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June 30, 2010

You Can't Love Tesla And Ignore Energy Storage

John Petersen

The second quarter was brutal for publicly traded energy storage companies which saw their stock prices fall by an average of 24.1% after a first quarter drubbing of 16.2%. Frankly I'm astonished that investors are chasing a battery-powered IPO like Tesla Motors (TSLA) and ignoring the energy storage technologies that will make EVs possible, and perhaps cost-effective, while making wind, solar and other renewable energy sources stable. At times like these I need to remind myself that energy storage is the beating heart of cleantech and take comfort in the fact that while Goldman Sachs began covering advanced batteries as a sector on June 27th, I've been focused on the energy storage sector for almost two years.

The following table provides comparative second quarter performance data and key valuation metrics for the 17 pure-play energy storage companies I track. All values have been adjusted to reflect disclosed material changes since the last reporting date. In the working capital columns, I've included my subjective assessment of working capital adequacy based on historical operating results and disclosed capital spending plans. The "Blue Sky" value is the spread between the book value shown on a company's balance sheet and its current market capitalization. For this quarter only, I've included Tesla as an honorary member because it's blue sky premium equals 118% of the blue sky premium for the 17 energy storage companies combined.

6.30.10 Table 1.png

The following graph compares the composite price performance of my five categories with the Dow Jones Average since November 14, 2008, when I first started tracking the sector.

6.30.10 Composite.png

The following table summarizes the portfolio performance a hypothetical investor would have realized over the last three months if he invested $1,000 in each company and the three broad market indexes on March 31, 2010.

Broad Market Indices -11.29%
Cool Emerging Companies -31.47%
Cool Sustainable Companies -10.71%
Cheap Emerging Companies -35.19%
Cheap Sustainable Companies -17.94%
Chinese Battery Companies -25.23%

Cool Emerging Companies

My Cool Emerging Companies category includes four companies that are developing cool but expensive energy storage technologies that are not yet commercialized. The companies in this category are Ener1 (HEV), Valence Technology (VLNC), Altair Nanotechnologies (ALTI) and Beacon Power (BCON). The Cool Emerging group fell an average 31.47% in Q-2 and have fallen an average of 58.65% since November 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

6.30.10 Cool Emerging.png

Valence, Ener1 and Beacon do not have sufficient working capital to support their operating losses and capital spending plans for more than three to six months without relying on financing transactions where shares are sold into the public market on a regular basis for the purpose of providing working capital, which can put significant pressure on stock prices. Until their working capital positions improve, I'd be cautious.

While Altair will likely need additional financing within the next year, it does not appear to have any pressing needs and its low market capitalization of $31.6 million and miniscule blue sky premium of $1.7 million leave significant room for outsized gains if it successfully implements its business plan.

Cool Sustainable Companies

My Cool Sustainable Companies category includes three companies that manufacture cool but expensive energy storage devices and generate substantial recurring revenue. The companies in this category are A123 Systems (AONE), Maxwell Technologies (MXWL) and Ultralife (ULBI). The Cool Sustainable group fell an average 10.71% in Q-2 and have fallen an average of 2.47% since November 2008

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

6.30.10 Cool Sustainable.png

In the Cool Sustainable category Ultralife strikes me as a bit of a sleeper because of its diversified product lines and customer base. It has larger revenues and smaller losses than either of its peers and is currently trading at a modest discount to book value. It certainly merits further analysis.

Cheap Emerging Companies

My Cheap Emerging Companies category includes two companies that are developing effective and objectively cheap energy storage technologies that are not yet commercialized. The companies in this category are Axion Power International (AXPW.OB) and ZBB Energy (ZBB). The Cheap Emerging group fell an average 35.19% in Q-2 and have fallen an average of 43.51% since November 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

6.30.10 Cheap Emerging.png
ZBB does not have enough working capital to support its operating losses and capital spending plans for more than three to six months without relying on financing transactions where shares are sold into the public market on a regular basis for the purpose of providing working capital. ZBB's recently announced financing plans are more company friendly than others I've reviewed, but future pressure on its stock price cannot be ruled out. Conversely its miniscule market capitalization of $7.3 million and very small blue sky premium of $3.3 million leave significant room for outsized gains if it successfully implements its business plan.

In the two emerging company categories, Axion Power is the only company with enough working capital to support a couple years of operations and significant expansion of its manufacturing capacity.

Cheap Sustainable Companies

My Cheap Sustainable Companies category includes four companies that manufacture effective but objectively cheap energy storage devices and generate substantial recurring revenue from product sales. The companies in this category are Enersys (ENS), Exide Technologies (XIDE) C&D Technologies (CHP) and Active Power (ACPW). The Cheap Sustainable group fell an average 17.94% in Q-2, but gained an average of 76.43% since November 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

6.30.10 Cheap Sustainable.png

Chinese Battery Companies

My Chinese Battery Companies category includes four companies that manufacture a variety of energy storage devices including lead-acid, NiMH and lithium-ion batteries, and generate substantial recurring revenue from product sales. The companies in this category are Advanced Battery Technology (ABAT), China BAK Batteries (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). The Chinese Battery group fell an average 25.23% in Q-2, but has risen an average of 36.69% since November 2008..

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

6.30.10 Chinese.png

China BAK is very weak from a working capital perspective and has not publicly disclosed its plans to remedy the problem. Until its working capital position improves, I'd be cautious.

My Murky Crystal Ball

For two years I've been telling readers why energy storage will be a core enabling technology for the cleantech revolution and cautioning that valuations in the cool technology groups were less attractive than valuations in the cheap technology groups. On that basis alone, I've consistently suggested that the cool technology groups were likely to stagnate or underperform on a go-forward basis while the cheap technology groups were likely to outperform. I think the comparative price performance charts say it all.

These are heady times because times and technologies are changing rapidly and risky times because many of the highest profile technologies like electric vehicles are not cost-effective and may never reach that goal. In my opinion, the biggest challenge for energy storage investors is separating business reality from press release hype and establishing a realistic timeline for expected changes in the energy storage sector.

During the information and communications technology revolution, we got used to the idea that Apple (AAPL) could announce a new product and sell millions of copies within a few months. In cleantech the development timelines will be longer and until we build a substantial experience base with some of these exciting new technologies, adoption rates will be slow and uncertain. One of the most useful graphs I've seen for energy storage and cleantech investors is set forth below.

My last table is arranged in declining order of blue sky premiums and summarizes where I believe the pure-play energy storage companies I track fit on the technology adoption lifecycle graph.

6.30.10 Chasm.png

For my investment dollar, companies that have already crossed the chasm, together with developers like Maxwell and Axion that have a good shot at crossing the chasm in the next 12 to 18 months are better opportunities than riskier business models that face a three to five year development cycle and uncertain customer acceptance.

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

The Big Oil-Electric Vehicle Connection

Neal Dikeman

For those of you interested in the sector under the sector in electric vehicles, the guts of Li Ion battery technology, the week just got more interesting than an overpriced, over hyped Tesla (TSLA) IPO.

Check out a very quiet unnanouncement in A123's SEC filings noting a multi-year supply deal with ConocoPhillips' Cpreme, the emerging leader in anode materials for Li On batteries.  The technology is a processing technology to make high performance graphite based powders out of plain old petroleum coke materials, that has the potential to be very low cost at scale.  A123 has announced supply deals in the past with Navistar, Fisker, Eaton, Think, the Chevrolet Volt and a number of others.

For those interested in the guts of the Cpreme technology, a good summary is here.  And a quick search of the patents includes: 7,618,678, 7,597,999, 7,323,120.

It wasn't too long ago when the only other contender for Tier 1 battery supplier in the US, Johnson Controls-Saft, was announcing their Cleantech Innovation Award win and DOE award with a Cpreme logo quietly slipped into the presentation, though likewise no announcements were ever made.  Johnson-Controls-Saft had announced lithium ion supply wins with Ford, Mercedes, and BMW.  Maybe the liberal view is right, cleantech can bring manufacturing and green jobs back to the US - courtesy of our oil companies?

Or perhaps we should note that Tesla has announced it's buying its batteries from Panasonic in Japan - with our DOE money (about half of its total capital!) and California tax breaks.  So maybe we'll just ship the new cleantech manufacturing jobs to Japan instead.

Neal Dikeman is a partner at Jane Capital Partners LLC, the Chairman of Carbonflow and Cleantech.org, and a long time cleantech advocate and blogger on Cleantechblog.com.

June 28, 2010

Ten Clean Energy Stocks for 2010: Q2 Update

Tom Konrad CFA

In the six months since I published my annual clean energy mini-portfolio, it has far outperformed my industry benchmark, the Powershares Wilderhill Clean Energy Index (PBW).  The dismal performance of renewable energy stocks so far this year is likely to lead to great buying opportunities in the rest of the year.

2010 is the third year in a row that I've published a list of ten renewable and energy efficiency stocks that I expect to perform well over the coming year. The details on the list for 2010 are here; this article is my second quarterly look back at the performance of the ten stocks so far this year.

These stocks are intended for small investors wanting to put some money in the sector, but not satisfied with the performance or holdings of clean energy mutual funds or clean energy exchange traded funds (ETFs). Please consult your investment advisor to decide if any or all of them are appropriate for your portfolio.

The diagram below shows the two versions of the my Ten Clean Energy Stocks for 2010 mini-portfolio, with the outer ring denoting an equal weight portfolio of ten stocks, including three energy efficiency stocks, three electric grid stocks, three alternative transportation stocks, and one biomass/waste to energy stock. The inner ring denotes a simplified portfolio, which substitutes the Smart Grid Infrastructure Index Fund (GRID) for the three electric grid stocks and the Powershares Global Progressive Transport ETF (PTRP) for the three alternative transportation stocks. For future reference, I'll call the portfolio shown in the outer ring "10 stocks for 2010" and the portfolio shown in the inner ring "4 stocks plus 2 ETFs for 2010."


Since December 27th, the Russell 3000 broad market benchmark has fallen 3.67%, while the Powershares Wilderhill Clean Energy Index (PBW) has fallen 21.7%. Both portfolios are trailing the broad market by less than 2%, while outperforming the industry benchmark by almost 16%, producing a nearly identical -5.21% for the ten stocks for 2010 and -5.34% for the four stocks plus two ETFs for 2010.

