Energy Storage Performed Poorly in the First Quarter of 2010

John Petersen

The first quarter was unkind to publicly traded companies in the energy storage sector, which saw their stock prices fall by an average of 16.22% over the last three months. While the shares of Enersys (ENS) and C&D Technologies (CHP) posted gains of 12.8% and 3.2% respectively, all of the others in my universe of 17 pure play energy storage companies traded down. The following table summarizes first quarter performance and provides some important valuation metrics.

The following table summarizes the portfolio performance a hypothetical investor would have realized over the last three months if he invested $1,000 in each company and the three broad market indexes on December 31, 2009.

After publishing performance updates for a year and a half, I’ve decided that quarterly snapshots don’t provide enough information to show how my tracking categories and companies have performed over time. In an effort to make these summaries more useful to investors, I’m going to introduce a new format that breaks the data down into more digestible chunks. I hope it helps.

Cool Emerging Companies

My Cool Emerging Companies category includes four companies that are developing cool but objectively expensive energy storage technologies that are not fully commercialized. The companies in this category are Ener1 (HEV), Valence Technology (VLNC), Altair Nanotechnologies (ALTI) and Beacon Power (BCON). These four companies were down an average 14.85% in the first quarter and have fallen an average of 36.80% since November 14, 2008.

The following table provides quarterly price information for each company’s stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

Cool Sustainable Companies

My Cool Sustainable Companies category includes three companies that manufacture cool but objectively expensive energy storage devices and generate substantial recurring revenue from product sales. The companies in this category are A123 Systems (AONE), Maxwell Technologies (MXWL) and Ultralife (ULBI). These three companies were down an average 25.50% in the first quarter, but have gained an average of 12.19% since November 14, 2008.

The following table provides quarterly price information for each company’s stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

Cheap Emerging Companies

My Cheap Emerging Companies category includes two companies that are developing effective but objectively cheap energy storage technologies that are not fully commercialized. The companies in this category are Axion Power International (AXPW.OB) and ZBB Energy (ZBB). These two companies were down an average 29.40% in the first quarter and have fallen an average of 12.76% since November 14, 2008.

The following table provides quarterly price information for each company’s stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

Cheap Sustainable Companies

My Cheap Sustainable Companies category includes four companies that manufacture effective but objectively cheap energy storage devices and generate substantial recurring revenue from product sales. The companies in this category are Enersys (ENS), Exide Technologies (XIDE) C&D Technologies (CHP) and Active Power (ACPW). These four companies were down an average 6.65% in the first quarter, but have gained an average of 103.72% since November 14, 2008.

The following table provides quarterly price information for each company’s stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

Chinese Companies

My Chinese Companies category includes four companies that manufacture a variety of energy storage devices including lead-acid, NiMH and lithium-ion batteries, and generate substantial recurring revenue from product sales. The companies in this category are Advanced Battery Technology (ABAT), China BAK Batteries (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). These four companies were down an average 13.70% in the first quarter, but have gained an average of 80.28% since November 14, 2008.

The following table provides quarterly price information for each company’s stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.

Murky Crystal Ball

Since July of 2008 I’ve consistently told readers that energy storage is an essential enabling technology for the cleantech revolution and has immense potential in transportation, wind and solar power and the smart grid. I’ve also consistently cautioned that the prevailing valuatio
n metrics in the cool technology groups were far less attractive than the prevailing valuation metrics in the cheap technology groups. Since I believe Benjamin Graham was right when he said, “In the short run, the market acts like a voting machine, but in the long run it works like a weighing machine,” I’ve consistently predicted that the cool technology groups were likely to stagnate or underperform on a go-forward basis while the cheap technology groups were likely to outperform. I think the comparative price performance charts say it all, particularly when you realize that China Ritar Power (CRTP) makes lead-acid batteries, instead of the lithium-ion and NiMH batteries made by the other Chinese companies.

The biggest challenge for energy storage investors is separating business reality from press release hype and establishing a realistic mental timeline for expected changes in the energy storage sector. Late last month, Lux Research published a new industry report titled “Emerging Technologies Power a $44 Billion Opportunity for Transportation and Grid.” Some of the more intriguing conclusions I gleaned from my copy of the report are:

• $4.5 billion in battery sales for e-bikes and e-scooters (predominantly lead-acid);
• $1.2 billion in battery sales for plug in vehicles (predominantly lithium-ion)
• $0.9 billion in battery sales for stop-start micro hybrids (exclusively lead-acid);
• $0.5 billion in battery sales for HEVs (predominantly NiMH);

The futurist in me likes to look ten; twenty or even thirty years down the road and imagine what the world might be like. The realist in me knows long-term forecasts are always wrong because technological change is inherently unpredictable and the rate of change has been accelerating for decades. Therefore the investor in me tries very hard to concentrate on where the growth will occur over the next five years, and where market perceptions are out of synch with reality.

The combined market capitalization of the lithium-ion and NiMH battery companies I track is about $2.75 billion. In comparison, the combined market capitalization of the lead-acid battery companies I track is about $1.8 billion. When a highly regarded firm like Lux reports that over 75% of the expected revenue growth during the next five years will go to companies that make lead-acid batteries, I have to believe the market’s weighing machine mechanisms will significantly increase the valuation of the cheap technology companies while the cool technology companies tread water or decline. So far the theory seems to be holding up pretty well.

The following table identifies six pure play energy storage companies that I’d classify as speculative. For each company I’ve taken the raw financial data from their December 31, 2009 SEC reports, eliminated derivative accounting impacts that make no sense in micro-cap companies and adjusted for stock conversion and financing transactions reported since year end.

If you focus on the intangible premium column, you’ll see a huge variation among the six companies. At the low end of the spectrum ZBB Energy’s (ZBB) market capitalization is only $6.8 million more than its tangible net worth. In my experience that’s a low premium for a speculative stock. At the other end of the scale, Valence Technologies (VLNC) and Ener1 (HEV) have intangible premiums of $185.7 million and $536.5 million, respectively. In my experience, both premiums are unsustainably high. The other three companies are clustered in the $40 to $70 million range, which is low compared to historical norms, but probably not unreasonable under current economic conditions.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock.

SPECIAL SUPPLEMENT:

Tom Konrad suggested that it might be worthwhile for me to prepare a composite graph that showed the average performance of my five tracking categories to either support or refute my cheap vs cool methodology. I ran the graph for him and decided to add it to this article.

Cheap may not always beat cool, but it’s done a heck of a job over the last 18 months.