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August 29, 2010

Seven Greentech "Experts" and Their Stock Picks

Tom Konrad CFA

Not many self-proclaimed Greentech experts know what they're talking about, and fewer can effectively make the case of Greentech investing.

When I attended the MoneyShow last week to moderate a panel, I also stayed around to see what people who held themselves out as Greentech or Cleantech experts were saying.  Since MoneyShow attendees do not pay to get in, all the revenue comes from presenters.  I was asked to moderate my panel because I made it a condition of helping them advertise the show, but many of the presenters I saw were on stage simply because they had something to sell, often a newsletter.  A few had been asked there to flesh out the program, although it was not always clear which was which.  My best guesses as to whether the speakers paid to present are listed below.

In my decision about which sections to attend, I simply tried to attend as many sessions in the show's Cleantech/Greentech track as possible.  All of these presenters chose to represent their presentations as belonging in the Cleantech/Greentech track, although for some it was a real reach.  Here they are, in the order I attended their presentations:

Expert: Susan Preston
Affiliation: CalCEF Clean Energy Angel Fund
Position: Manager and General Partner
Paid Appearance: Probably Not
Cleantech Expertise: Good
Selling: Her book: Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success
Notes: Ms Preston did a general presentation during the opening ceremonies making the case that we should not only invest in Cleantech, but that we needed to pressure government to provide more support for the sector.  She made a strong case that Cleantech was the right thing to do, but did not do as well making the case that Cleantech is a good investment.  I thought her message about needing government support undermined her case for making Cleantech investments.  After all, why would we invest in a sector that needs more government support than it is already getting?

Expert: Jackie Ann Patterson
Affiliation: Back-Testing Report
Position: Trader
Paid Appearance: Probably
Cleantech Expertise: Clueless
Selling: Reports about technical trading strategies.
Notes: I attended Ms. Patterson's session because it was titled "What's Driving CTIUS?" which is the market index underlying the Powershares Cleantech Portfolio ETF (PZD).  I was hoping for a discussion of the relative performance of Cleantech sectors, but instead she did some superficial technical analysis on the stocks in the index.  She also did not think Cree (CREE) the LED lighting leader, had anything to do with Cleantech, which is why I label her Clueless when it comes to the sector.

Expert: Elliot Gue
Affiliation: Personal Finance and The Energy Strategist
Position: Editor
Paid Appearance: Probably
Cleantech Expertise: Weak
Selling: Newsletters.
Notes: This presentation was about oil, and had no reason to be listed as Cleantech/Greentech.  Although Mr. Gue claims to "cover" Alternative Energy, he did not show much sign of knowing much about it, and seemed to conflate Alternative Energy with Solar, a common novice's mistake.  He talks a good line about oil companies, so I decided to look into the one oil stock he recommended shorting - Diamond Offshore (DO).  The reason he gave was that the company had most of its platforms in the Gulf and would soon have to cut its dividend, sending income investors to one of his favorite picks, SeaDrill (SDRL).  That sounded reasonable to me, until I took a look at DO and found out they had already cut their dividend significantly on Apr 22 and July 22.  It's pretty easy to predict a dividend cut when the cut has already happened.

Expert: Paul Dravis
Affiliation: Dravis Group LLC
Position: Consultant
Paid Appearance: No
Cleantech Expertise: Good
Selling: Nothing.
Notes: Mr. Dravis's approach to Cleantech is a good one: look for supporting industries that have less technological risk than the high profile start-ups.  He currently likes Cosan (CZZ), SQM (SQM), General Cable (BGC), and Power-One (PWER) almost all of which I've had good things to say about in the past, for similar reasons (see here, here, and here).  The only one I have not talked about is SQM, which is not green enough for my taste (admittedly a fairly high bar.)  That said, I was more impressed by his feel for market timing than his industry knowledge, so much so that I asked him to send me his weekly newsletter, the Dravis Wealth Advisor, which he does not charge for.  If you're interested in giving his newsletter a try, send him an email at p a u l at d r a v i s dot n e t.  Like me, he's currently quite bearish, so don't rush out to buy his picks unless you're also prepared to hedge them.

Expert: Neil George
Affiliation: Stocks That Pay You
Paid Appearance: Probably
Cleantech Expertise: None
Selling: Newsletters
Notes: Neil brought out the old saw about Alternative Energy (which he also conflates with the highest-profile subsector, solar) being a bad investment because he does not like energy generation that's "heavily subsidized."  Then, in the very next breath, he recommended Nuclear Energy.  In the US, Federal nuclear subsidies account for about 21% of the cost of Nuclear Energy, while Federal Solar subsidies account for about 12% (2006 data.)  State subsidies are probably higher for Solar, but vary by state.  In any case, one thing Nuclear energy clearly isn't is unsubsidized.   One thing Neil George clearly isn't is logically consistent.

Expert: Jeffrey Cianci
Affiliation: Green Science Partners
Position: Cheif Investment Officer
Paid Appearance: Unknown
Cleantech Expertise: Very Good
Selling: His Fund - Green Science Partners (but only to accredited investors)
Notes: Jeff bases his investment decisions on a combination of deep analysis of both the technology and technical analysis of the stocks in question.  He looked at a large number of stocks in his presentation, but his high-velocity trading strategy is such that I don't know if any of the stocks he liked will still be among his favorites a week from now.  In many ways, his investment strategy is the exact opposite of mine: he tries to figure out what the best technology is in any sector, and times his buying and selling using technical indicators in combination with earnings projections.  In contrast, I try to find picks that have solid earnings based on tried-and true technology, and can be bought solely on the basis of fundamentals.  Despite our contrasting approaches, he gave me the impression of someone who knows the sector at a deep level.

Expert: Peter Cox
Affiliation: Greentech Opportunities
Position: Analyst
Paid Appearance: Probably
Cleantech Expertise: Good
Selling: Newsletter
Notes: Peter made the best, most concise case for investing in Cleantech that I heard at the entire show.  He also had a couple of interesting wind picks: Western Wind Energy (WNDEF.PK, WND.V) and Catch the Wind (CTW.V), a pair of Toronto Venture listed firms.  I have a small position in Western Wind, but until his talk, I did not know that Catch the Wind was public, but I'd heard of it and was already enthusiastic about their technology.  Of all the paid newsletters being sold at the show, Greentech Opportunities is the only one I'd sign up for if they were all free.


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.

August 26, 2010

Why Baby Steps For Fuel Efficiency Mean Major Revenue Gains For Lead-acid Battery Manufacturers

John Petersen

If EV evangelists have everything their way and lithium-ion battery developers can achieve their lofty cost and performance goals, your long-term future may include a car with a plug. While we wait for that glorious day to arrive your short-term future will almost certainly include a car with stop-start engine technology.

The issue is simple – sitting at a stop light with the engine running wastes fuel and fouls the air. Depending on traffic, weather and driving habits, the waste can range from 5% to 15%. On a personal level the waste may seem modest, but on a national scale the numbers are mind-boggling.

The solution is simple – use cheap and effective automatic stop-start technology to turn the engine off every time a car rolls to a stop and automatically re-start the engine when the driver takes his foot off the brake.

If all cars in the US used stop-start systems, the nation would save 10 billion gallons of gasoline a year while reducing CO2 emissions by 100 million tons. I think saving the equivalent of 50 BP-class oil spills per year is a worthwhile goal. The EPA and the NHTSA seem to agree because they've recently adopted regulations that are expected to drive stop-start technology into at least 40% of the new car fleet over the next five years.