Performance Chart

Coming Opportunities

While the performance against PBW is impressive, most investors would have probably been happier if they had simply stayed out of the market, or hedged their market exposure so far this year, which is exactly what I've been urging readers to do (see here, here, and here.) Although I saw some brief buying opportunities in clean energy at the end of May (I picked up a little Exide (XIDE) at $3.85 and US Geothermal (HTM) at $0.70) those opportunities were short-lived, and probably do not represent the market bottom for clean energy.

If the year continues to progress as I expect, the broad market will continue to decline, as will the clean energy sector. Individual clean energy stocks will likely continue to present excellent buying opportunities when the market as a whole has been declining rapidly. Buying opportunities in clean energy are likely to lead buying opportunities in the market as a whole, because the rapid decline of the whole clean energy sector over the last year is already producing great valuations. These great valuations broaden the appeal of clean energy stocks beyond the base of committed environmental investors, drawing in dyed-in-the-wool value investors who may not even think that Global Warming is happening, but know a good value stock when they see one.

I personally am still maintaining an overall short position in the market, but expect to be buying clean energy stocks with a focus on profitable micro-cap companies opportunistically.

Since these ten stocks have held up better than clean energy as a whole, we're liable to find fewer than average great buying opportunities in this list. C&D Technologies (CHP), currently trading at $0.95 is the best value I see among them at the moment, and this company may have already see its low for the year ($0.90 on June 10.)

One opportunity for short term gain may have just re-emerged in Portec Rail Products (PRPX). The company is the subject of a takeover bid from LB Foster (FSTR) which I covered in detail on June 1. The judge in a shareholder class action lawsuit lifted her earlier injunction blocking the merger on June 25th. The merger is not a done deal, however, since, as of May 28, only 59% of Portec shares had been tendered, and 65% are needed for the successful completion of the buyout. Foster may have to raise the offer price in order to consummate the deal.


At some point, I hope to be able to say it's time to buy this portfolio as a whole, but I think that time is not yet. Just the best strategy for the first six months of the year so far has been to stay in cash, and I think that will continue to be the best strategy for at least few more months. Now is still a time to remain mostly in cash, while keeping an eye out for individual buying opportunities.


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.

June 24, 2010

Plug-in Vehicles Will Be Dirtier Than HEVs

John Petersen

On June 22nd Scientific American rolled-out a Web-only article titled "The Dirty Truth about Plug-in Hybrids, Made Interactive" that summarizes a January 2008 report from Oak Ridge National Laboratory and shows why plug-in vehicles in the U.S. will, on average, be just a little bit dirtier than gasoline HEVs.

You read that right – dirtier, not cleaner!

I first raised the issue in an August 2009 article titled PHEVs and EVs, Plugging Into a Lump of Coal, where I estimated that plug-in vehicles would be about 25% cleaner than HEVs, but the marginal cost of CO2 abatement with plug-in vehicles would be five times higher than the marginal abatement cost with HEVs. The Oak Ridge report went a couple of levels deeper than my simple calculations and evaluated:
  • Baseload power requirements and generating facilities in 13 regions in the year 2020;
  • The specific types of generating facilities that would be used to charge plug-in vehicles; and
  • The regional CO2 increase or decrease from using those generating facilities to charge plug-ins.
The following graph highlights the comparative CO2 increase or decrease in the 13 regions identified in the Oak Ridge study and discussed in the Scientific American article.

6.23.10 CO2 Graph.png

After accounting for the projected number of vehicles in each region, the national average was a 0.37% increase in CO2 emissions. Given the modest CO2 reductions from plug-in vehicles in regions like the Pacific Northwest and the significant CO2 increases in the industrial heartland, it would be easier, cheaper and better policy to use domestic natural gas in HEVs and forget about plugs entirely. Where HEVs cut to the heart of the CO2 problem nationwide, plug-ins only nibble around the edges in a few select regions.

Last month the American Chemical Society published a similar white paper from Tsinghua University, Beijing, and the Argonne National Laboratory Center for Transportation Research titled "Environmental Implication of Electric Vehicles in China," which concluded that implementing electric vehicles in China would increase CO2, SO2 and NOX emissions. It also concluded that gasoline HEVs are more environmentally friendly, more commercially mature and less cost-intensive. The following graph comes from page 4 of the white paper.
6.2.10 China CO2.png
While the CO2 emissions data from both China and the U.S. is damning, simple calculations prove that electric vehicles like the Leaf from Nissan (NSANY.PK) and the MiEV from Mitsubishi (MMTOF.PK) save an average of 10.4 gallons of gasoline per year for each kWh of incremental battery capacity while PHEVs like the Volt from General Motors save an average of 7.6 gallons of gasoline per year for each kWh of incremental battery capacity.

I'll encourage each of you to run your own discounted cash flow calculations on annual gasoline savings of 10.4 and 7.6 gallons per kWh and then compare your calculated value with current battery costs of ~$1,000 per kWh and projected future costs of ~$500 per kWh. I've run the numbers and am not impressed.

In addition to Tesla Motors, which is scheduled to go public next week at a price of $14 to $16 per share, there are six pure-play battery companies that focus on electrification solutions for transportation. A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are all working on lithium-ion battery solutions for plug-in vehicles. Maxwell Technologies (MXWL) is working on supercapacitor solutions for city bus, stop-start vehicle and HEV applications. Exide Technologies (XIDE) and Axion Power International (AXPW.OB) are working on advanced lead-acid and lead-carbon battery solutions for stop-start vehicle and HEV applications.

The following table assumes the Tesla IPO will go off at $15, the mid-point of the price range, and includes summary balance sheet and market valuation metrics for all seven companies. For both working capital and stockholders equity, the table reflects the dollar amount and the percentage of market capitalization those values represent. The Blue Sky column highlights the spread between market capitalization and stockholders equity.

6.23.10 Value Table.png
It doesn't take much training to see that valuation premiums are much higher for plug-in vehicle companies than for lead-acid companies. In March of this year I suggested that stop-start idle elimination and other vehicle efficiency technologies were the investment equivalent of birds in the hand while plug-in vehicles were a flock of wild geese on the wing. In April I reported that the EPA and NHTSA were forecasting a 42% market penetration for stop-start systems by 2016. Over the last month we've seen important articles in prestigious publications expose the zero-emission myth as urban legend. With Oak Ridge and Argonne Laboratories, the American Chemical Society and Scientific American targeting the wild geese with double-barreled shotguns, I'm more convinced than ever that the market will soon shift to a more rational focus on economic reality and business opportunity.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock.

June 22, 2010

The Best Peak Oil Investments Meet the Smart Grid: Telvent GIT SA (TLVT)

Tom Konrad CFA

I'm bullish on Smart Transportation, which is my term for applying information technology to make our transportation system more efficient.  The majority of my list of Smart Transportation Stocks focus on GPS navigation.  I've been a fan of GPS navigation ever since 2001, when I first experienced the relief using one while driving in an unfamiliar city.  But I'm much less enthusiastic about GPS Navigation stocks: I feel the industry is too competitive, which is great for the consumer, but not so great for the shareholder. 

Hence, I'm drawn to the three Smart Transportation stocks that apply IT to transportation infrastructure, enabling congestion-based tolling and the better timing of traffic lights.  The three stocks I've found are AECOM Technology Corporation (ACM), Cubic Corporation (CUB), and Telvent Git S.A. (TLVT).  AECOM provides technical and management services to governments, some of which is on Smart Transportation projects.  Cubic develops and installs transportation fare collection systems and defense electronics, while Telvent provides IT services to a broad range of transportation and energy infrastructure markets.

Each of these companies gets less than a third of their revenues from Smart Transportation.  But in the case of Telvent, the other two-thirds is also interesting: applying IT to electric and natural gas infrastructure.  In other words, the Smart Grid, and smarter pipelines.  The company also has smaller segments applying information technology to agricultural supply chains and environmental services.


Telvent's Energy segment accounted for 33.5% of revenues in Q1 2010, mostly in North America (this segment is headquartered in Houston), but also from the EU and Latin America.  They provide enterprise-level information management and automation control to companies with large pipeline networks.  They also provide the information management services electric utilities need to manage and use the information flowing from Smart Grid projects.

The value of applying information technology to energy systems lies in the reduction of waste: better information and controls can let a company move more gas through the same pipeline network, and also detect leaks more quickly.  The Smart Grid is about creating a two-way flow of information on top of the electric grid; Telvent's role is to help utilities take this information and use it to better match energy production and load, and also detect system instability sooner, reducing wear on utility assets and potentially preventing blackouts.


Telvent's global Transportation segment accounted for 24.8% of revenues in Q1 2010.  This segment struggled in 2009 but is beginning to show signs of recovery.  SmartMobility™ platform is a collection of information services from automated enforcement such as the traffic signals that take pictures of cars running red lights to traffic signal optimization and toll and fare collection.  These are offered a la carte, or as an integrated solution, and help municipalities and other regions manage their road, rail, and maritime transportation systems more effectively.  In short, they help governments make most of the Smart Transportation improvements I mentioned in my recent article.


Telvent's agriculture business is the result of a recent acquisition, and operates solely in North America, and accounted for 12.0% of revenues in Q1 2010.  The segment helps participants in all parts of the grain and livestock complex with weather information, an agricultural products trading platform and real-time pricing information.  Although I'm not bullish about the earnings prospects of biofuels businesses, I think the growing size of the biofuels industry will put increasing strains on other agricultural businesses, and both will require more and more up-to-date pricing and supply chain information.  If I'm right, this trend will be a boon for Telvent's agriculture business.  Tevent is also realizing some synergies from the acquisition my incorporating the real time weather data from the agricultural segment into their SmartMobility™ transportation offering.


The Environment segment focuses on water system management, monitoring of weather and air quality, and hazardous material containment.  It accounts for 8.6% of revenues and is growing quickly.

