John Petersen
On June 8th Switzerland’s ABB Group Ltd. (ABB) announced an agreement to buy UK-based Chloride Group PLC (CHLD.L) for £860 million in cash, or approximately $1.26 billion. This stunning purchase provides the best evidence yet that lead-acid battery manufacturers including Enersys (ENS), Exide Technologies (XIDE) and C&D Technologies (CHP) are woefully undervalued and offer outstanding opportunity for patient and risk tolerant investors.
ABB is the gold standard in the secure and efficient generation, transmission, distribution and use of electricity in utility, industrial and commercial applications. Its portfolio ranges from light switches to robots, and from huge electrical transformers to control systems that manage entire power networks and factories. With 2009 revenues of $31.8 billion and income of $2.9 billion, you’d have to look long and hard to find a better infrastructure investment in the electric power industry.
Chloride is a highly regarded vendor of uninterruptible power solutions for commercial and industrial customers in Europe (78%), the Americas (10%) and Asia (12%). Chloride’s solutions and services protect business critical systems and processes from the effects of poor power quality and power interruptions prevalent in most world economies, both in developed and developing countries. Its products range from battery back-up systems to diesel generators, flywheels and fuel cells, but at the end of the day Chloride’s business is buying manufactured energy storage devices and integrating them into power systems that assure “Secure Power Always through leading technology and exceptional customer support.” Chloride buys all its batteries from well-recognized manufacturers including Enersys, Yuasa, C&D, Hoppecke, Fiamm, Exide and others. It should be a fine acquisition for ABB and significantly extend that company’s reach and depth.
The thing I found fascinating about ABB’s purchase of Chloride is the fact that a systems integrator with a fraction of the assets, equity and annual revenue was sold for cash at a far higher value than the market attributes to the original equipment manufacturers. The following table provides summary financial metrics for Chloride, Enersys, Exide and C&D for the trailing 12 months.
| Chloride | Enersys | Exide | C&D | |
| Service revenue | $182.1 | |||
| Product sales | $308.2 | $1,579.4 | $2,685.8 | $346.7 |
| Gross profit | $208.8 | $360.9 | $538.1 | $42.2 |
| Net income (loss) | $28.6 | $87.3 | ($31.6) | ($21.3) |
| Current assets | $189.3 | $895.3 | $1,042.8 | $138.6 |
| Total assts | $451.7 | $1,652.0 | $1,956.2 | $303.0 |
| Current liabilities | $154.0 | $419.5 | $613.8 | $61.0 |
| Total debt | $271.4 | $867.8 | $1,608.2 | $265.1 |
| Stockholders equity | $177.9 | $779.9 | $348.0 | $38.0 |
| Cash purchase price | $1,264.5 | |||
| Market capitalization | $1,154.6 | $407.5 | $23.7 |
When I study the table, I can’t help but conclude that either ABB is overpaying for Chloride, or the market is seriously undervaluing Enersys, Exide and C&D. The best explanation comes from the work of Benjamin Graham who observed, “in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” For the last couple years, the market has been showing its voting machine side. Over the next couple years I expect the weighing machine to emerge with a vengeance.
In addition to a striking disconnect between market potential and market value at the established manufacturer level, there are similar disparities in companies that are developing new technologies based on old-line battery chemistries. My favorite example is Axion Power International (AXPW.OB), which recently announced that it was launching a program with Norfolk Southern Corporation (NSC) to develop a battery management system that will facilitate efforts to retrofit part of Norfolk Southern’s fleet of 3,500 diesel electric locomotives as hybrid vehicles that operate partially on battery power and recharge their batteries through regenerative braking.