Ford Motor Company (F) has already announced plans to ramp stop-start engine production to 1.5 million units a year by 2013. Other automakers aggressively pursuing stop-start technology include PSA Peugeot-Citroen, BMW, Hyundai, Mazda, Nissan, and Volkswagen. Market penetration estimates range from 10 to 20 million cars per year by 2015, and those estimates will be woefully inadequate if Chinese proposals to require stop-start systems on all internal combustion engines by 2012 are implemented.

The key takeaway for investors is that stop-start technology is not a somewhere over the rainbow solution. The technology is real, it's proven and it's being implemented today in auto factories worldwide.

Reduced to basics stop-start systems are simple. The automaker replaces its normal starter and alternator with a belt driven integrated starter generator and then adds the necessary control electronics. After several years of experience with over a million stop-start vehicles in Europe the biggest issues are battery problems.

Stop-start systems are hard on starter batteries because instead of starting a car once for a normal commute, a car equipped with stop-start can restart the engine 10 or even 20 times. Heavy accessory loads that must be maintained while the engine is off increase the complexity. In stop-and-go urban driving, where two-, three- or even four-light backups at busy intersections are not uncommon, the battery strain is enormous and performance deteriorates rapidly.

Initially, the automakers' response to battery issues was to upgrade from commodity starter batteries to higher quality valve regulated lead-acid [VRLA] batteries. Since their stop-start systems still fell short of optimal performance, a more recent trend has been to use two high-quality VRLA batteries instead of one.

I frequently write about a new generation of lead-acid batteries that use carbon additives or components to increase cycle-life and power while reducing the time required to bring the battery back to a full charge. Last week I found an obscure presentation that Axion Power International (AXPW.OB) used at last September's Asian Battery Conference in Macau. This presentation is the first document I've found that shows how several different types of lead-acid and lead-carbon batteries perform under simulated stop-start driving conditions.

The testing protocol began with a one-minute discharge at 50 Amps to simulate engine-off accessory loads that was followed by a brief 200 Amp starter load. It then measured the maximum current the battery would accept and the amount of time required to return the battery to a full state of charge.

The first graph shows the performance of a high-quality VRLA battery. The 4,000-cycle test period is roughly equivalent to six months of urban driving at 30 stop-start cycles per day. The downward curving blue line shows the maximum charge current the battery would accept as the number of cycles increased. The upward curving black line shows the amount of time required to restore the battery to its initial state of charge.

8.26.10 VRLA.png

The second graph shows the performance of a high-quality VRLA battery with high surface area carbon added to the electrode pastes. While charge rates and recharge times improve, the performance degradation is still pronounced over the testing period.

8.26.10 VRLA+HSAC.png

The third graph shows the performance of a high-quality VRLA battery with conductive carbon added to the electrode pastes. While charge rates and recharge times show additional incremental improvement over high surface area carbon, the performance degradation is still pronounced.

8.26.10 VRLA+CC.png

The final graph shows the performance of Axion's PbC® battery, a battery/supercapacitor hybrid that replaces the lead-based negative electrodes with carbon electrode assemblies. Further comment seems superfluous.

8.26.10 PbC.png
Several publicly held energy storage companies are actively developing solutions for the stop-start market. Johnson Controls (JCI) has sold the lion's share of stop-start batteries to date and seems content to stick with traditional VRLA chemistry while focusing its research and development efforts on lithium-ion batteries.

Exide Technologies (XIDE) and C&D Technologies (CHP) are both actively developing VRLA batteries with carbon additives. Exide is focusing on lead-carbon batteries for stop-start applications and C&D is focusing on lead-carbon batteries for stationary applications.

After seven years of research and development, Axion Power International (AXPW.OB) is just now making the transition to commercial production. Its multi-patented carbon electrode assemblies have been designed to work as plug-and-play replacements for the simple lead electrodes used in battery plants worldwide and its goal is to become a leading manufacturer of high-value electrode assemblies that will be sold to other battery companies that want to offer a better product to existing customers. Axion's manufacturing partners include Exide Technologies and privately held East Penn Manufacturing. It has also entered into a development relationship with Norfolk Southern Railroad (NSC) and quietly conducted product testing for a bevy of first tier automotive OEMs over the last 15 months.

The last serious contender in the stop-start game is Maxwell Technologies (MXWL), which has partnered with Continental AG to develop a stop-start system that uses conventional VRLA batteries in tandem with Maxwell's BoostCap® supercapacitors to satisfy the requirements of stop-start applications.

Given the amount of press and PR hype that have surrounded automakers plans to make tens of thousands of plug-in vehicles over the next few years, most investors are surprised that they haven't heard more about plans to make tens of millions of stop-start equipped vehicles. The only explanation I can offer is that plug-in vehicles have a great deal of long-term PR value while stop-start systems involve bread and butter production decisions that will materially impact the bottom line over the next few years.

If dual-battery stop-start systems become the norm, the short-term revenue gains for a handful of lead-acid battery and supercapacitor manufacturers could easily amount to a couple billion dollars per year. Since high quality VRLA batteries and carbon-enhanced products will typically command a higher margin than commodity lead-acid starter batteries, the bottom line impact should be impressive. For now, most of the likely beneficiaries of stop-start technology implementation trade at bargain basement valuation multiples. As the automakers begin announcing design wins for their upcoming stop-start product lines, that dynamic will change rapidly.

Unlike the lithium-ion advocates, I don't believe in the absurd idea of "One Technology To Rule Them All." Given the size of the market and the variety of potential solutions the only thing that matters in my book is being in the game. Since September is traditionally the month when first tier automakers introduce their new product lines for the coming model year, I think things are about to get interesting.

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

August 24, 2010

The Best Peak Oil Investments: Why Invest for Peak Oil?

...and Why Not Invest in Oil Companies?

Tom Konrad CFA

The purpose of this series on peak oil investments has been to highlight companies outside the oil sector that are likely to benefit from increasing oil prices.  This article explains why we should expect oil prices to rise.

What is Peak Oil?

There are many definitions for peak oil.  In its most basic form, Peak Oil is the moment of highest production.  World oil supplies are finite, and so we cannot continue to produce oil in increasing quantities forever.  It's a mathematical certainty that at some point the supply (the annual total production) of oil will stop increasing and begin declining.  Theoretically, peak production could be the result of declining oil demand, or it could arise from declining oil supply.  With rising economic activity and car ownership in much of the third world, there is little prospect of declining demand, so nearly all observers focus on supply. 

If demand continues to follow its current rising trend, even stable oil supplies will lead to rising oil prices.  How quickly oil prices rise in response to increasing demand will depend on how responsive oil supply is to changes in the oil price.

Oil Price Volatility

Historically, increases in volatility in the price of oil has been associated with disruption of supply. Consider this price chart from InflationData.com (click for full size image.)  Before 1973, the oil price was remarkably stable.  In 1973, 1979, and 1990, we see sharp jumps in the price of oil caused by the Arab oil embargoes and the first Gulf War.  But in addition to the immediate increase in the price of oil, we also see that each of these price spikes is also associated with more volatility in the price of oil (the graph becomes more jagged.