Global Efficiency

At 21.1% of revenue, the Global Efficiency segment is a cross-disciplinary IT consultancy offering to help clients use resources more effectively.  Key markets include insurance, health care, finance, government services, and telecommunications.  This segment is struggling against increased competition in Spain, but sees strong potential growth in Brazil.


At a recent price of $18, Telvent has a trailing P/E of a little over 13, and pays no dividend.  Although it trades at only 65% over book value, operating cash flow ($33M) is low compared to net debt ($471M) and it has a low current ratio of around 1.  The company recently refinanced its debt, increasing the maturity and stretching out the payment schedule, which means that debt is not an immediate problem, and if the company can achieve decent growth over the next few years, they should be able to handle it easily.  

Although I could not be much more enthusiastic about the business, the high debt to cash flow means that I'll be watching and waiting for much cheaper valuations before I'm ready to buy TLVT stock.

DISCLOSURE: No position.

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.

June 20, 2010

Electric Cars and the Fixed Cost Conundrum

John Petersen

Later this month, Tesla Motors plans to launch its initial public offering and sell about 12% of the company for $200 million. If the IPO is successful, Tesla's stock will trade on the Nasdaq Stock Market (TSLA) and its initial market capitalization will be roughly $1.5 billion. Since the IPO has spawned a series of analytical articles from better writers, I'll avoid the temptation to analyze the deal terms and focus on product issues instead. Like their cars, Tesla's IPO will undoubtedly attract vanity investors, the philosophically committed and the mathematically challenged. The more cautious element will probably stay on the sidelines.

Calling Tesla an automaker is like calling France's très chic Louis Vuitton, Möet Hennesy Group (LVMHF.PK) a beverage company. Tesla started with a $100,000 roadster in 2008 and has sold 1,063 cars to date. They plan to add a $50,000 family sedan in 2012 and have booked approximately 2,200 reservations over the last year. As a reference point, the star-crossed Delorean Motor Company sold about 9,000 stainless steel gull-wing sports cars for $25,000 (roughly $60,000 current dollars) in 1981 and 1982.

There will always be a market for vanity goods, particularly in the green space where eco-bling is hard to find. Moving down market will be a major challenge, however, because real consumers live in a world of paychecks, stressed budgets and overwhelming economic uncertainty. So while the eco-bling crowd will pay any price for the right status symbol, real consumers tend to think the green in their wallets is more important than the green in their cocktail party conversation. When people seriously consider their transportation needs and put pencil to paper, EVs will always fall short of the mark.

In a conventional car with an internal combustion engine, or ICE, the fixed cost of the fuel tank is insignificant and the variable cost of gasoline is high. In an electric car the dynamic is reversed. The fixed cost of the battery pack is immense and the variable cost of electricity is low.

At current US gasoline prices of $3 a gallon, an ICE that gets 30 mpg has a fuel cost of $0.10 per mile. At EU prices of roughly $6 a gallon, the fuel cost is $0.20 per mile. These numbers will move up and down with fuel prices and are certain to increase over time as oil prices climb, but they won’t change because of an individual owner’s driving habits.

In an EV, the cost calculation is more complicated because there's a capital cost for the battery pack that must be recovered over a period of years and a variable cost for the electricity.

The appropriate cost recovery period is always a thorny issue with EV evangelists claiming that the goal should be breakeven over the life of the car and consumer surveys indicating that three years is the preferred breakeven period. Since no single number will please everyone, I'll default to IRS regulations that require businesses to depreciate cars and light trucks over a maximum of five years, and to new car loans, which commonly run for five years. Five years is probably not a perfect number, but it's more reasonable than either of the extremes.

The Wall Street Journal recently reported that Nissan’s cost of making a 100-mile battery pack for the Leaf is about $18,000. By the time you add Nissan’s normal 25% markup, the retail price should be about $24,000, or $1,000 per kWh. In spite of the facts, many readers believe $500 per kWh battery packs will be a reality within a couple years. Since I'm weary of arguing the reasonableness of those assumptions, I'll use both a $1,000 and a $500 per kWh pack price for this article.

I'll also use a number of other charitable assumptions including stable electric costs of $0.12 per kWh, no loss of battery capacity over time and no cycle-life limitations. While I cringe when reading discussions of second-life value because (a) nobody's demonstrated a 10-year first-life in the real world, and (b) I don't believe a buyer in 2020 will pay more than scrap value for a battery based on 2010 technology that's already logged a decade of service under unknown operating conditions, I'll assume a 15% second-life value to keep the peace.

The following graph presents alternative gas price scenarios of $3, $6 and $9 per gallon, and then overlays depreciation and charging cost curves for an EV with a 25 kWh battery pack priced at $1,000 and $500 per kWh. The solid bold lines show current gas and battery prices. The dashed lines show possible futures that are uncertain as to both timing and magnitude.

6.19.10 Fuel Costs.png

The most striking feature of this graph is the shape of the curves. Where prevailing mythology holds that EVs will be wonderful for urbanites with short commutes who don't need much range flexibility, the curves show that the best value will be derived by high-mileage drivers who presumably need far more range flexibility. The reason is simple. Spreading battery pack depreciation over 5,000 or even 10,000 miles a year results in a higher cost per mile than spreading that depreciation over 20,000 or 25,000 miles a year.

The bottom line is that EVs are only economical when you buy no more battery than you need and you use the battery pack heavily. That leads to a life and death struggle between range anxiety and affordability. When you factor in the other uncertainties, I believe plans to electrify passenger cars are doomed until gas prices increase substantially or battery costs fall substantially. While I think both are virtual certainties over the next decade, I don't believe either is likely in time to make Tesla a business success.

Disclosure: None

June 18, 2010

The Best Peak Oil Investments: GPS Navigation Stocks

Tom Konrad, CFA

Satellite (GPS) navigation is a Smart Transport strategy that drivers can implement without waiting for governments to act.  This is a look at five GPS Navigation stocks.   

I recently wrote how Smart Transport stocks may benefit from declining supply and increasing demand for oil.   I call the application of information technology (IT) to transportation "Smart Transportation."  Smart Transportation improves the function of the market for transportation services, just as the Smart Grid improves the market for electricity: by giving market participants better information and making the price of transportation better reflect the costs.  Because reducing congestion also reduces fuel use at very little cost, Smart Transport stocks should benefit from peak oil.

Types of Smart Transport

Smart Transport can be implemented from the top down, or the bottom up.  Top down Smart Transport involves government agencies adding IT such as cameras, card readers, and other sensors to roads or mass transit systems, either to provide drivers or passengers better information about conditions or to charge a usage fee.  Bottom-up involves drivers and riders using IT to acquire better information about road or transit conditions in order to make better decisions about where, how, and when they'll go about getting where they need to be.  That usually means a driver or fleet owner buying a GPS navigation system or systems.

Because GPS Navigation only improves access to information, and does not improve the market structure, it has less potential to reduce congestion than top-down road pricing schemes.  Yet GPS navigation has a major advantage as well: it's quick.  A driver can purchase an learn to use a GPS in an hour or two.  Government agencies seldom implement anything in less than a year, let alone anything that involves charging voters for something they're used to getting for free. In contrast, London's central congestion charge was formally proposed in July of 2001, and was not fully implemented until February 2003.

Will Peak Oil Help GPS Stocks?

If you believe that much of our response to peak oil will be last-minute and on a budget, you may have little trouble imagining growing numbers of people buying increasingly cheap and functional navigation devices or software for their smart phones in order to save gas by avoiding traffic and wrong turns.  As I argued in "The Methadone Economy," my vision of a likely peak oil future, the less prepared we are for peak oil, the more prevalent such bottom-up, quick to implement solutions will become. 

Yet most purchasers of GPS navigation aren't currently motivated by a desire to save gas.  Until drivers begin to make the connection between navigation and gas savings, a higher oil price won't help the share prices of GPS companies.  Some GPS companies know this, and are starting to help customers make this connection.    Features such as Garmin's (GRMN) EcoRoute, which gives drivers feedback on how they can drive more efficiently is an excellent advertisement for the connection between navigation and gas savings, as well as good PR.  Trafficmaster PLC (TFC.L) is even more explicit: Trafficmaster's home page encourages fleet managers to "Cut your fuel bills by up to 30%."  Rising fuel prices will only encourage more GPS companies to jump on the "navigation saves fuel" bandwagon, and encourage more drivers and fleet managers to listen.


Unfortunately, a company's success requires more than a growing market.  Companies also need to maintain profit margins.  Strong competition in GPS navigation is eroding profit margins.  Smart-phone based navigation programs are challenging the incumbent vehicle based systems and stand alone devices.  Google's (GOOG) entrance into the market with free smart phone navigation software should worry all industry participants.  Before Google entered the market, smart phone based GPS software came with a monthly subscription fee.  A free alternative will make many more drivers wonder if they need a dedicated GPS at all.

I feel much the same about the GPS navigation industry as I do about the solar PV manufacturing industry.  The industry as a whole has a great future, but there is no guarantee that any industry participant will be able to maintain profitability for long in the face of new competition and constant innovation.  That said, some companies are in better positions than others.  Here are my thoughts on five GPS stocks:

Garmin, Ltd. (GRMN), $32.24

I own a Garmin Nuvï.  It is the best navigation device I've used to date (out of three total,) despite a software bug that sometimes keeps it from booting up properly.  Garmin has an excellent profit margin of 24%, no debt, and great cash flow, with a nice forward dividend yield of 4.4%. I like the fact that Garmin is directly playing the fuel-saving card with ecoRoute software, which might help them in a rising fuel price environment.

Telenav (TNAV), $8.39

Telenav went public on May 13.  The company sells subscription-based navigation software for smart phones.  The direct competition from a free product from Google makes me think this is a good stock to avoid.

TomTom (TOM2.AS), €5.14

TomTom makes stand alone navigation devices as well as software for the iPhone which has received good reviews.  However, the company carries more debt and has a much thinner profit margin than Garmin, leaving it vulnerable to further revenue declines.  TomTom does not pay a dividend.

