerging Group||
|Axion Power International||AXPW.OB|| $1.40
|ZBB Energy||ZBB|| $1.10
|Cheap Sustainable Group||
|Exide Technologies||XIDE|| $5.45
|C&D Technologies||CHP|| $1.80
|Active Power||ACPW|| $0.54
The numerical average of the intangible premiums the market has attributed to the 15 companies I track is $148.5 million. While it’s easy for me to justify substantial intangible premiums for companies like Enersys that have stable operating histories, global customer bases and product lines that are affordable for everybody, I have a much harder time justifying huge intangible value premiums for emerging companies that have neither stable histories nor established customers and plan to manufacture products that 95% of the population can’t afford, particularly when the 5% who can afford their proposed products may not want them.
These are treacherous times in the energy storage sector. The new investors who are investigating energy storage for the first time are generally early adopters like me who instinctively focus on the right hand tail of the bell curve. We get so enamored with the technical performance claims that we tend to forget the realities of a free market where the vast bulk of potential customers don’t have the economic power to choose a cool solution over a cheap solution.
Mark Twain quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he just made the cheapest cars. Microsoft didn’t make the best operating system; it just made the cheapest operating system. In times like these I believe energy storage investors will be well-advised to heed the philosophy of the great value investor Benjamin Graham who said, In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine. Otherwise, they may find that they’re chasing their tails.
Investors that want to develop an in-depth understanding of the issues and opportunities in the energy storage sector may want to consider attending Infocast’s Storage Week in mid-July. The speaker’s list includes more than 80 thought leaders the battery industry, the government, the utility and automotive industries and the research and development sector. They’ve even invited me to participate in three panel discussions. Hopefully I’ll return from San Diego with investable insights that I can share with readers in future articles.
Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE), Enersys (ENS) Active Power (ACPW) and ZBB Energy (ZBB).
John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.
Thanks for the analysis John.
In my view a useful addition to looking at the absolute value of the intangible premium is to look at a price-to-tangible book value ratio (market cap/tangible book value). This provides a good metric for gauging the relative intangible premium investors place on these stocks, which is more telling than the absolute.
I ran the numbers and got the following (I excluded negative values, which biases the results downward for a couple of categories): Cool Emerging – avg 11.55x, median 3.88x; Cool Sustainable – avg 2.65x, median 2.41x; Cheap Emerging – avg 4.88x, median 4.88x; and Cheap Sustainable – avg 2.05x, median 1.74x.
These numbers are in line with your thesis, and there seems to be a premium for the “Emerging” category across both Cheap and Cool (although n is too small for Cheap Emerging to really draw conclusions there).
Based on this, shouldn’t investors just gun for Sustainable?
Charles, if you buy into the theory that all things being equal intangible premiums will tend to the mean over time, then companies with below mean intangible premiums have a significantly greater upside potential than companies with above mean intangible premiums. Within the cheap sustainable group, for, example I think Exide has more upside potential from present levels than the comparably sized Enersys. If I was looking for the long odds bets, I’d go to the low aggregate market capitalizations like HPJ, ACPW, ZBB and Axion.