Since 2003, Axion has been developing a new technology that combines the positive electrode from a lead-acid battery with a negative electrode from a supercapacitor in a hyrid device that offers the power and cycle life of exotic battery chemistries at a lead-acid price. While Axion has been tight-lipped about the performance specifications and potential applications for its PbC® battery, it has been actively testing the device for hybrid electric vehicle, railroad and military applications for the last couple of years. At last month’s Advanced Automotive Battery Conference 2010, Axion unveiled the following graphs that compare the dynamic charge acceptance rates of conventional lead-acid batteries and its PbC battery, and show how lead-acid batteries deteriorate rapidly with
shallow cycling while the PbC remains stable.
The Norfolk Southern announcement is the first clear signal that the PbC battery has met or exceeded the battery performance requirements established by a top tier transportation customer and is now ready for the acid test of a locomotive prototype to demonstrate real world performance. With any luck, we’ll see comparable signals or outright design wins from one or more first tier automakers later this year.
The Axion – Norfolk Southern project is basically a retrofit counterpart to an OEM initiative that General Electric (GE) kicked off in May of 2009 when it announced plans to build a $100 million plant to make molten salt batteries for use in its ecoimagination hybrid locomotives. While the long-term potential of the retrofit market is not as attractive as the OEM market, there are roughly 24,000 diesel-electric locomotives in the current U.S. fleet and retrofits could cut their fuel consumption by up to 10%, or about 450 million gallons of diesel fuel per year, while improving their emissions profile by an even wider margin. Since locomotive retrofits will cost about $500,000 each by the time you include batteries, battery management systems and other control electronics, the potential revenues from this niche market are on the order $10 billion spread over several years, which doesn’t look too bad along side Axion’s market capitalization of $68.6 million.
Since July of 2008 I’ve been writing a regular blog on the manufactured energy storage device sector and the various technologies that will be fundamental enablers of cleantech, the sixth industrial revolution. A complete archive of my articles is available on Seeking Alpha. My consistent message has been that many companies that are developing gee-whiz technologies for plug-in vehicles are overvalued while the lead-acid sector offers great value in companies like Enersys and Exide, and significant speculative potential in companies like C&D and Axion.
When companies like ABB pay premium prices for lead-acid battery integrators like Chloride and companies like Norfolk Southern join forces with lead-acid battery innovators like Axion, the conclusion is clear; the king of energy storage technologies is alive and well and lead-acid battery companies are well positioned to provide market beating returns for risk tolerant investors over the coming decade.
I’m not a disinterested observer. I’m a former director of Axion and own a huge block of its common stock. Since I know that I can only speak from the perspective of the shoes I stand in, my archived articles include extensive links to third-party source documents that can be very useful due diligence tools for investors who want to understand the dynamics of the energy storage sector, and the strengths and weaknesses of the various pure-play companies that are active in the sector. Even if you disagree with my conclusions, I can guarantee that you’ll learn more than you ever wanted to know if you download and study the source documents.
Disclosure: Author is a former director of Axion Power International and holds a substantial long position in its common stock.
Is Chloride a major customer (more than 5% of sales) for any of these battery companies? If so, the ABB acquisition might directly help that company’s top line revenue if ABB is able to help Chloride grow more quickly by integrating the company’s offerings into ABB’s sales channels.
I checked their annual reports and none of them had enough sales to Chloride to warrant identification of Chloride as a material customer.
Too bad, but I guess it makes sense… most of their sales are automotive batteries.
Actually that’s not quite correct. Almost all of C&D’s sales are for UPS applications and Enersys is split between industrial traction batteries (fork lifts and the like) and UPS applications. The only one of the three that’s a big player in automotive batteries is Exide.
From what I hear, ABB is bidding on Chloride more for its channel and to keep it out of the hands of Emerson (who, if you recall, made the first bid for Chloride back in May). Chloride is one of the few independent UPS providers left (APC-Schneider, Eaton-MGE, etc). So, I don’t know if I’d say this is so much of an expression in the hopes of lead acid growth in the data center, but more of a strategic play by ABB. I think there are signs that the UPS market (for larger scale systems) is increasingly moving towards rotary (flywheel) systems.
Not to say that the lead acid batt makers aren’t looking undervalued right now… agree with you on that part.