Histoical inflation-adusted oil price

After 2002, the recent rising trend in the oil price has been accompanied by a further increase in oil price volatility.  Economics says that the price adjusts to bring supply and demand into balance.  We know that demand for oil has been increasing for most of this period, and supply has been increasing to keep up.  This can account for the observed increases in the oil price.  But what accounts for the increasing oil price volatility?

Is it Speculation?

Many have been quick to point the finger at speculation as the cause of increasing volatility in the oil price.  Multiple studies have looked for but have not found any link between oil speculation and oil price volatility [pdf].

In addition to the lack of evidence that speculation increases price volatility, blaming speculation for increased volatility demonstrates a naivete about how speculators make money.  As anyone who has ever traded anything from baseball cards to exotic derivatives knows that, in order to make money, a speculator needs to buy low and sell high. When speculators buy oil, they are acting to increase demand (the aggregate desire to buy), and so are increasing the oil price.  When speculators sell oil, they are acting to increase supply (the aggregate desire to sell), and so are decreasing the oil price.

In order to increase price volatility, a trader would need to buy when prices are high (raising prices further) and sell when prices are low (causing them to drop further.)  Any speculator who consistently buys high and sells low will also consistently lose money, and will soon stop speculating because of lack of funds. In contrast, a speculator who buys low and sells high will not only make money, but will reduce overall volatility.  Selling when prices are high will moderate price spikes, while buying when prices are low will moderate price falls: both have the effect of reducing price volatility. 

In other words, speculators who increase volatility will soon run out of money and stop speculating, while speculators who reduce volatility will make money and likely continue speculating unless laws are changed to prevent them from doing so.  Attempts to ban or limit oil speculation are likely to have the perverse effect of increasing, rather than reducing future oil price volatility.

The End of Easy Oil

If increased volatility is not the result of speculation, it probably has to do with other changes in the structure of the oil market.

Except for geopolitical events such as the wars and oil embargoes mentioned above, the supply of oil tends not to be volatile.  Demand fluctuates with changes in economic activity, and so the demand for oil will be more volatile when economic activity is more volatile.  Hence, the price volatility associated with the large spike in oil prices leading up to 2008, along with the subsequent rapid decline and recovery may be attributable to changes in oil demand.  However, the years from 2002 to 2007 were characterized by remarkably steady economic growth.  Hernce the high oil price volatility during 2002-07 must indicate that the ability of the oil supply to respond to changing demand had decreased compared to earlier periods.

I conclude that the most likely source for increased oil price volatility is a reduction in the ability of oil supply to adjust to changes in price.  This agrees with another formulation of the Peak Oil thesis:  Peak Oil is not the end of oil, but the end of "easy" oil.  We still have an oil supply, and it may or may not be declining, but extracting enough oil to meet demand is becoming increasingly difficult and expensive.  We pay the increased cost of extracting the more difficult oil reserves in higher and more volatile prices at the pump, and in environmental disasters such as the blow-out of BP's Macando well.

Implications of the End of Easy Oil

As world oil demand continues to rise, and extracting oil becomes increasingly expensive and more dangerous, several trends are likely to continue.
  1. Oil prices will rise in order to compensate oil companies for the increased costs and risks of finding oil.
  2. Oil companies will become less able to quickly adjust supplies to changes in the oil price, further increasing price volatility.
  3. Increased drilling risks will cause more frequent oil spills.  Increased political risks as oil firms increasingly search for oil in places controlled by less stable political regimes will lead to more frequent expropriation of oil firms' assets by those same unsavory regimes, as we have seen in Venezuela.
  4. Increased oil prices will lead to adjustments in our oil use that decrease demand.
Why not Just Invest in Oil Companies?

The increased geological and political risks of oil exploration and production are why investing in oil companies is probably not the best way to benefit from increases in the oil price.  BP's price decline in the wake of the Deepwater Horizon disaster is a graphic reminder of the risks of investing in oil companies in the hope of profiting from rising oil prices.

BP Stock Price Chart after Deepwater Horizon disaster

Investing In Reducing Oil Demand

Not wanting to take on the increased risks inherent in oil companies, I have focused this series on the companies and technologies that help reduce demand for oil.  These include substitutes for oil, such as Biofuels, Hydrogen, Electricity, Natural Gas, Synthetic Fuels, and Algae.  I also probed the barriers that limit adoption of alternative fuels, and the constraints that limit alternative fuel deployment and profitability, which I brought together in a comparison of the short and long-term viability of all these alternative fuels.

Shifting gears a little, I took a look at what reducing oil demand will mean for the economy going forward, and concluded that technologies and strategies for reducing oil use in transportation have better prospects than most options for replacing oil.  I looked at increasing vehicle efficiency, and ways to use IT to reduce congestion and driving, including GPS navigation, and Mass Transit stocks.  Delving into AltEnergyStocks' Peak Oil Stock lists, I brought you Ten EV and HEV stocks, and then Six More HEV and EV stocks from reader suggestions.  I also looked at four bicycle and moped stocks, as well as four individual stocks that caught my attention along the way: CVTech Goup, Telvent GIT SA, Shimano, and Great Lakes Dredge and Dock.

Coming Up

This is the twenty-second article in a series that has expanded to a breadth and depth that I never anticipated when I began it in March.  (You can find a complete index here.)  I have a few more individual stocks to write about, after which I plan to cap the series with a short list of companies best positioned to profit from a long-term rise in the price of oil.  I've learned a lot in the writing of this series, and my picks today are not the same as they would have been when I started, and that is in large part due to your comments and suggestions along the way.  I hope you all have learned at least as much as I have.


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.

August 21, 2010

The Best Peak Oil Investments: Shimano

Tom Konrad CFA

I missed Shimano (SHMDF.PK) in my recent list of bicycle and scooter stocks, but in many ways, Shimano is the best of the lot.

Shimano Inc. manufactures bicycle components and fishing and rowing gear, with the bike segment accounting for about four-fifths of sales, but I had not realized that they were public until I received a note from a reader in response to my recent article on bike and moped stocks.

In that article, I noted that, while bike sales rose in response to rising oil prices in 2008, bicycle repairs surged far more.  As a manufacturer of components, Shimano may be better placed than other bike companies such as Giant Manufacturing (GTMUF.PK) and Dorel Industries, Inc (DIIBF.PK) to take advantage of a surge in bike repairs. 

Shimano has a 70% market share in some key components such as gear wheels, derailleurs, and brakes.  This is possibly due in part to a corporate philosophy that keeps Shimano from competing with its customers by not building complete bikes.  If Shimano did build complete bikes, many bike manufacturing firms might feel compelled to return the favor by making their own high-end components.  As it is, Shimano's place in the bicycle industry is a lot like Intel's place in the computer industry: the maker of many of the highest tech components manufactured with great precision to exacting specifications, and, in fact, Shimano has often been called "The Intel of the bicycle industry." Many bicycle buyers care more that it is made with Shimano parts than which manufacturer does the final assembly.

Revenues by segment

Two Edged Sword

For investors, the high-end nature of Shimano's products is a two-edged sword.  The benefit is that Shimano's continual research into new technology and strong brand recognition create barriers that help the company maintain market share and margins.  The company's large market share also helps reduce unit cost of production, allowing the company to fend off competition with relatively low prices while maintaining profit margins.  The problem is that the high-end components in which Shimano specializes are less likely to appeal to more casual riders who are interested in using their bikes to run a few local errands than to more hard-core cyclists.  It was this class of casual rider that accounted for most of the new riders in 2008, when high gas prices caused a surge in interest in cycling.