Trafficmaster PLC (TFC.L), £ 0.47

Much more than other navigation companies, Trafficmaster is focused on helping customers (both fleet and individual) reduce fuel consumption by avoiding congestion.  They use real-time speed from units installed in vehicles to constantly update their congestion data.  They also provide stolen vehicle tracking.  Unlike Garmin and TomTom, the company is still seeing revenue growth, perhaps because of their greater emphasis on value-added services.   The company's trailing P/E is 13, making it one of the best values in the sector.

Trimble Navigation Ltd (TRMB), $30.38

Trimble is a general global positioning company, making GPS chip sets for a large range devices, including navigation systems.  As such, they are in a relatively good position in terms of competition: their chip sets are used in other companies' navigation systems, as well as many other industrial, construction, and agricultural applications.  They're solidly profitable, with no net debt and good cash flow, although with a P/E of 50 (at $30) and no dividend, a lot of expected growth is priced in to the stock.


If I were to buy any stock in this sector, it would be Trafficmaster because of the fuel-saving focus, decent valuation, and value-added services.  Because Trafficmaster uses two-way communication from its units to gather traffic data, the company benefits from network effects.  The more vehicles have Trafficmaster installed, the better the company's data, and the more effective its devices will be at avoiding traffic.  Yet any such advantage may be transitory:  a new competitor might instantly surpass Trafficmaster in network size by using cell phone tracking data from an existing wireless phone operator, or by using some other data source no one else has thought of yet.

The competitive landscape would make me uncomfortable holding any GPS stock for the long term.  As with most highly competitive industries, it's probably better to be a customer than an investor.

DISCLOSURE: No positions.
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.

June 16, 2010

Should Ethanol Subsidies be Renewed?

Jeff Coombe

The Ethanol industry has only responded tepidly to the Volumetric Ethanol Excise Tax Credit in the past, so why should it be renewed?

The U.S. ethanol industry is nearing a major deadline. The industry's primary subsidy mechanism, the Volumetric Ethanol Excise Tax Credit (VEETC), is set to expire on December 31, 2010. Federal ethanol subsidies were worth roughly $5 billion in 2009, a figure large enough to create vigorous debate over their renewal. Some call the credits a boondoggle, others a vitally important lifeline for an industry still in its formative years.

Whichever it is, one has to wonder whether we as a country and as taxpayers are getting our money's worth for it. All subsidies are intrinsically positive for the industries they support, of course. But how much of an impact is really felt by the industry, especially as compared to the cost to the taxpayer, is much harder to quantify.

This article will look at the history of subsidies and other government support mechanisms for the ethanol industry, and how they result in increased production, plant construction, and stock pricing. By lining up the dates of landmark legislation with several industry performance metrics, we are able to view the industry response in terms of production and growth, rather than rhetoric. Only pure-play ethanol company stocks are reviewed, represented here by Andersons, Inc. (ANDE), Pacific Ethanol (PEIX), BioFuel Energy Corp. (BIOF), and the now-defunct VeraSun Energy (VSE).

The data below is a limited snapshot, and cannot account for the myriad of variables that affect the ethanol industry. Supply-and-demand market conditions, economic climate, and even public perception impact businesses and investment decisions. While keeping this in mind, it is still striking how little of an effect the VEETC, by far the largest biofuel subsidy, has on the industry as a whole. Almost no metrics responded positively to key dates in the VEETC history, instead seeming to respond much more to direct producer incentives and production / use mandates.

History of Ethanol Incentives

The VEETC was enacted on October 22, 2004 with the American Jobs Creation Act, and set a $0.51/gallon credit for any blender of ethanol into the petroleum gasoline stream. It replaced a convoluted set of subsidies begun in 1979, with a partial federal tax exemption of  gasoline blended with at least 10% ethanol (gasohol) by the Energy Tax Act. Fuel blender's tax credits and a pure alcohol tax credit were subsequently added, achieving roughly the same goals, but available to smaller fuel blenders that were unable to receive the excise tax exemption. The VEETC streamlined this system and provided a single mechanism for subsidizing ethanol use. The 2008 Farm Bill reduced the VEETC credit to $0.45/gallon.

One other federal tax credit applied to ethanol, the Small Ethanol Producer Tax Credit.  Enacted in 1990, this credit allowed plants producing less than 30 million gallon per year to receive a $0.10/gallon credit for the first 15 million gallons of fuel produced annually. The size of plants that can receive the tax credit was subsequently raised to 60 million gallons per year, though it still only applied to the first 15 million gallons of annual production. The Small Ethanol Producer Tax Credit also expires at the end of 2010. In addition, some 30 states have enacted their own biofuel incentive measures.

The federal government also uses non-monetary support mechanisms to assist the ethanol industry. Foremost amongst those is the Renewable Fuel Standard (RFS), enacted with the August 8, 2005 Energy Policy Act, and amended with the Energy Independence and Security Act, signed into law on December 19, 2007. RFS1 was the 2005 version, and mandated that specific minimum volumes of ethanol be blended with gasoline in the national fuel pool. Starting at 4 billion gallons in 2006, the RFS ramped up the minimum volume of ethanol that had to be blended with gasoline to 7.5 billion gallons by 2012. The industry grew much faster than expected, though, and in 2007 the RFS was amended (RFS2). This raised the minimum volume of corn ethanol blending to 15 billion gallons per year, and adds another 20 billion gallons of cellulosic ethanol, biodiesel, and other advanced renewable fuels by 2022.

Early Years of the Ethanol Industry

Ethanol production as a large-scale industry began in the 1970's. Over 150 ethanol plants, mostly small on-farm distilleries, were built in response to the OPEC oil crisis and fuel prices spikes. However, many plants were going out of business by the end of the decade, and the first ethanol subsidy was installed in 1979 to support the flagging industry. While the volume of production steadily rose in the 1980's and 1990's, the excise taxes failed to stem the drop in plant numbers. By the mid-1980's, there were less than 40 ethanol plants in the U.S. Figure 1 shows numbers of U.S. ethanol plants and production numbers from 1960-2000. Reliable ethanol production volumes were not tracked until 1980.

Ethanol Plants and Volume
*Source: RFA 2010 Ethanol Industry Outlook
**Source: BBI International

While the total number of plants barely changed in the 1980's and early 1990's, larger scale plants were being constructed and the ethanol production volume increased steadily over that time period. The Small Ethanol Producer Tax Credit was installed in 1990, and likely contributed to an increase in total production from 900 million gallons in 1990 to 1.4 billion gallons in 1995. How this credit was set up is in itself an indicator of its impact on the ethanol industry. The Small Ethanol Producer Tax Credit is the only credit that is paid directly to the companies that make ethanol. The VEETC and its predecessor excise credits are paid to fuel blenders, which are often petroleum refineries or bulk distributors, and not the ethanol producers themselves. While the majority of the excise credit finds its way back to producers in the form of better prices for their product, the subsidy effectively incentivizes oil companies to use ethanol.

Boom Times

Everyone knows the ethanol industry experienced a boom cycle in the mid-2000's. What is less agreed upon is what set of market forces really caused this boom. Contrary to popular belief, the data shows that the VEETC, enacted in 2004, did not immediately result in a change of ethanol plant construction. Between 2002 and 2005, the number of new plants or plant expansions announced held relatively static in the neighborhood of 15 plants per year. Total production capacity of plants grew slightly during that time. The real growth in the ethanol industry came in 2006 and 2007, which more closely corresponds to the RFS implementation. Figure 2 shows the relative inactivity between 2004 and 2005, and the large increase in construction projects from 2006-2008.

It is important to take into account the lag time between when a project is conceived and construction begins. This lag allows for the requisite capital to be raised, construction firms contracted, and other aspects of the project to be developed to the point that construction can be announced. In the ethanol industry, and especially in the boom years, the project development period is usually on the order of 12-18 months. If the VEETC was a major difference maker in the decision to build an ethanol plant, at least some early adopters would have been able to capitalize in 2005, and would have registered an uptick in construction. As it worked out, though, the bulk of industry growth came 2-3 years later.

Ethanol Plant Construction and Capacity
Source: Renewable Fuels Association

A measure of a company's health, and the most immediate indicator of positive and negative changes affecting a company, are shown in its stock price. In today's investing world, stock prices respond instantly to the slightest news, and it is here that the indifference towards the VEETC is most apparent.

If financial experts had agreed it was vital for the industry, stock prices should have jumped after signing of the VEETC. On the contrary, Figure 3 shows that there was almost no change in ethanol company stock pricing in 2004 and most of 2005. It was late-2005 and 2006 before the pure-play ethanol company stocks began their meteoric rise, immediately after signing of RFS1. Later, the increase in mandated volumes of ethanol production, through RFS2 in 2007, lines up with minor spikes in all four stock prices. This data indicates that investors were more responsive to RFS legislation than the VEETC. (Stocks are shown as a percentage of their highest point within the time period, in order to show the wide range of share values on one graph.)

Ethanol Pure Play Stocks

The other end of the boom (late 2008 and 2009) saw the bankruptcy of VeraSun, sharp drops in ethanol stocks and almost instant halting of all ethanol plant building, including some projects in mid-construction. All of this occurred while the VEETC was in the middle of its 6-year effective term, and the RFS was being increased to its 36 billion gallon goal.

The reduction of the VEETC in 2008 does correspond with reductions in the numbers of plants constructed and stock values. A change of $0.06/gallon in the credit reduces profit to a 100 million gallon plant by $6 million annually, so this change was definitely felt by producers. By that time, however, corn feedstock prices had hit an all-time high, oil prices had crashed, and a recession was hitting the U.S. economy. These forces impacted the industry much more than changes to the federal incentives packages could help. On the other hand, the fact that the industry is still alive today is probably due in part to those support mechanisms.

Going Forward

Does this show that ethanol companies and the investors who fund plant construction were more interested in the guaranteed market for their product resulting from the RFS, rather than increases in profit from the tax credit? Or are subsidies, while easy to point to, insignificant in the face of the much larger economic forces that really determine the health of the industry (general economic and investment climate, crush spread, etc)?

