Valuation Primer For Energy Storage Companies – Lesson #2
On November 6th I published Lesson #1 in this series, which provided a quick side-by-side comparison of Ener1 (HEV) and Exide Technologies (XIDE). Yesterday two more companies that I track, A123 Systems (AONE) and Enersys (ENS), reported results for the September quarter. The quick summary is that Enersys handily beat street estimates while the bleeding at A123 continued unabated.
To follow up with the format I introduced last week, the first graph is a simple market performance comparison of the two companies over the last year.
The second graph comes from my quarterly tracking data and compares the relative market capitalizations of the two companies since September 2009.
The following table compares the balance sheet fundamentals of the two companies, their income statement performance over the last twelve months, and some important per share valuation metrics.
The final table presents A123's reported product shipments, sales revenue, cost of products sold and unabsorbed manufacturing costs over the last year, both as gross numbers and on a per kWh basis.
I pay special attention to reported revenue and cost data because it's so far out of sync with happy-talk stories in the mainstream media about rapidly falling lithium-ion battery prices. A successful manufacturing enterprise must have a spread of 20% to 30% between unit cost and unit revenue to pay operating overhead and generate a profit. With a $1,010 per kWh average unburdened cost of products sold over the last five quarters, A123 would need to charge its customers between $1,250 and $1,450 per kWh, which is a far cry from the $500 per kWh short-term target for electric car batteries I keep reading about. Barring a visit from the manufacturing cost fairy, I can't see how savings of that magnitude are possible over the next few years. I certainly haven't seen any real progress over the last five quarters.
One could argue that this week's comparison between A123 and Enersys and last week's comparison between Ener1 and Exide are unfair because the lithium-ion battery developers are emerging technology companies while the lead-acid battery manufacturers have global footprints, decades of experience and immense financial muscle. The fallacy in that argument is that lithium-ion battery developers are trying to displace well-established lead-acid battery manufacturers with modest form factor advantages and immense product cost handicaps.
For the last couple of years, the mainstream media has waxed prophetic on the ability of lithium-ion battery developers to slash costs and improve performance, while dismissing the possibility that there could be any significant improvement in lead-acid batteries because they've been around for 150 years. The reality is that lead-acid chemistry has been improving at a rapid pace over the last decade and third generation devices that combine carbon nanotechnology with lead-acid chemistry promise potentially disruptive gains in cycle-life, power and durability.
Since size and weight are irrelevant in most existing applications, electric vehicles can't become mainstream products without huge battery cost reductions, and the two chemistries will be competing for the same customer dollars, I'm convinced valuations in the lithium-ion battery sector are at or near the peak of inflated expectations depicted in the following graph from the Gartner Group.
Benjamin Graham observed that in the short-run the market acts like a voting machine but in the long run it acts like a weighing machine. As the weighing machine works its magic, valuation multiples in the lithium-ion sector are certain to decline while valuation multiples in the lead-acid sector remain stable or improve. Since the essence of successful investing is buying stocks when they're undervalued and selling them when they're overvalued, the message to serious investors seems clear.