On the other hand, not all of Shimano's products are made for the wanna-be Lance Armstrongs of the world.  For instance, Shimano introduced an automatic gear shifter for bicycles in 2003, designed with the urban commuter in mind.  For someone whose largest concern is dodging traffic and the morning meeting he's preparing for, an automatic shifter is just the thing. 


Shimano has an extremely strong balance sheet, a large plus in the current economic climate.  The company has no net debt, an extremely high current ratio of over 5, and strong cash flow from operations even when revenues were depressed by the recession in 2009. 

With so much going for the company, the stock trades at a very high valuation.  At the recent ¥4,350 ($52.50) stock price, the company pays a  1.4% annual dividend, and trades at a P/E ratio of about 32.  As a value investor, I'd like to see the stock drop 30-50% before I'd be ready to buy it.  At the right price, this is certainly a company I'd like to own.

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.

August 19, 2010

What Does GM Really Think About The Volt?

John Petersen

I love IPO registration statements because they have to provide full and fair disclosure of all material facts and forward-looking statements must "bespeak caution." The following quote from the risk factors section on page 19 of the prospectus included in the Form S-1 Registration Statement that NewGM filed yesterday says everything you need to know about the Volt and the other plug-in vehicles that currently reign as media darlings.

"In some cases, the technologies that we plan to employ, such as hydrogen fuel cells and advanced battery technology, are not yet commercially practical and depend on significant future technological advances by us and by suppliers. For example, we have announced that we intend to produce by November 2010 the Chevrolet Volt, an electric car, which requires battery technology that has not yet proven to be commercially viable. There can be no assurance that these advances will occur in a timely or feasible way, that the funds that we have budgeted for these purposes will be adequate, or that we will be able to establish our right to these technologies. However, our competitors and others are pursuing similar technologies and other competing technologies, in some cases with more money available, and there can be no assurance that they will not acquire similar or superior technologies sooner than we do or on an exclusive basis or at a significant price advantage."

While I don't hold myself out as being qualified to analyze GM's business there were a couple of line items on its balance sheet that concern me. At December 31, 2008, OldGM had $91.0 billion in total assets, including $46.7 billion in non-current assets. At December 31, 2009, NewGM had $136.3 billion in assets, including $77.0 billion in non-current assets. When I went through and did a line by line comparison the major changes boiled down to three line items that were insignificant on OldGM's balance sheet but massive on NewGM's balance sheet.
  • NewGM reflects $30.7 billion of goodwill where OldGM didn't have any;
  • NewGM reflects $14.5 billion of intangible assets where OldGM only had $0.3 billion; and
  • NewGM reflects $22.0 billion of stockholders' equity where OldGM had an $85.1 billion deficit.
I don't claim to be an expert in fresh-start accounting or the incredibly complex valuation estimates that generally accepted accounting principles require in a bankruptcy reorganization, but it strikes me as more than passing strange that a bankruptcy could create $45 billion in intangible asset values and stockholders' equity that didn't exist before OldGM failed.

Disclosure: None.

August 17, 2010

Opportunities In China's Extraordinary Battery Companies

John Petersen

Over the last couple years I've spent enough time in Asia to be fascinated by the growth opportunities and terrified by my own ignorance of the culture and the business dynamic. Since I know that I don't understand Asia, I tend to give Asian battery companies less attention than they deserve. Today I'll try to rectify that oversight. I'll also be adding New Energy Systems Group (NEWN) to my Chinese companies tracking list with a start date of June 30th.

The first Asian company most investors think of when you mention batteries is BYD Co. Ltd (BYDDF.PK). In my view, BYD is not a battery company. Instead, I view it as an automaker and cellphone component manufacturer that just happens to make some batteries. For the year ended December 31, 2009, BYD reported approximately $3.2 billion in automotive sales, $2.2 billion in cellphone component sales and $687 million in battery sales.

BYD gained a very high profile in 2008 when Warren Buffet's Midamerica Energy Holdings bought 225 million shares for $1.17 per share. At December 31, 2009, the 2.28 billion BYD shares outstanding had a net book value of approximately $1.22 per share. For the year, BYD reported a consolidated net income of approximately $0.26 per share, which works out to a net margin of roughly 10.4%. Based on the 2009 numbers, BYD's current stock price of $6.26 per share works out to 2.5 times annual sales, 5.1 times book value and 24 times earnings. While I don't necessarily think these market multiples represent a fair value, I do believe they can be used as a bright-line standard for comparing the relative valuations of the pure-play Chinese battery manufacturers.

The Chinese battery manufacturers I've tracked for the last year include Advanced Battery Technology (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). I originally excluded New Energy Systems from my list because it was a small manufacturer of battery components. Since last December New Energy Systems has bought two new subsidiaries, become a significant battery manufacturer and upgraded their market listing from the OTCBB to the Amex. Therefore I've decided to add New Energy Systems to my tracking list effective June 30, 2010.

The following table uses BYD as the comparison standard and shows how the market valuations of the pure play Chinese battery companies stack up.

8.17.10 Chinese.png

Of the five pure play Chinese battery companies, the one that worries me the most is China BAK because its working capital is inadequate and its operating losses are substantial. The others are well-capitalized and exercise remarkable restraint when it comes to spending. My personal favorite in the group is ABAT, which started out as a lithium-ion battery manufacturer and has recently implemented a vertical integration into the electric two-wheeled vehicle market. My second favorite is China Ritar, which makes lead-acid batteries for a variety of applications.

While I'm still a bit provincial when it comes to my own portfolio because I don't understand Asia well enough, there are at least four pure-play Chinese battery companies that deserve serious consideration from investors who want the international exposure in a vibrant and rapidly growing sector.

Disclosure: None

August 15, 2010

Earnings Season Surprises In Energy Storage

John Petersen

Now that the earnings season is almost over, a review of surprises in the storage sector seems appropriate. Before digging into performance surprises, however, I want to share a surprising excerpt from "Reinventing Capitalism: How to jumpstart what the marketplace can’t," an interview with Bill Gates that served as the closing presentation at this month's Techonomy 2010 Conference. While I commend the entire video for those who have 50 minutes to spare, I was particularly intrigued by Mr. Gates response to a question about whether we could reasonably hold out hope that Moore's Law class gains would occur in energy technology.

"Now and then yes, but we’ve all been spoiled and deeply confused by the IT model. You know chip scaling - exponential improvement - that is rare. Now we do see it; we see it in hard disk storage, fiber capacity, gene sequencing rates, biological databases, improvement in modeling software – there are some things where exponential improvement is there. If you believe Ray Kurzweil he takes it and says OK all of technology is subject to that and therefore, mankind in 2042 will be replaced by robots. That’s the, you know, positive view, which I think goes too far. ...

The more realistic view is what you’ll see in Vaclav Smil in terms of writing about energy. He has Thomas Edison reincarnated and he says OK what would Thomas Edison be surprised about and not surprised about? Light bulbs that screw in? He did that screw in thing. Lead-acid batteries? Very similar to what Edison did - no surprises. So you say “oh no, batteries have improved.” They haven’t improved hardly at all and there are deep physical limits. You know I’m funding five battery startups. There’s probably fifty out there. That is a very tough problem and intermittent energy sources force you into that problem. And it may not be solvable in any sort of economic way. There is no one that you look at and say has those pieces together.