It is impossible to argue that the VEETC did not help spur investment into the ethanol area, and equally as difficult to argue that it isn't helping the industry through the bad times. It is not a perfect incentive, however. The purpose of the VEETC was to equalize the cost of ethanol with gasoline, but at times it has not been enough to help the producers, and at other times bonus profit on top of an already profitable product. Creating a guaranteed market for ethanol through mandated volumes of use, via RFS1 and RFS2, seems have a much greater effect on the industry at a much lower cost. Mandated use stabilizes the market, and still allows for the most efficient, low-cost producers to rise to the top.

A bill for renewing the VEETC and Small Ethanol Producer Tax Credit has been proposed in the House and Senate. Cattle and dairy groups have raised opposition to the measure, not interested in supporting their competition for corn any longer. Many groups feel the ethanol industry, at least the  corn-based subset of the industry, has matured and should  not need further subsidization in the form of tax credits. 

With the biofuels industry mired in a worse rut than the overall U.S. economy, government efforts to help the industry should not be cut. However, alternative incentive schemes need to be devised that provide more bang for the taxpayer buck. Systems including grants and loan guarantees for the construction of plants using second-generation feedstocks, a blending equalization scheme recently proposed in Biofuels Digest, and a new tax-and-tariff system proposed by researchers at Iowa State University and the USDA are all being discussed. With the current subsidy set to expire, now is the best time to explore better and more effective support schemes for the U.S. biofuels industry.

Jeff Coombe has been in the renewable energy and environmental science field for 7 years, including experience developing ethanol and biodiesel production facilities, project management for end use vehicle fleet conversions to alternative fuels, and environmental protection management. He is an active member of the Colorado Governor’s Biofuels Coalition steering committee, and has presented research findings at conferences including the International Algae Congress (Amsterdam, Netherlands), the Advanced Biofuels Workshop (Portland, Oregon), and the Colorado Renewable Energy Conference (Pueblo, Colorado). Strengths include data acquisition and analysis, emerging  feedstock and production technologies, and inter-industry relations. Mr. Coombe is currently seeking a project development position with a company local to the Denver, CO area. Click here to view his resume and biography.

June 15, 2010

Join Me at the MoneyShow San Francisco

Tom Konrad CFA

On August 19th, I'll be moderating a panel Sustainable Investing for Solid Returns at the MoneyShow in San Francisco.  Registration is free, so if you are in San Francisco I encourage you to attend, and not just my panel.  If you do attend my panel, be sure to stick around and say "hi" afterward, or look for me at one of the other many panels that weekend having to do with clean energy.  Here are the ones I expect to attend:

Thurs., Aug. 19 10:10 am-10:45 am
Greening Your Portfolio: New Opportunities for the Savvy Investor Susan Preston
1:30 pm - 3:10 pm
Sustainable Investing for Solid Returns My panel
Thurs., Aug. 19, 3:20 pm-4:05 pm
Who Is Driving the CTIUS: Accelerator or Brakes? Jackie Ann Patterson
Fri., Aug. 20 10:40 am - 11:25 am
Cleantech Investing: A Global Perspective Paul Dravis
2:10 pm - 2:55 pm
The Right Tech Companies That Fix the World's Biggest Threats While Actually Paying Their Investors Neil George
6:00 pm-6:45 pm
How to Profit from Global Greentech Nancy Zambell
How to Trade Greentech Stocks Jeff Cianci
August 21, 2010 8:00 am-8:45 am
GreenTech Opportunities--How to Profit from Innovations in Green Technology Peter Cox

Most trade shows I go to are for Renewable Energy and Cleantech shows, as opposed to investing shows, it will be interesting to hear and chat with these experts who mostly approach Clean energy from an investing perspective. 

When I began writing about investing in Clean Energy in 2006, there simply weren't many other analysts who "got it."  Over the last two to three years, that has changed, and it's very stimulating to interact with bright minds bent on fixing the world's problems while growing our portfolios at the same time.

So I hope you'll join me at The MoneyShow San Francisco.  When I attended the 2003 MoneyShow San Francisco, I found much to interest me, even though no one was talking about Clean Energy.  There's a lot going on in other tracks as well, so check out the complete Show details, learn how to attend, and register FREE online, or call 800/970-4355 and mention priority code 019042.

June 14, 2010

Baldor Electric (BEZ): Efficient Motors Drive Profits

Tom Konrad, CFA

Baldor Electric Company stands to benefit from new Federal energy efficiency standards and other efforts to improve industrial energy efficiency.

One of the lesser-known provisions of the 2007 Energy Independence and Security Act (EISA) will be to require efficiency standards for the majority of industrial electric motors.  This will be a boon for motor manufacturers when EISA comes into effect in December 2010: efficient motors require higher quality materials and manufacturing, and so can be sold for higher margins. 

Baldor logoA major beneficiary of this transition will be Baldor Electric (NYSE:BEZ).  Baldor is the market leader for industrial electric motors in the United States.  Almost two-thirds of Baldor's sales are electric motors (the balance comes from power transmissions, drives, and generators,) and Baldor claims to have more motor types that are in compliance with the EISA standards than any other company in the world.

EISA Effect on motor sales
In addition to gains from selling more premium efficient motors, Baldor has opportunities to benefit from shifts towards energy efficient products, such as replacing single-speed motors and gearboxes with variable speed motors, producing both energy and maintenance savings.  Their motors are also used in hybrid commercial trucks.

Financial Strength and Valuation

Baldor has more net debt than I like, but at about 8 times the last three year's average operating cash flow, it looks manageable.  The debt was mostly acquired in the purchase of another electric motor company at the start of 2007, and Baldor has been payed it down a quarter of it over the last three years.  The company has good liquidity, with a current assets over three times current liabilities, even after last year's very slow sales.

Baldor pays a $0.68 annual dividend, which management has said will not be raised until they have made more progress paying down their debt in order to comply with debt covenants.  With the share price at $38.03 on June 9, the dividend yield was 1.8%.  Compared to depressed 2009 earnings, the P/E is an extremely expensive 45, but I agree with the consensus that earnings are likely to rise significantly in 2010 and 2011, bringing the P/E to a more reasonable 15 or so. 


Given my current bearish outlook on the stock market, I'd wait for a pullback to $25 before purchasing BEZ.  I'd be surprised if the company achieves consensus 50% five year annual growth, mainly because I'm less optimistic about the overall economy than most analysts.  Baldor has great growth potential, but industrial equipment is a very cyclical industry.  Time the cycle right, and the stock will be a great addition to a clean energy portfolio.

DISCLOSURE: No position.

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.

June 11, 2010

The Coming Bull Market In Lead-Acid Batteries, Part II

John Petersen

On June 8th Switzerland's ABB Group Ltd. (ABB) announced an agreement to buy UK-based Chloride Group PLC (CHLD.L) for £860 million in cash, or approximately $1.26 billion. This stunning purchase provides the best evidence yet that lead-acid battery manufacturers including Enersys (ENS), Exide Technologies (XIDE) and C&D Technologies (CHP) are woefully undervalued and offer outstanding opportunity for patient and risk tolerant investors.

ABB is the gold standard in the secure and efficient generation, transmission, distribution and use of electricity in utility, industrial and commercial applications. Its portfolio ranges from light switches to robots, and from huge electrical transformers to control systems that manage entire power networks and factories. With 2009 revenues of $31.8 billion and income of $2.9 billion, you'd have to look long and hard to find a better infrastructure investment in the electric power industry.

Chloride is a highly regarded vendor of uninterruptible power solutions for commercial and industrial customers in Europe (78%), the Americas (10%) and Asia (12%). Chloride's solutions and services protect business critical systems and processes from the effects of poor power quality and power interruptions prevalent in most world economies, both in developed and developing countries. Its products range from battery back-up systems to diesel generators, flywheels and fuel cells, but at the end of the day Chloride's business is buying manufactured energy storage devices and integrating them into power systems that assure "Secure Power Always through leading technology and exceptional customer support." Chloride buys all its batteries from well-recognized manufacturers including Enersys, Yuasa, C&D, Hoppecke, Fiamm, Exide and others. It should be a fine acquisition for ABB and significantly extend that company's reach and depth.

The thing I found fascinating about ABB's purchase of Chloride is the fact that a systems integrator with a fraction of the assets, equity and annual revenue was sold for cash at a far higher value than the market attributes to the original equipment manufacturers. The following table provides summary financial metrics for Chloride, Enersys, Exide and C&D for the trailing 12 months.

Chloride Enersys Exide C&D
Service revenue $182.1

Product sales $308.2 $1,579.4 $2,685.8 $346.7
Gross profit
$208.8 $360.9 $538.1 $42.2
Net income (loss) $28.6 $87.3 ($31.6) ($21.3)

Current assets $189.3 $895.3 $1,042.8 $138.6
Total assts $451.7 $1,652.0 $1,956.2 $303.0
Current liabilities $154.0 $419.5 $613.8 $61.0
Total debt $271.4 $867.8 $1,608.2 $265.1
Stockholders equity $177.9 $779.9 $348.0 $38.0

Cash purchase price $1,264.5

Market capitalization
$1,154.6 $407.5 $23.7

When I study the table, I can't help but conclude that either ABB is overpaying for Chloride, or the market is seriously undervaluing Enersys, Exide and C&D. The best explanation comes from the work of Benjamin Graham who observed, "in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." For the last couple years, the market has been showing its voting machine side. Over the next couple years I expect the weighing machine to emerge with a vengeance.

In addition to a striking disconnect between market potential and market value at the established manufacturer level, there are similar disparities in companies that are developing new technologies based on old-line battery chemistries. My favorite example is Axion Power International (AXPW.OB), which recently announced that it was launching a program with Norfolk Southern Corporation (NSC) to develop a battery management system that will facilitate efforts to retrofit part of Norfolk Southern's fleet of 3,500 diesel electric locomotives as hybrid vehicles that operate partially on battery power and recharge their batteries through regenerative braking.

Since 2003, Axion has been developing a new technology that combines the positive electrode from a lead-acid battery with a negative electrode from a supercapacitor in a hyrid device that offers the power and cycle life of exotic battery chemistries at a lead-acid price. While Axion has been tight-lipped about the performance specifications and potential applications for its PbC® battery, it has been actively testing the device for hybrid electric vehicle, railroad and military applications for the last couple of years. At last month's Advanced Automotive Battery Conference 2010, Axion unveiled the following graphs that compare the dynamic charge acceptance rates of conventional lead-acid batteries and its PbC battery, and show how lead-acid batteries deteriorate rapidly with shallow cycling while the PbC remains stable.

