Earnings Season Surprises In Energy Storage
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.
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.