So we’re fooled by this, you know. Supersonic transport, OK that was a nice thing in the past. There are things that don’t move forward and energy, nuclear energy, you know, stopped in the 1970s, by and large that got shut down. So this latest Smil book Energy Transitions really is eye opening when you see how long and hard it is for change to take place. So we have to have a blended model of the optimism that we get from our IT thing and the realism that the energy sector teaches us through its history."

In late-July I argued that the origins of specious battery cost forecasts were political and ideological rather than scientific, and drew vitriolic comment from scores of readers who've bought the mythology and think me out of touch with the way technology develops. It's more than a little gratifying to see a man with the technical stature of Bill Gates joining me in the Luddite camp and cautioning that while we can expect baby steps, the giant leaps for mankind will be few and far between.

In general the earnings season turned out pretty much the way I expected it would. The following table includes some key market metrics for the companies I follow that have recently reported earnings.

8.15.10 Summary.png

Ener1 (HEV) finished the quarter with $5.8 million in working capital, which pales in comparison to its losses over the last 12 months, the $100 million in additional company-funded capital spending that will be required under the terms of its ARRA battery manufacturing grant and an unknown amount of company-funded capital spending that will be required if its ATVM loan comes through. While Ener1 has been able to cover its funding requirements to date with a variety of stopgap financings, its balance sheet is a couple hundred million dollars light for its capital spending plans and I think that's a dangerous position when the capital markets are mushy.

A123 Systems (AONE) spent more money and generated less revenue than the analysts expected, and was punished for it. After adjusting A123's cost of goods sold for unabsorbed manufacturing costs, the hard cost of batteries sold to customers during the quarter was $970 per kWh – a far piece from the sub-$400 costs that will be required if it hopes to sell batteries for $500 per kWh by 2015.

Exide Technologies (XIDE) took a significant beat-down for reporting its best first quarter performance in five years. What observers have failed to note is that on a trailing twelve month basis Exide has reported net income of $33 million and the first two quarters of its fiscal year are historically weak due to the cyclical nature of its automotive battery business. Given the trajectory of its performance over the last year, I fully expect Exide to be solidly profitable by the time its next annual report comes around.

While it's not included in the summary table because its fiscal cycle is a month out of synch, C&D Technologies (CHP) has traded down to point where its $14.8 million market capitalization represents 20% of its working capital and 39% of its book value. C&D had a few ugly years while they were restructuring their business and building a new factory in China. Since the Chinese factory is now on line and capacity utilization is building rapidly, my sense is that the current selling pressure is likely coming from institutions that either can't or won't carry sub-$1 stocks on their books. With a market capitalization that's 4.3% of trailing twelve-month sales I tend to believe that C&D is an extraordinary speculation, particularly when you consider that Enersys (ENS) trades at 71% of sales and their business model is very similar.

The big question mark for the coming week is whether President Obama will be bearing gifts when he visits ZBB Energy (ZBB) on Monday. While ZBB was not included in my summary table because it uses a June 30 fiscal year and won't report till late-September, this is another company that trades at a surprisingly low market capitalization of $13.1 million. When I consider ZBB's current market capitalization in light of the numbers that frequently accompany a pre-election presidential visit, it could be fun to watch.

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

August 13, 2010

PFB Corporation (PFB.TO,PFBOF.PK)

Tom Konrad, CFA

PFB Corporation is a manufacturer of energy efficient building materials, including SIPD and ICFs, based on expanded polystyrene.  The company's sales have fallen in response to the housing downturn, but less so than most of the housing industry, despite a strong balance sheet and cash flow.  I consider the stock a buy below C$6.

NOTE: I'm taking a break in order to take a trip to California for some vacation and to moderate a panel at the San Francisco Moneyshow.  This article was written in January 2010, but I delayed publication for seven months because the company is very thinly traded, and I was still adding to my position.  In July and early August, the stock fell decisively below C$6, due to losses caused by the moribund market for new homes in the first half of 2010.   I saw these losses as providing the opportunity I needed to complete my planned purchases of this very thinly traded stock.

When Bill Paul called PFB Corporation (PFB.TO/PRBOF.PK) an "energy efficiency play" whose managers have the "demonstrated ability to control costs (and maintain the regular 6-cent-a-share divided payout) in tough economic times," he instantly had my attention.  Pure energy efficiency companies are rare, and managers' ability to control costs is priceless.  Any energy efficiency stock which has managed to maintain liquidity (not to mention a dividend) in the current downturn is worth a look.

I look for four things in a stock:

  1. A good business. 
  2. A strong balance sheet and cash flow that can allow the company to continue executing its business model when external financing is scarce. 
  3. Competent and honest management with both an understanding of the business and a record of straightforwardness with shareholders and analysts. 
  4. A good value for the money.

The Business

PFB manufactures products based on Expanded Polystyrene (a.k.a. Styrofoam, or EPS,) including Structural Insulated Panels (SIPs) and Insulated Concrete Forms (ICFs) for the green building market.  I first heard of both SIPs and ICFs in a course on homebuilding I took in 2003, and I left the class confident that I would use one or the other if I ever designed my own home.  

For new buildings, SIPs and ICFs are among the simplest and most practical ways to erect a well-insulated building quickly.  SIPs easily achieve high R-Values with minimal air leakage, while ICFs have many of the same advantages as walls, but have the additional advantage of being fireproof and extremely strong.

With a green building code improving the baseline, and green buildings taking a larger market share, PFB's products are in the right place in the housing industry, even if the housing industry is not the best industry to be in.  While neither SIPs nor ICFs are exclusive to PFB, the company has invested in making sure that their products are listed in many local building codes in North America.

I like the business, despite the fact that the market for EPS products, including SIPs and ICFs are competitive, and the company is vulnerable to continued weakness in the North American building industry.  

Balance Sheet and Cash Flow

The company carries little debt, which it has reduced slightly since the onset of the financial crisis, despite a decline in revenues.  It has strong cash flow from operations and current ratio of current assets to current liabilities.  It has a small (relative to the size of the company) pension deficit.  This deficit worsened by the 2008 market crash, but it remains small compared to cash flow.  Furthermore, the last evaluation of the pension deficit was conducted on March 31, 2009, near the stock market bottom.  I anticipate that the next evaluation will show a reduction in the pension deficit due to improved market conditions.  Although the company has relatively little debt, it has extended its credit facilities during the year, although these facilities remain mostly unused.  This should provide them with an additional cushion in case building industry conditions worsen.

Profits are sensitive to input costs, which are mostly denominated in dollars, as well as oil and gas prices, which are major components of cost of goods.  Declining energy prices in 2009 have meant that the company has been much more profitable in 2009 than in 2008, despite a 16% decline in sales.  About 4/5 of PFB's sales are in Canada, which helped insulate the company from the more severe housing downturn in the United States.  

My back of the envelope estimate is that the company would be close to break even if energy prices returned to 2008 levels without any increase in sales volume.  I don't expect this scenario to occur, and so expect the company to remain profitable in 2010, with a good chance of improving profitability.  Although higher energy prices may hurt the company in the short term, over the long term high energy prices will increase demand for green building products as a share of building materials, which will in turn help PFB.