6.11.10 Axion Graphs.png

The Norfolk Southern announcement is the first clear signal that the PbC battery has met or exceeded the battery performance requirements established by a top tier transportation customer and is now ready for the acid test of a locomotive prototype to demonstrate real world performance. With any luck, we'll see comparable signals or outright design wins from one or more first tier automakers later this year.

The Axion - Norfolk Southern project is basically a retrofit counterpart to an OEM initiative that General Electric (GE) kicked off in May of 2009 when it announced plans to build a $100 million plant to make molten salt batteries for use in its ecoimagination hybrid locomotives. While the long-term potential of the retrofit market is not as attractive as the OEM market, there are roughly 24,000 diesel-electric locomotives in the current U.S. fleet and retrofits could cut their fuel consumption by up to 10%, or about 450 million gallons of diesel fuel per year, while improving their emissions profile by an even wider margin. Since locomotive retrofits will cost about $500,000 each by the time you include batteries, battery management systems and other control electronics, the potential revenues from this niche market are on the order $10 billion spread over several years, which doesn't look too bad along side Axion's market capitalization of $68.6 million.

Since July of 2008 I've been writing a regular blog on the manufactured energy storage device sector and the various technologies that will be fundamental enablers of cleantech, the sixth industrial revolution. A complete archive of my articles is available on Seeking Alpha. My consistent message has been that many companies that are developing gee-whiz technologies for plug-in vehicles are overvalued while the lead-acid sector offers great value in companies like Enersys and Exide, and significant speculative potential in companies like C&D and Axion.

When companies like ABB pay premium prices for lead-acid battery integrators like Chloride and companies like Norfolk Southern join forces with lead-acid battery innovators like Axion, the conclusion is clear; the king of energy storage technologies is alive and well and lead-acid battery companies are well positioned to provide market beating returns for risk tolerant investors over the coming decade.

I'm not a disinterested observer. I'm a former director of Axion and own a huge block of its common stock. Since I know that I can only speak from the perspective of the shoes I stand in, my archived articles include extensive links to third-party source documents that can be very useful due diligence tools for investors who want to understand the dynamics of the energy storage sector, and the strengths and weaknesses of the various pure-play companies that are active in the sector. Even if you disagree with my conclusions, I can guarantee that you'll learn more than you ever wanted to know if you download and study the source documents.

Disclosure: Author is a former director of Axion Power International and holds a substantial long position in its common stock.

June 10, 2010

Wal-Mart Goes Green: The World's First Quintuple Play

Jim Fitzpatrick

Watching baseball's first quadruple play was strange. Seeing Wal-Mart (WMT) go green is stranger still.

First the baseball: The scene was a game of T-Ball, where everyone bats every inning, regardless of the number of outs.

The bases were loaded when a line drive ended up in the glove of the pitcher. While he wondered how it got there, all the runners took off without tagging up. The pitcher ran to third, then second, then first.

We kept counting the number of outs and they did not add up. First in our heads: That doesn't make sense. Then on our hand: That's crazy. Then our other hand: It kept adding up to four outs.

It took us a while to believe what we saw right in front of us.

And now Wal-Mart, the original Black Hat, is going green. Or better said, sustainable. Let that sink in because it is true. Big time.

So much so that Treehugger.com says it "could end up being one of the biggest motivators to make truly 'green' products ever."

As in history of the world.

Wal-Mart has made believers out of not just the biggest environmental organizations in the world -- like the Environmental Defense Fund and the World Wildlife Federation -- but also Wal-Mart's suppliers.

It started five years ago when Wal-Mart announced three goals: 1) 100 percent renewable energy; 2) Zero waste; 3) Sustainable products.

Wal-Mart stores have already gone sustainable on dozens of fronts from shipping to selling to storing to recycling. Last year, Wal-Mart saved 4.8 billion plastic shopping bags.

That's how they roll in Bentonville: Big.

Even the combined efforts of 8400 stores with two million associates doing $400 billion in sales every year was not enough: Wal-Mart figured out 90 percent of the carbon was coming from its supply chain. So it reached down to all its 100,000 vendors -- and their vendors and their vendors -- and told them that reducing carbon footprints -- reducing energy -- will save money.

Everyone knows that is what Wal-Mart is all about.

"And vendors are listening," said Tom Rooney, CEO of SPG Solar in Novato, California, one of the largest solar installers in the country. "We are seeing renewed and intense interest in industrial- and commerical-scale solar because of Wal-Mart and Proctor and Gamble and other companies are showing their suppliers how to change their shipping, packaging, storing, selling, heating, cooling, disposing,
recycling and other practices to squeeze energy out of the supply chain and save money. And solar is a big part of that."

Not that many need much coaxing: Financial incentives for solar today are so strong that many companies are essentially getting free energy -- and more -- by buying a new solar array from the money they will save from lower energy bills. And having a big chunk left over.

Now on top of that, the largest companies in the world are saying solar and other renewables have to be a part of their supply chain. By some estimates, 1 in 3 dollars worldwide is associated with a company that does business with Walmart. So, if you shift Walmart and its suppliers, the global economy shifts with it, says R. Paul Herman at hipinvestor.com. Or as the New York Times puts it: "because of its size and power, Wal-Mart usually gets what it wants."

And Wal-Mart wants renewable energy.

Earlier this year, Wal-Mart sent its vendors a 15 part questionnaire to determine what their companies were doing to become more sustainable. Also leading the effort is Wal-Mart's "Sustainabilty Index."

Scholars from around the world are gathering at the Universities of Arizona and Arkansas to create this new measure of the energy created -- and wasted -- during the life cycle of a product found at Wal-Mart.

It won't be ready for at least anothear year. "But that doesn't matter," says Rooney. "No one is fighting Wal-Mart or complaining about the reporting that this new index requires. Just the opposite: They are
racing to out do each other, and surpass Wal-Mart's expectations. Right now. Not next year. "

And why not:

In May, the world's largest consumer product company, Proctor and Gamble (PG), announced its own, similar, sustainability program for its vendors. Joining IBM, GE, and other corporate giants on the sustainability train.

The results are already showing up on the bottom line:

"Perhaps more than any other company, Wal-Mart has pursued this approach" said the Harvard Business Review of Wal-Mart's new vision of sustainability. "The payoffs are already showing up: One of the Sustainable Value Networks, tasked with fleet logistics, came up with a transportation strategy that improved efficiency by 38%, saving Wal-Mart more than $200 million annually and cutting its greenhouse
gas emissions by 200,000 tons per year."

Wal-Mart: Not just for beating up anymore. Or maybe we are just seeing the world's first quintuple play.

Jim Fitzpatrick is a retired civil engineer and solar entusiast living in Delaware.

What Will the Oil Spill Do For Oil Sands Stocks?

Bill Paul

Will shares of the oil companies that are major players in Canada’s tar sands region rise or fall?

Logically, shares should rise in the wake of the deepwater drilling moratorium ordered by President Obama following the BP (BP) oil spill, as Wall Street begins to reflect on the fact that Alberta’s tar sands region is the second biggest crude-oil deposit in the world. Even before the spill, a report from IHS CERA had concluded that Canadian tar sands would be the single biggest source of US crude imports in 2010.

Just as logically, however, shares should fall, given that the environmental disaster in the Gulf likely will focus increased political and media attention on the extensive environmental damage caused by tar-sands extraction. It would seem to be just a matter of time before some reporter asks Canadian officials how they feel about the US basically outsourcing the environmental destruction caused by the US’s insatiable thirst for oil.

One Canadian newspaper – the Prince Albert Daily Herald – has already reported that the CEO of oil-sands firm Cenovus Energy (CVE) doesn’t think such a catastrophe could occur in the tar sands region, a conclusion environmentalists no doubt will disagree with.

That BP is as big in Canadian tar sands extraction as it is in Gulf of Mexico oil drilling only adds to the likelihood of an attention-grabbing front-page story in, say, the New York Times.

In addition to Cenovus, several companies’ shares stand to be impacted, among them: EnCana (ECA), Canadian Natural Resources (CNQ), Suncor (SU) and Royal Dutch Shell (RDS.A).

Disclosure: No positions

Disclaimer: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

June 06, 2010

The Best Peak Oil Investments: Smart Transportation

Tom Konrad CFA

What the Smart Grid will do for electricity, "Smart Transportation" will do for road-based travel.  Here are eight companies making Smart Transportation a reality.

Congestion and Peak Oil

In late 2005 Houston was evacuated as hurricane Rita approached.  The memory of Hurricane Katrina was still fresh in everyone's mind, and Houston, also called the Oil Capitol of the World, is extremely car-dependent.   100-mile traffic jams quickly formed on all the major routes out of the city.  Many people were stranded as their cars ran out of gas from driving for hours just to go a few miles.  In the end, the evacuation turned out to be unnecessary as Rita turned and missed the city.

The Rita evacuation is one graphic example of how traffic congestion wastes gasoline to no purpose.  As we look for companies that may benefit from declining oil supplies, one good place to look is companies that help reduce congestion. 

Reducing congestion does a lot more than save oil: it saves everyone time and aggravation, as well as reducing vehicle emissions.  Everyone wants less congestion, but few people want to reduce their own driving, they would prefer that other people get off the road instead.  A 2000 Salt Lake County, Utah referendum on light rail passed in large part because of an advertising campaign that focused on the benefits of light rail to the people who don't use it [pdf, p.7].  The main benefit cited was reduced congestion.  I've heard similar stories about Denver's FasTracks project: the initial polling showed support among commuters not because they wanted to take light rail themselves, but because they wanted other people to take the train and make their driving commute quicker.

Along with buses and road building, light rail projects such as the two referenced above are usually the first options that come to mind when people think about ways to reduce congestion.  Unfortunately, with the exception of bus rapid transit, such projects take a long time to implement.  They are also quite expensive.   FasTracks authorization was passed in 2004, and the project is not scheduled to be completed until 2016.  Although initially cited as a model, it's now billions over budget.

