The Lead Acid Battery Sector Is Starting A Bull Run
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.