For US investors, the company's sensitivity to the dollar is an advantage.  PFB's profits increase with a falling dollar, which means that gains in PFB's stock price may somewhat offset losses in the investor's purchasing power that result from a declining dollar, and if the company is hurt by a strong dollar, the US investor will be better able to bear any losses because of his general increase in purchasing power.


With a small company such as PFB with little management coverage, it is often difficult to get an accurate idea of management quality.  That said, those indications that I do have are good.  One sign I look for is complex financial structures or excessive related party transactions when reading the annual reports.  I found both the 2008 annual report and the most recent quarterly report (Q3 2009) commendably straightforward and easy to understand.

I was also pleasantly surprised that although all outstanding employee incentive options are considerably out of the money (weighted average execution price C$8.45) the company has not felt the need to revalue these options downward or issue new options at lower strike prices, despite the decline of the stock price from C$12 in 2006 to C$8 in 2008 to below C$6 today.  Option based compensation is charged as an expense against income based on a Black-Scholes valuation at the time of issuance, which, due to the decline in the stock price since options were last issued most likely overstates the value of the options and in turn depresses income.

I recently read Dan Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions.  It contains a chapter towards the end on how we actually end up making moral decisions, and it's rather depressing reading for any of us who want to think the best of our fellow man, any company's management, or ourselves.  But one conclusion he draws is that nearly everyone acts much more responsibly when they've recently been thinking about morality, in any form.  With this in mind, I think it's worth noting that PFB displays their corporate Code of Business Conduct and Ethical Policy fairly prominently on the website.  Just having such a code does not necessarily mean much, but the fact that they have one puts them a big step ahead of the many small companies that don't.

Value for Money

The company has a C$0.06 quarterly dividend which I expect it to maintain for the foreseeable future, which translates into a healthy dividend yield of about 4.5% at the C$5.35 price at which I bought most of my shares.  Given the uncertain future of the housing industry, I'm uncomfortable predicting future earnings, but I expect the company to be able to survive a sustained downturn, which would improve its competitive position in the industry.  If the housing market remains stable or recovers slightly without outsized increases in oil and natural gas prices, the company should be able to maintain earnings of C$0.30 to C$0.45 per share, giving a P/E ratio in the 12-20 range, and allow the company to maintain a share price in the $4-$6 range.  Rosier scenarios should produce large increases in profits, which ranged from C$0.60 to C$0.92 per share during the 2005-7 housing boom.  Those levels of profitability need not require a return to the housing boom since a growing market share for green building is likely to increase the market of PFB's products even in a flat housing market.


The biggest negative for PFB is the company's liquidity.  Less than $10,000 worth of shares trade on a typical day.  This means that even one investor with a decent amount of money to invest could significantly raise the price of the stock (or drop it when selling.)  Because of this, I decided to leave PFB out of my Ten Green Energy Stocks for 2010, even though I think it's a better value (at C$6 or less) than the three energy efficiency stocks in the list. The problem is, very few readers will be able to buy this stock at that price, and my annual list is so widely followed that most readers would have ended up overpaying. 

I decided to sneak this article in with a bit less fanfare, to let my most loyal readers get the first chance.  But be careful!  With a stock this thinly traded, you should almost certainly use limit orders to avoid overpaying.


Positives: Energy Efficiency business.  Profitable, decent cash flow, minimal debt.  Reasonable valuation.  C$0.24 annual dividend (4% at C$6).  

Negatives: Very thinly traded.  Housing industry.

Recommendation: Buy below C$6.00, unless homebuilding gets even worse than it is now.

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.

August 09, 2010

The Best Peak Oil Investments: Bicycle and Scooter Stocks

Tom Konrad CFA

When gas prices rise, more people turn to bicycles for transportation.  Will these bike and scooter stocks ride in the oil price's slipstream?

UPDATE: Here is an article on one more bicycle stock that should have been on this list: Shimano (SHMDF.PK).
A 2008 survey of bicycle retailers found that the vast majority of bike store owners felt that their sales had increased because many people were turning to bicycles for some of their transportation needs because of high gas prices.   95% of store owners reported that they had new customers because of high gas prices.
Survey graphic
While few people can completely replace their car with a bicycle, many people can make some trips on two wheels and human power.  And 2008 is not the first time we've seen a surge in bike sales along with a surge in oil prices: the all time record for annual bike sales was in 1973, during the last oil crisis.  If future gas prices return to the levels seen in 2008 and stay there, we should not be surprised to see a sustained increase in the use of bicycles for transport, as well as a rise in the purchase of bikes, bike parts, and accessories. 

One fly in this ointment is that the biggest increases  in sales for bike retailers during 2008 were in service and repair, followed by new bikes and accessories.  Bicycle manufacturers saw increased sales in 2008, but not as large as the increases in ridership, because much new ridership came from cash-strapped individuals dusting off old bikes and getting them in shape to run errands or commute.  I think it will take a longer sustained rise in oil prices than we saw in 2008 to permanently shift the transportation landscape towards bicycles; investors should not expect perfect (or even near-perfect) correlation between oil prices and bike company profitability. 

Bike Stocks

Babies to Bikes- Dorel Industries

Dorel Industries, Inc (DII-B.TO, DIIBF.PK) is primarily a manufacturer of juvenile (baby) and home products, but in 2004 they began acquiring bicycle manufacturing and related businesses with the purchase of Pacific Cycle.  They now own Cannondale, GT, Schwinn, and several athletic apparel and accessory brands such as SUGOI.  This segment accounted for $681M or 32% of 2009 sales, up from 30% in 2008.  So while bicycles are currently less than a third of sales, they are growing in importance.

In terms of valuation, 2009 earnings were $3.21 per share, easily justifying the recent $33 share price with a trailing P/E ratio of slightly over 10. Dorel has relatively little debt at only 36% of equity and good liquidity ratios, but does not pay a dividend.  Overall, the low valuation and strong balance sheet are good compensation for the relatively small fraction of sales that come from bicycles.

USA Today comic - Schwinn
from Dorel's 2009 Annual General Meeting presentation

Taiwan's Giant of Bike Manufacturing

Taiwan's Giant Manufacturing (GTMUF.PK, TWSE:9921) is the world's largest bicycle manufacturer, with $1.2B in annual sales, twice Dorel's bicycle sales.  Giant began as a low-cost manufacturer in 1972, getting its start with an early order from then-independent Schwinn.  Today, Giant makes everything for every market, including racing bikes with world-class technology to cheap volume bikes churned out in low-cost factories in China. 

Giant's sales fell slightly in 2009 with the slowing economy and lower gas price, but improved margins meant that earnings per share held constant.  Giant pays a dividend; it was TWD 4.5 dividend in 2010.  The company's stock price is currently trading around TWD 100, having doubled since its March 2009 low.  With no long term debt, this company is well positioned for an oil-induced increase in bike sales, even if the oil price increase also undermines overall economic growth.   Although the trailing P/E ratio is still a reasonable 15, I feel the stock has room to fall because of the recent run up if the current stock market decline continues.