Congestion as Market Failure

The first solutions that come to mind are not often the best solutions. 

Understanding the economic causes of congestion can lead to insights as to the best solutions.

Congestion is an instance of market failure.  In particular, it's a combination of the tragedy of the commons and incomplete information.  The tragedy of the commons occurs when many individuals (drivers in this case) share a common resource (road space) but do not individually pay the incremental cost of using that resource.  Each individual driver benefits by driving, but imposes costs on all other drivers by incrementally slowing traffic and increasing the risk of accidents.  Further, drivers have incomplete information because they typically must chose a route without knowing if the route is congested or blocked by an accident.

The reason that adding lanes and building new roads does not reduce congestion is that these solutions do nothing to address the underlying market failure: they simply increase the size of the common resource, giving drivers a larger incentive to over consume.  Mass transit also increases the common resource (transport services), but, since it is typically not free, mass transit is typically more effective at reducing congestion.  Yet, since mass transit only provides a new option to driving, the congestion benefits of mass transit in the absence of road pricing tend to be small.  Mass transit gives drivers the option of leaving their cars at home, but unless they also have an incentive, only a few drivers will switch to mass transit. 

Enter the Invisible Hand

The most cost effective approaches to reducing congestion address the underlying market failures. 

One way to address the tragedy of the commons is to price the common resource.    The pay per mile pricing programs (also known as Pay as You Drive, or PAYD) for auto insurance and registration I discussed in part X of this series improve the market signal and help reduce congestion.  Electronic ticketing systems can also improve transit ridership by making it easier to pay, effectively lowering the cost of mass transit when compared to driving. In April, a US Department of Transportation (USDOT) report identified several strategies that produce large net savings while reducing CO2 emissions from transportation.  USDOT found urban center cordon pricing, where people are charged to drive into a congested city center, produces $530-640 per tonne in net savings, while congestion based road pricing produces $440-570 per tonne in net savings.  There are relatively few ways to cut CO2 emissions that produce net savings, let alone savings in the hundreds of dollars per ton.  By definition, when a market is efficient, there can be no net gains from changing the market structure.  The large gains found in the USDOT report are the result of massive market failure, and also a sign that congestion based road pricing and urban center cordon pricing both improve the market structure. 

Tackling the problem of incomplete information can also reduce congestion.  New York City has a system of stop lights that respond to traffic conditions and leave fewer people waiting at red lights.  Navigation systems (GPS) with traffic information can help users avoid congestion and accidents, reducing congestion for everyone.  GPS systems without traffic information can also reduce driving by helping drivers find the shortest route to their destinations and make fewer wrong turns.   Routing buses around congestion and signal priority systems can help them arrive on time, encouraging ridership, while satellite tracking systems can keep riders updated about the next arrival time. 

Smart Transportation

I call methods of addressing transportation market failures "Smart Transportation" because they typically apply information technology (IT) to transportation, just as the Smart Grid is the applies IT to the electric grid. Although not obviously IT, pricing structures to address the tragedy of the commons require information about vehicle locations over time in order to charge appropriate prices.

Like most IT, Smart Transportation is scalable: variable costs that come from added vehicles are small compared to the cost of the project.  Smart Transportation requires only relatively cheap tags or navigation systems (from about $30 for tags and $100 to $500 for navigation systems, with prices falling constantly) for each vehicle.  There are even navigation systems for smart phones from Google (GOOG) and TeleNav (TNAV), which had its IPO on May 13th.  Smart phone based navigation is even more scalable than navigation systems, since it requires no new hardware. 

Most Smart Transit project also require sensors, cameras, and/or tag readers placed throughout the covered area.  GPS navigation can benefit from sensors that detect traffic and road conditions, although traffic data can also come from the GPS devices themselves: Trafficmaster (TFC.L) has developed such as system, which becomes more effective the more people use it.  Even when infrastructure is required for Smart Transportation, once it is in place, the infrastructure can service any number of vehicles. 


Here are nine stocks that I'd classify as Smart Transportation:

Company (Ticker)
Smart Transportation Businesses
% of Revenues
AECOM Technology Corporation (ACM) Transportation planning and design
Cubic Corporation (CUB) Fare and Toll collection
Garmin, Ltd. (GRMN) Satellite Navigation (Automotive, Marine, Aviation)
Telvent Git S.A. (TLVT) Transportation information systems
TomTom (TOM2.AS) Satellite Navigation and mapping
Trafficmaster PLC (TFC.L) Vehicle tracking, Satellite Navigation, Traffic monitoring
Telenav (TNAV)
Smartphone based Navigation.
Trimble Navigation (TRMB)
Chipsets for global positioning, vehicle tracking
Google (GOOG) Mapping and navigation software

If you know of any I've missed, please add your suggestions in the comments.


Scalability of Smart Transportation can lead to impressive economic outcomes, but road pricing schemes run into political opposition when drivers don't have acceptable transport options other than their car. 
While mass transit projects benefit increased ridership when road pricing is implemented, road pricing is often politically untenable in the absence of reliable mass transit [pdf].  Often these links are made explicit in that the revenues from road pricing are used to improve all transportation options, as is the case with London's successful congestion charging scheme [pdf. p.5]

In future articles of this series on peak oil investments, I plan a more detailed look at some of these Smart Transportation stocks.  I'll also delve deeper into the alternative transport companies such as rail and bus mass transit without which Smart Transportation would be politically untenable.

DISCLOSURE: No positions.
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.

June 04, 2010

The Lead Acid Battery Sector Is Starting A Bull Run

John Petersen

It's been a very good week for companies in the lead-acid battery sector and from all indications the fun is just beginning. Unlike most market sectors, the principal players in the lead-acid group report on a fiscal year basis instead of a calendar year basis. Enersys (ENS) and Exide Technologies (XIDE) both use fiscal years that end March 31st, and C&D Technologies (CHP) uses a fiscal year that ends January 31st. That makes the first two weeks of June a busy time as Enersys and Exide report annual results and C&D reports first quarter results.

In its earnings release on Tuesday, Enersys reported net income of $17.8 million for the quarter, or $0.36 per share, and net income of $62.3 million for the year, or $1.28 per share. Revenues for the year were $1.58 billion. The earnings for both the quarter and the year exceeded expectations and the subsequent conference call made it clear that management believes earnings will continue improving as the global economy recovers and the company realizes the planned economies from restructuring investments that impaired earnings over the last couple of years. The closing price prior to the earnings release was $21.78, as compared to a price of $24.47 on Thursday. Given its strong earnings and a bright outlook for continued growth and improved margins, I expect Enersys to surpass its 52-week high of $27.23 before year-end.

An even bigger surprise was unveiled on Thursday when Exide reported net income of $40.4 million for the quarter, or $0.53 per share, and a net loss of $11.8 million for the year, or ($0.16) per share. Revenues for the year were $2.69 billion. The earnings for the quarter exceeded expectations by a wide margin and came as a huge surprise for people who don't follow Exide closely. As a result the stock gapped up sharply on very heavy volume and gained about 27% before closing at $5.41.

Over the last couple years Exide has been engaged in a comprehensive restructuring program that crushed earnings. From a $19.66 peak in the spring of 2008, Exide tumbled to a low of $1.83 in November 2009. In yesterday's call Exide's management confirmed that the restructuring activities are almost complete and that product demand and margins are ramping nicely as the economy recovers.

The one big question mark with Exide's future market performance arises from potential distributions and sales by the Tontine funds that bear no necessary relationship with Exide's fundamentals. Tontine owned 23.7 million Exide shares last July and had distributed or sold approximately 8.7 million shares as of May 17th. Until Tontine completes its restructuring, there may be selling pressure that would tend to depress the market price. The market will probably want to see a couple more quarters of stable operating performance before assuming that Exide is out of the woods, but a double or even a triple prior to year-end would not surprise me in the least.

Nothing in life is certain, but I'm hoping C&D Technologies will be the third in the series of lead-acid surprises when it reports first quarter earnings. Last December I wrote an article, Why I'm Buying C&D Technologies, that laid out the fundamental business case for significant improvements in operating earnings beginning with the current quarter. If C&D has experienced growth rates in Asia that were comparable to the rates reported by some of its competitors, it could be an interesting time. At Thursday's closing price of $1.14, C&D is trading for book value and a piddling 9% of annual sales. Since consensus estimates are predicting a loss of roughly ($0.10) per share for the current quarter and ($0.09) per share for the fiscal year, any surprise could result in a significant short-term gain.

My fun take-away of the week came from the Exide conference call and is probably best classified as gossip and conjecture from reading between the lines. Since it could also be very important to readers who follow Axion Power International (AXPW.OB) I'll pass it along for what it is; gossip and conjecture.

A big chunk of the Exide conference call was spent discussing their expectations regarding the implementation of stop-start and micro-hybrid technologies in response to new CO2 emission regulations in Europe and the U.S. When speaking of critical industry trends, Exide's Chief Operating Officer, P..J. O'Leary said, "Our view is that the hybrid market is real and will be significant with approximately 16% of the total worldwide car build by the year 2015. More significantly we estimate that 70% of the hybrid vehicle build will be in the start-stop and micro-hybrid applications." Earlier in the conference call, Chief Executive Officer Gordon Ulsh said, “Exide’s technology development projects with Axion Power, Nano-terra, Savannah River and the University of Idaho are all on track to complete critical evaluation phases within the next six months. One or more of these technologies is expected to be carried forward to commercialization.”

For those who don't follow Exide closely, the Nano-terra relationship was announced last spring and described as an R&D collaboration where "Nano-Terra will use its expertise in surface chemistry and surface engineering to create a number of innovative functionalities for stored energy solutions manufactured by Exide." Similarly, the relationship with the Savannah River National Laboratory and the University of Idaho was announced last summer and described as an R&D collaboration where "these two research institutions can collaborate on their unique strengths, with Exide providing the resources to commercialize the technologies to improve lead-acid battery performance." In comparison, the Axion agreement announced last spring was described as a multi-year, global relationship for the purchase of Axion PbC batteries and other Axion Technologies that contemplated three consecutive phased purchase- and test-periods with Axion supplying an escalating number of batteries to Exide on a monthly basis. The first two phases were to span 18 months and, if successful, serve as trigger events for the final two commercialization phases.

