Energy Storage: Q1 2012 Winners and Losers
The first quarter of 2012 was the best of times for shareholders of companies that are developing and manufacturing cheap energy storage products like lead-acid batteries, but the worst of times for shareholders of pure-play lithium-ion battery developers. The following table tracks stock price performance in the energy storage and electric vehicle sectors for the first quarter of 2012 and for the twelve months ended March 31st.
Long-term readers will notice that the current list is a good deal shorter than it was in March of last year because of my decisions to delete China Ritar Power (CRTP.PK), Advanced Battery Technologies (ABAT.PK), New Energy Systems (NEWN), C&D Technologies (CHHP.PK), Ener1 (HEVVQ.PK) and Beacon Power (BCONQ.PK) for reasons ranging from reporting deficiencies and changed business models to outright business failures. It's been a turbulent year.
The best performer for the year and the quarter ended March 31, 2012 was Tesla Motors (TSLA), a stock that investors either love - or love to hate. Tesla is trading at a 119% premium to its $17 IPO price and one of the market's most heavily shorted stocks. Where sell side analysts see upside potential to $49, more pragmatic types expect the price to collapse into single digits. While experience tells me that consensus among short sellers is usually right, only time will tell.
It was a solid quarter for several companies that were beaten down over the last year but started to recover some of their long-term price declines during the quarter. The lead-acid group in particular is performing very well. The only group that was down for both the year and the quarter were lithium-ion battery developers. That group's performance would have been even worse if I hadn't culled Ener1 after its public stockholders got flushed in a bankruptcy reorganization.
The following summary table shows how the surviving companies in my five tracking categories performed compared to broader market indexes.
My last table for the day provides a summary of some key financial metrics I like to focus on when performing a high level forward-looking analysis of the companies I track. The data is stated in millions, derived from the most recent SEC reports filed by the companies and adjusted for material events including financing transactions and extraordinary losses reported after the date of the most recent financial statements.
For companies with a history of losses, the first number I focus on is working capital. If a company can't cover expected losses for the next year and make planned capital investments with available funds, it will almost certainly be forced to seek new financing and that can be tough in a turbulent capital market. This year, only three of the companies I follow have clear working capital issues, a significant improvement from last year. While I've been impressed with its business development activities over the last year, I'm less impressed with ZBB Energy's (ZBB) financing activities, which have boosted its share count by 57% while the balance sheet treads water.
A second key metric is the difference between a company's market capitalization and its book value, which is commonly referred to as blue-sky. Public companies normally trade at a premium to their book value because intangible assets like intellectual property, human resources, industry experience, customer relationships and the like usually have no balance sheet value. When the blue-sky premium is inordinately high, it's a bright red warning flag. When the blue-sky premium is out of line on the low side, it can hint at significant upside potential.
To simplify comparisons among companies I like to calculate the ratio between blue-sky and book value. The result is a "BS to Book Ratio" that can be quite illuminating.
The most alarming BS to Book ratios in my tracking group, in fact the most alarming BS to Book Ratios I've ever seen, belong to Valence Technologies (VLNC) and Tesla Motors. Valence has a $60 million deficit in stockholders equity but it carries a market capitalization of $138 million, which makes its BS to Book ratio infinite. Tesla is a little better since it has $204 million in equity and $182 million in working capital, but it's sky-high market capitalization of $3.7 billion gives it BS to Book Ratio of 16.4. To put things in perspective, Apple has a BS to Book ratio of 5.2 and it's become the most successful tech company in history.
Companies with inordinately low BS to Book ratios include Exide Technologies (XIDE) and A123 Systems (AONE) which both trade at a 40% discount to book value. If you adjust A123's book value to include $128 million of ARRA grant proceeds that aren't reflected on the face of its balance sheet, the discount to book value is closer to 60%. While both companies have had more than their fair share of problems over the last few quarters, I continue to believe their market prices have fallen to very attractive entry points.
I believe a BS to Book ratio of one is healthy for large established manufacturers and that BS to Book ratios of up to four are reasonable for transition stage companies that have completed their principal product development and are focused on commercializing new technologies. Enersys (ENS) has had a strong run over the last two quarters but still has a way to go before it achieves parity with Johnson Controls (JCI). Since Maxwell Technologies (MXWL) is currently sporting a BS to Book ratio at the top of the reasonable range, I don't look for it to outperform the market on a go-forward basis. Active Power (ACPW), on the other hand, seems to have significant upside potential if its management can continue to execute. Baring unforeseen negative developments, Axion Power International (AXPW.OB) should be an easy double as revenues continue to ramp and advanced testing programs with a variety of first tier OEMs and battery users mature into orders.
The energy storage sector occupies a unique position global industry because it must prosper as humanity changes the ways it produces and consumes energy. For those who believe conservation of fossil fuels and waste minimization are key elements of our energy future, batteries are essential. They're also essential to a future powered by intermittent power from the wind and sun. No matter what you believe the path will be, the future simply can't happen without cost-effective energy storage. It's not just a desirable thing – it is an essential thing!
There aren't any silver bullet technologies or killer apps in the energy storage sector, but there are several emerging trends that will create new multi-billion dollar markets over the next few years. In that rapidly evolving environment, every company that can offer a cost effective product will have more customer demand than it can satisfy. As global demand for cost-effective energy storage increases, so will margins and profitability.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.