A Scooter Stock: Piaggio
The First Commercially Available Plug-in Hybrid is an Italian Scooter

Piaggio & C.S.p.A. (PIA.MI, PIAGF.PK) is the leading manufacturer of motor scooters under the Piaggio's and Vespa brands.  Where bicycles are more likely to replace the car on short errands than everyday commuting, a scooter will be a practical option for many commuters hoping to reduce their fuel costs.  Piaggio scooters get between 50 and 100 MPG, and the company has even released a high-end plug-in hybrid scooter, the MP3 300ie in Europe.  After the initial version flopped due to too little power for too high a price, Piaggio has given it a larger engine and power to match the 9000 euro price tag.  Even with the larger engine, the hybrid 300ie still gets 141 MPG.

With the stock price at EUR 1.92 Piaggio's Price/Earnings ratio was a reasonable 14, especially if the analyst consensus of a long term growth rate of 30% is correct.  Year over year earnings growth was over 40% in the last year.  The company also boasts a 3.65% dividend yield. 

Electric Bikes and Electric Scooters

Chinese Lithium-Polymer battery and e-bike/electric scooter manufacturer Advanced Battery Technologies (ABAT) was my top pick in my recent  in my article Six More EV and HEV Stocks.  I concluded that about 50% of the company's revenues come from e-bikes and electric scooters, and the company's valuation seems very attractive.  Follow this link for more detail.


For the investor looking for an investment in two-wheeled transport, Giant and Piaggio are attractive pure-play options, and ABAT has an attractive valuation.  These alternative transport companies provide relatively low-cost alternatives to the car that have benefited in the past from rising oil prices.  All three are profitable and don't have excessive debt; Giant and ABAT have no long term debt.  Piaggio pays a decent dividend, but is probably the riskiest of the three given its debt burden.

Because scooters cost considerably more than bikes, Giant would probably be the best investment if rising oil prices exacerbate the weakness of the economy, and people have very little money to spend.  Piaggio would likely perform better if the economy is relatively strong even as oil prices rise.  Advanced Battery Technologies falls somewhere in between the two.

The data in this article comes mostly from third party sites such as Morningstar and Reuters, so I would not make a decision without first investigating each company in more detail. 

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.

August 04, 2010

The Best Peak Oil Investments: Six More Electric Vehicle and Hybrid Electric Stocks

Tom Konrad CFA

My Ten Electric Vehicle (EV) Stocks article drew considerable attention and comments, including suggestions for stocks that did not make the ten.  Here are my takes on the EV stocks suggested by readers.

All of these companies do have something to do with electric vehicles (EVs) or hybrid electric vehicles (HEVs), but many were omitted from the original list because EV and HEV exposure was quite small as a fraction of total revenue.  This matters because, even when a small segment of a company is growing rapidly, it can have very little effect on the company's overall performance.  For instance, if a company gets 5% of its revenues from its EV-related business, and the revenue from this segment doubles, that doubling will only produce a 5% rise in overall revenues.  The company's overall performance is likely to be dominated by other segments if its revenue and earnings are dominated by other segments.

Rogers Corp (ROG) - suggested by Andy Nagle.Rogers logo
Rogers provides products and materials to "a variety of markets, including portable communications, communications infrastructure, consumer electronics, mass transit, automotive, defense and alternative energy" according to the company.  I believe that Andy recommended this one because they compete with CPS Technologies Corp. (CPSH.OB) (mentioned in Ten EV Stocks.)  CPS Technologies also supplies advanced materials for mass transit, wind turbines, and electric and hybrid electric vehicles.  Rogers Corp seems to be more (but not exclusively) focused on high performance foams, while CPS focuses on combinations of metals and ceramics.  Roger's segment breakdown was unhelpful in determining how much of the firm's revenue comes from these alternative energy segments, but most of these seem to fall in their "Custom Electrical Components" segment, which was about 13% of revenues.  If half of this revenue comes from alternative energy, that's still too little to interest me in the company.  Opinion: Not interesting from a peak oil investing perspective.

Capstone Turbine (CPST) - suggested by Robert B FergusonCapstone logo
Capstone has a patented technology for micro turbines which allow for the relatively efficient combustion of gaseous and liquid fuels at a smaller scale than is possible with conventional turbines.  In the past, I've highlighted Capstone as a potential beneficiary of a move to distributed combined heat and power or cogeneration applications.  Over the last couple years, the company has also been pursuing opportunities as a generator for hybrid electric vehicles, with an emphasis on larger vehicles such as boats, buses, and trucks.  With the exception of buses, Capstone's HEV applications are still in the demonstration stage, but the many other applications for micro turbines in stationary distributed power should be interesting to investors looking for a broader exposure to alternative energy.  Both DesignLine and EcoPower Technology have developed buses using Capstone's 30 kW turbines.  DesignLine has received an initial order of 90 HEV buses incorporating Capstone turbines from the New York MTA.

Unfortunately, Capstone is not profitable and has little prospect of reaching profitability with current cash on hand.  Opinion: Avoid until financial position improves.

Advanced Battery Technologies (ABAT) - suggested by Deepfryer999ABAT logo
I left this Chinese Polymer Lithium-Ion battery company with an interest in electric bicycles and mopeds off my first list not because it does not deserve to be there, but because John Petersen, who also writes for AltEnergyStocks, covers battery companies (including ABAT) for us.  John will probably forgive me for this brief foray into his territory, but check the comments, because he'll also correct me if I get something wrong.

In my opinion, battery companies are among the better ways to play EVs and HEVs, because the market for such vehicles is still very young leading to a lot of uncertainty as to which EV manufacturers will succeed.  In contrast, the market for batteries is established, with many existing profitable companies, and electrified vehicles represent a large new source of demand for the industry's products.  If EVs are a flop and that demand fails to materialize, battery companies will be hurt due to what will turn out to be overbuilding in anticipation of large demand for batteries and government incentives.  On the other hand, a single EV requires so many batteries that if electric vehicles do become popular, the industry will have trouble keeping up with demand: even HEVs alone should be able to accommodate the increased battery manufacturing capacity.

Turning back to ABAT, the company is profitable and has a solid balance sheet.  At the recent price of $3.54, it has a trailing P/E Ratio (9.1) and Price/Book Ratio (1.75) of a value stock.  ABAT acquired Wuxi ZQ, a manufacturer of electric bikes and scooters in May 2009 for an approximate 4.5% ownership stake in ABAT.  Wuxi ZQ is exporting thousands of two wheeled EVs (2WEV) to the US.  According to the most recent quarterly statement, batteries for EVs account for 46% of ABAT's battery sales.  Although the company did not break out the value of 2WEV sales, we can assume that about half of the company's revenues are attributable to EVs.

Opinion: A good prospect for further research.

Toyota (TM) and Nissan (NSANY.PK) - suggested by Big Bear Lake Hostel
In  2009, Toyota sold 195,545 hybrids and no EVs, out of total sales of 1,770,149 vehicles, or 11% of sales.  The 2011 plug-in hybrid Prius will likely have limited runs as Toyota becomes comfortable with plug-in technology.
Nissan has only one hybrid model, the fun-to-drive Altima Hybrid (I speak from experience when I say it's fun to drive: my wife has one.)   With one model available in only 9 states, Nissan sold only 842 hybrids in 2009.  I could not find annual sales numbers for 2009, but the company expects to sell 850,000 units in 2010, which means that 2009 hybrid sales would be only 0.1% of total 2010 sales.  Nissan's hybrids are not the reason people are excited about the company: the excitement surrounds the rapidly selling Nissan Leaf EV.  Nissan now has 17,000 reservations for the Leaf, but only half of those are in the initial launch markets, and most of those are unlikely to be delivered in 2010.  While Nissan claims that Leaf production capacity "will soon approach 500,000 units per year," more likely sales numbers will be shaped by the number of reservations in target markets: perhaps 5,000 Leafs in 2011, or less than 1% of total auto sales.
If either of these car companies can be considered an EV or HEV company, it's Toyota because of its success delivering hybrids, but with the recent quality problems of the Prius, I expect Prius sales to fall as a percentage of total Toyota vehicles sales in 2010.  Opinion: Toyota and Nissan are best analyzed as conventional car companies, not EV or HEV companies.

