Tom Konrad CFA
|The 2013 Lamborghini Aventador will incorporate Maxwell ultracapcitors. (Photo credit: Autoviva.com via Flickr )|
The headline was good: Maxwell Technologies, Inc. (NASD:MXWL) beat analysts’ third quarter (Q3 2012) earnings estimates by 10 cents on improved cost control and revenues in-line with analyst expectations (up 7%). The good news stopped there, however, and investors are in a panic this morning (the stock is down $1.48 to $6.13 as I write) about some worrying comments made in the earnings call (transcript here.)
Worries About the Chinese Hybrid Bus Market
Revenue growth has been driven in recent quarters by ultracapacitor sales for hybrid buses and wind turbines, mostly in China. CEO David Schramm discussed worries about both of these markets in his comments. Part of the problem is uncertainty about subsidies and policy support from the Chinese government given the upcoming leadership change. According to Maxwell’s Chinese bus customers,
[O]n the one hand, subsidies will be made available to more cities across the country, and on the other, that the Probus subsidy is likely to be lower, shifting some of the investment burden to local and regional governments. Until the leadership transition takes place, and those anticipated adjustments are implemented and digested in the market, it is impossible to forecast future volumes with a high degree of confidence.
Worse, ultracapacitor sales for hybrid buses will be disrupted in Q4 because of potential mechanical problems which Maxwell’s engineers are currently working to fix,
[W]e become aware of some Hybrid Drive System application issues that are impacting our production schedules. There are mechanical vibrations in the system, higher than our module specification, which are causing interface and cabling issues. I should emphasize, that these issues are mechanical, not electrical. And our application engineers are now working with customers to resolve these interface issues, so that normal production can resume in the months ahead.
Potential integration problems like this can be extremely disturbing to investors, despite Schramm’s reassurances that they are mechanical and related to a new racking configuration which puts them higher in the bus. They have not caused by problems with the ultracapacitors themselves, and are not a problem with previous configurations. They expect this problem to be resolved by the end of Q1 2013, with improved sales growth again in Q2 2013.
The European Auto Market
Hopes for large sales for stop-start idle elimination technology to European automakers continue to be delayed because of Euopean economic weakness. Maxwell continues to make technical progress, with sales to smaller automakers like PSA PeugeotCitroen (Paris:UG, OTC:PEUGF) and Lamborghini, but a major automaker design win remains elusive, although a growing number of automakers are evaluating the stop-start systems.
The truck market is more encouraging, with an ultracapacitor based engine start module in field trials with ten large truck fleets. Since this is a drop-in replacement for standard Group 31 truck batteries, uptake should be very rapid once fleet operators appreciate the benefits. Maxwell plans to put significant sales efforts behind this product going forward.
IT and Wind
Maxwell’s IT markets have been down, following recent IT spending in the US, and this market does not have the growth potential to replace hoped-for sales in transportation.
The prospects for wind are much brighter. Schramm, said,
Wind turbine deployments in China appeared to stabilize following the government imposed slow down, we experienced in the second half of 2011. Looking ahead, China’s five-year plan calls for wind energy to account for 3% to 5% of the country’s total power generation by 2020. And the trend towards larger turbines and offshore installations favors ultracapacitors. So, we anticipate steadily growing demand for our products.
Altogether, Maxwell does not expect any sales growth over the next two quarters, which is a big disappointment to growth investors. However, long-term potential remains strong. The mechanical issue with racking in hybrid buses seems a hiccup, not a long term problem.
The recent slower than expected growth has given Maxwell the chance to streamline operations and get a better control of costs, which can be seen in the improved earnings number this quarter. Cost control will be very important going forward, and is often a problem for companies experiencing rapid growth. While the current slow-down has been disappointing, it sets Maxwell up to handle future growth much better, while allowing investors a very attractive entry point on the stock.
I had hoped that last quarter would have been the turning point for this battered stock, but that turning point is farther in the future than I expected. At this point, I think we’re going to have to wait another quarter or two before we again see rapid appreciation in MXWL, but I’ll be watching the stock with an eye to buying more at bargain basement prices as short term investors flee.
Disclosure: Long MXWL
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