When I combine the discussions in the Exide and Axion conference calls, I have to believe the PbC battery will make the transition from OEM testing to commercial sales sometime this year.

I believe the lead acid battery sector is starting a major bull run. Enersys should continue appreciating, Exide is looking like a multi-bagger, C&D is poised for a turn-around and it looks like Axion is making the transition from development to commercialization. It's a target rich environment for investors who take the time to do their homework and select the companies that best fit their portfolio requirements and risk tolerance.

Disclosure: Author is a former director of Axion Power International and holds a substantial long position in its common stock.

June 02, 2010

Electric Vehicles Will Increase China's Air Pollution

John Petersen

Last week the American Chemical Society published a white paper in Environmental Science & Technology from a team of researchers at Tsinghua University, Beijing, and the Argonne National Laboratory Center for Transportation Research titled "Environmental Implication of Electric Vehicles in China." This white paper concludes that:
  • Implementing electric vehicles in China will increase national CO2, SO2 and NOX emissions; and
  • Gasoline HEVs are more environmentally friendly, more commercially mature, and less cost-intensive.
The following graph comes from page 4 of the white paper and compares the relative fleet wide CO2 emissions for gasoline ICEs, gasoline HEVs and electric vehicles. It's tremendously gratifying to see a high-level analysis that compares all of the available alternatives, instead of simply comparing ICEs with EVs.

6.2.10 China CO2.png

While the graph focuses on CO2 emissions and shows that electric vehicles in China will be 50% dirtier than HEVs, the article also explains that EVs in China could double NOx emissions and increase SO2 emissions by 3–10 times. The bottom line is that in the U.S., China and India, PHEVs and EVs will be plugging into a lump of coal for decades to come and popular greenwash extravaganzas like the upcoming Tesla Motors IPO and the $7 to $11 billion Electric Drive Vehicle Deployment Act of 2010 that was introduced in Congress last week will ultimately be condemned for what they are, wholesale plunder of the treasury, the financial markets and the environment.

I have long argued that lithium-ion batteries are too valuable to waste on foolish applications like battery powered electric vehicles. I've even suggested that there won't be a lithium-ion battery glut because the world needs all the advanced batteries it can produce for sensible applications like electric two-wheeled vehicles and HEVs. Insanity is the only word I can use to describe the suggestion that batteries will ever be a cost effective replacement for a fuel tank.

If we wanted to create a hierarchy of possible battery applications going from the highest value per watt-hour to the lowest value per watt-hour, our list would look something like this:

6.2.10 Battery Use.png

In a normal free market, production capacity is allocated first to high value applications and then to successively lower value applications. In cases where supply is constrained by resource availability, manufacturing capacity or a host of other reasons, high value applications that only need a little battery capacity will always be able to outbid lower value applications that need a lot of battery capacity. The end result is that electric vehicles will always end up at the bottom of the food chain and the only batteries available to them will be the dreck and surplus that nobody else needs or wants. The economics of electric vehicles may work for the eco-religious crowd who will pay any price for the right status symbol to express their world view, but it's insanity to believe that electric vehicles have any future in the real world of paychecks and budget-conscious consumers.

I'm frequently critical of lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV) and Valence Technology (VLNC), but that criticism has nothing to do with the value of their products or the odds that they could develop a sensible business model for the commercialization of those products. The concept of electric vehicles, however, is inherently flawed and when good companies devote immense resources to the pursuit of foolhardy plans the result is invariably catastrophic for investors. Perhaps the latest study out of China will be enough to force some serious soul-searching before it's too late. I have never seen a new business prosper by targeting the most price sensitive, capital intensive and competitive markets first.

Disclosure: Author has no interests in the companies mentioned for obvious reasons.

June 01, 2010

The L.B. Foster / Portec Rail Products Takeover Saga

Tom Konrad, CFA

LB Foster (FSTR) may not succeed in their attempt to buy Portec Rail Products (PRPX) unless they raise the offer price.

As a Portec Rail Products (PRPX) shareholder since 2007, I've been watching the saga of L.B Foster's (FSTR) attempt to buy the company fairly closely, and it's been a lot more interesting than we could expect.  I've put together a detailed time line at the end of this article.

Offer Premium

The tender offer came at only a 4% premium compared to the price the day before it was announced, leading to a spate of class action lawsuits alleging that the Portec board did not do enough to get the best possible price for the company. 

Most analysts agree that the previous close is a poor measure of the value the market places on a company.  The first reason not to use the closing price from on the previous day is often biased upwards when if rumors of the impending merger leak out, and investors buy on this insider information.  Although such insider trading is illegal, my observation of stock price movements convinces me that it happens frequently.  In the case of Portec, the quick price rise right before the merger was announced at the same time that most stocks were falling and there was no significant news also leads me to believe that some investors were buying the company on the basis of rumors or insider knowledge.  The second reason against using the previous day's close is simple volatility: Had other trading prices from the previous day been used instead of the closing price, the offer premium could have been calculated as anywhere between 4% and 10%.

A better way to calculate an offer premium is to use the average price of the stock over the previous month or two.  Using this method, the actual offer premium was between 8.5% and 10.4%, which is still low but not alarmingly low.  A 20% premium is typical.

Portec chart

Class Action Lawsuits

The low offer premium led to a number of class action lawsuits against the Portec board, alleging that they had not fulfilled their fiduciary duty to find the best possible price for shareholders.  I initially opposed these lawsuits and suggested that shareholders unhappy with the price should not tender their shares, rather than joining a lawsuit.  However, the lawsuits ended up doing some good: it came out during the proceedings that Portec had received a slightly higher ($12.00) verbal offer from Ameridan Resources LLC, a merger and acquisition specialist firm.  The judge in the case found that the chairman of the board had breached his fiduciary duty in not bringing this offer to the board's attention, and put a temporary hold on the merger, which Foster and Portec recently filed a motion to have released.

Shares Tendered
shares tendered chart
According to the terms of the offer, 65% of Portec shares must be tendered in order for the deal to go through.  The companies initially expected to have enough shares tendered by March 25, but shareholder take-up has not been sufficient.  The companies have now extended the tender offer three times.  As of May 28, they still needed 6% of outstanding shares to be tendered in order for the deal to go through.

Will more than 65% of outstanding shares be tendered?  It looks too close to call.  But having enough shares tendered is not enough to ensure the merger goes through.  The judge in the class action suits must also lift her injunction against the merger.  She may not be willing to do so unless Foster raises the offer price to at least the $12 offered by Ameridan.


My best guess is that L.B. Foster will either raise their offer to appease the judge and entice shareholders to tender more shares, or the deal will not go through, opening the door to other potential bidders.  With no net debt and solid operating cash flow, Portec has a strong bargaining position, and the board is likely to be much more careful about their fiduciary duty after this experience.

With Portec stock currently trading around $11.40, new purchasers would make a quick 5% profit in the case of a takeover at $12, or a 3% profit if the deal goes thorough as is.  Since I've liked the company's business for a long time (see here and here), I'm holding my (untendered) shares in the hopes of a better offer or the chance to continue holding Portec for the long term.


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.

L.B. Foster/Portec Rail Products Tender Offer Time Line

  • June 2009.  LB.Foster approaches Portec to negotiate a buy-out.
  • June-December 2009: negotiations between Foster and one Portec board member.  Most board members are not aware of the negotiations.  Portec shares trade between $8.50 and $10.80.
  • Dec 18, 2009- February 16, 2009: Portec average closing share price $10.60.
  • Jan 17- Feb 16: Portec average closing share price $10.79.
  • Feb 17: L.B. Foster announces offer at $11.71/share, a 10.4% premium over $10.60, and a 8.5% premium over $10.79.  News reports call it a 4% premium (over the previous day's close.)
  • Feb 17-19: Several class action suits filed alleging board did not work hard enough seeking a higher offer.
  • Feb 19: I recommend against joining a lawsuit saying not tendering shares is sufficient.
  • March 1-March 21: In anticipation of dividend, tax loss buyers drive Portec to $11.73 to $11.76 a share.  They probably hoped to sell a month later, capturing the $0.06 dividend (subject to a reduced tax rate) and taking a capital loss of $0.06 or less, which can be written off against short term gains.
  • March 12: Portec announces regular $0.06 quarterly dividend.
  • March 22: ex-dividend date.
  • March 22: L.B. Foster extends tender offer until April 26.  Only 16.55% of outstanding shares have been tendered; 65% are needed.
  • March 22: Second inquiry from US Dept. of Justice looking into the merger negotiations. 
  • March 22-April 22: Investors begin to question likelihood of merger.  Tax loss sellers take much bigger losses than they expect as Portec falls from $11.67/share to as low as $11.33/share.
  • March 25: Tender offer initially set to expire.  
  • April 22: Judge in class action cases puts temporary stop to the merger.  Reveals that Marshall Reynolds, Portec's Board chairman failed to bring tell other board members about a $12 offer from Ameridan Resources LLC.  Says Reynolds breached his fiduciary duties.  Only one member of the board was aware or involved in merger negotiations between June and December 2009.
  • April 22-26: Portec trades over offer price, and as high as Ameridan $12 offer on speculation that Foster will raise its offer or Ameridan will purchase the company.
  • April 26: Offer again extended (to June 1). 54.33% of shares have been tendered; 65% are needed.
  • May 13: Dept. of Justice will not block merger on anitcompetitive grounds.  L.B. Foster agrees not to go ahead w/ merger without DOJ approval.  Drop-dead date extended to August 31.
  • May 21: Foster, Portec file motion to restart merger in class action case.
  • May 28: Third offer extension to July 30.  58.93% of shares have been tendered.
  • June 18: Expected ex-dividend date for Portec's quarterly $0.06 dividend.
  • Aug 31: Drop-dead date: last day the merger can proceed without a new agreement between the companies.

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