Chargeport for Nissan Leaf EV
Charge port for Nissan Leaf EV

Enova Systems (ENA) - suggested by InvestingfunEnova Systems Logo
Enova makes drive systems for electric and hybrid electric buses, medium and heavy duty commercial vehicles, stationary power generation systems, train locomotives, transit buses, and industrial vehicles, as well as for light, medium, and heavy duty trucks. It also makes power management and power conversion components for stationary distributed power generation systems, so from the perspective of exposure to electric vehicles, Enova is extremely well placed.  I especially like the exposure to heavy vehicles which I consider well-suited to electrification, and the exposure to alternative transportation in the form of trains and buses.  They have an impressive line-up of deals, including with Smith Electric Vehicles, the development of an electric drive system with Remy, Inc., and a hybrid school bus order all announced in the last few months.

Unfortunately, Enova is still a long way from profitability and most likely will need to raise additional funds within a year.  Unless the financial climate improves, such fund raising will be at the expense of diluting existing shareholders.  Opinion: Avoid until financial situation improves.


The only company in this list I would consider buying is Advanced Battery Technologies, since all of the others are either unprofitable and in need of outside funding, or not firmly in the electric vehicle space.  If you are looking for a Tesla (TSLA) at a better stock valuation, you would do well to research ABAT, as well as the three decent prospects I found among my previous list of ten EV and HEV stocks.

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.

August 02, 2010

Energy Storage and the Edison Blowback

John Petersen

Last week I stumbled across a disturbing quote from Thomas Edison that was published in February 1883.
"The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. ... Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying. ... Scientifically, storage is all right, but, commercially, as absolute a failure as one can imagine."

When I overcame my nausea and began researching the business dynamics of the day, several parallels between 1883 and 2010 emerged with striking clarity, providing a useful object lesson for investors.

Edison invented the light bulb in 1879 and established the first investor-owned electric utility in 1882. The Pearl Street Station began operations in September of that year and Edison's primary concern was improving service reliability for 85 lamps in lower Manhattan. Battery backup was the logical solution, but the technology of the day couldn't stand up to the demands of a power plant.  Battery manufacturers promised more than they could deliver and the consequence was a phenomenon I'll refer to as the Edison Blowback, a disillusioned and angry high-profile customer who said some really nasty things to the press.

Edison's disgust with the battery industry ultimately led him to develop a nickel-iron battery in 1901. It became the battery of choice for vehicular transportation until the first generation of electric cars drowned in a sea of cheap and plentiful gasoline. While I've found nothing to suggest that Edison mourned the death of the electric car when internal combustion engines established their superior economics, flexibility and usefulness, he was reportedly upset that nickel-iron lost out to lead-acid as the chemistry of choice for starter applications. After a long and storied history, the last U.S. factory for nickel-iron batteries was closed in 1975.

Our power infrastructure and transportation system might have evolved differently if cost-effective storage had been available in Edison's day. But he couldn't solve the problem and we had to find a workaround. A hundred and thirty years later, cost-effective large scale energy storage remains a seductive but highly elusive goal.

Today, as we stand at the dawn of the Age of Cleantech, large-scale energy storage is once again seen as a key enabling technology for wind and solar power, the smart grid, efficient transportation and a myriad of other applications. Once again battery manufacturers are focusing on overcoming technical hurdles that have thwarted researchers for over a century. Once again imagination is running wild with visions of instantaneous technical progress and immense commercial potential. Once again, it seems that battery developers are ignoring the cost and complexity of developing large scale energy storage solutions and promising more than they can deliver.

I guess Mark Twain was right when he quipped that "history doesn't repeat itself, but it does rhyme."

Until the 1970s, there were two common types of batteries. Rechargeable lead-acid batteries did the grunt work of starting cars and providing backup power while dry cells were used for flashlights, toys and transistor radios. Valve regulated lead-acid (VRLA) batteries were invented in the mid-70s and quickly became the preferred technology. They worked so well that R&D spending on lead-acid batteries collapsed. At about the same time, new rechargeable battery chemistries including nickel cadmium, nickel metal hydride and lithium ion emerged on the scene. Since advanced batteries had immense potential in portable electronics, R&D spending on those chemistries soared, particularly in Asia where the electronic devices were made. The trend continued through the turn of the millenium because lead-acid batteries were good enough for the work they needed to do while advanced batteries for portable electronics were not.

Over the last decade, a new dynamic emerged as people started coming to grips with the amount of energy they waste. Today we're witnessing a seismic shift in the energy storage sector because none of the technologies we used the past is cheap enough, durable enough, big enough or robust enough to meet the demands of an energy efficient future. In response to this market dynamic, companies throughout the energy storage sector have:
  • Launched new R&D programs to improve lead-acid batteries;
  • Refocused R&D to develop bigger and cheaper lithium-ion batteries;
  • Increased R&D on novel battery chemistries and nano-materials; and
  • Devoted new R&D resources to physical storage systems like compressed air and flywheels.
The challenge is a classic conflict between technology and economics. Cheap chemistries like lead-acid are not durable enough to serve the storage needs of an energy efficient future and durable chemistries like lithium-ion are not cheap enough. We desperately need disruptive innovation to fill the gap and the billion-dollar question is which outcome is more likely:
  • That a cheap and simple chemistry like lead-acid can be made more durable, or
  • That an expensive and complex chemistry like lithium-ion can be made cheaper?
If history is a guide, the safer bet is that the cheaper technology will progress more rapidly. The following graph is based on the work of Clayton Christensen and shows how disruptive technologies emerge, evolve and mature.

Disruptive Technology.gif

When you consider the natural evolution of disruptive technologies, factor in a 25-year period from 1975 to 2000 when lead-acid R&D was suspended while lithium-ion R&D was charging forward at breakneck speed, and consider the vast differences in raw materials requirements and natural resource availability, the conclusion that lead-acid is better positioned to fill the gap is persuasive if not compelling.

We live in an age of distorted expectations that have arisen from a universally recognized need for cost-effective large-scale energy storage. Lithium-ion battery technology will undoubtedly progress, but it will progress more slowly than people expect and as the inevitable delays, cost overruns and disappointments accumulate, another Edison Blowback is a virtual certainty. Lead-acid battery technology will also progress, but that progress will come as unexpected good news to a public that has low expectations for the technology. In time, incremental improvements in both technologies will cover the middle ground and relative valuations will equalize.

Great investors avoid the herd and focus on undervalued companies with a bright future. Herd followers that pay premium prices too early don't fare as well. As the cleantech revolution unfolds I believe every company that brings a cost-effective storage solution to market will thrive. The big upside surprises, however, will come from the lead-acid battery complex including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB).

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

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