Bad News, Good News on Batteries
The nascent electric-vehicle market isn't likely to do much for A123, Ener1 and Altair Nanotechnologies. But it could provide a boon for specialty-chemical producer OM Group.
Electric cars are rolling off the assembly lines, but that's not great news for American battery makers like A123, Ener1 and Altair Nanotechnologies. Their shares have run out of juice, and may not be energized soon, because aggressive, mainly Asian, rivals are dominating the battery business.
Conversely, Cleveland-based OM Group (ticker: OMG), a 20-year-old specialty-chemical producer, could be a winner. One of its businesses is supplying chemicals for lithium-ion batteries, used in everything from cellphones to electric cars. OM doesn't disclose its electric-vehicle customers' names and implies that EVs accounted for less than $10 million of its $1.2 billion in sales last year. But if electric vehicles take off, its stock would get a jolt. At a recent 33.54, it could double in two years, particularly if the company repurchases shares, says a portfolio manager who owns the stock. Observes Saul Ludwig, a Northcoast Research Partners analyst who rates the shares Neutral, "Clients look at OM Group as a call option on future battery technology."
THE ELECTRIC-VEHICLE INDUSTRY is in its infancy. But thanks to $110-a-barrel oil, improved batteries, and government subsidies, it has a decent chance of sticking around. Indeed, the $2.7 billion annual market for lithium-ion batteries in cars and electric bikes could rise at a compounded yearly 34% through 2016, to $11.6 billion, says Lux Research, a firm specializing in emerging technologies.
The Chevy Volt's 380-pound, 5½-foot-long rechargeable battery (shown here minus its housing) is made by Korea's LG Chem, which beat out U.S. vendor A123.
The industry has two business models. In one, the battery is sold with the vehicle. In the second, it's rented. Better Place, a private Palo Alto company, rents batteries to owners of Renault electric cars. When a battery is discharged, it can be switched for a fully charged one at automated stations the company runs. By renting rather than buying a battery, which can cost $10,000 to $12,000, consumers avoid a big upfront cost. Better Place's initial facility just opened in Israel and is expected to be joined by others, there and in Denmark, later this year. The batteries come from AESC, a joint venture between Nissan Motor, NEC (NIPNF) and NEC Tokin.
Renault doesn't sell cars in the U.S., where the only mass-market EVs�the Nissan Leaf and Chevrolet Volt�are sold with their batteries included in the price.
The Leaf's battery comes from the AESC joint venture. The battery for the Volt -- which has an onboard gasoline-powered generator to extend its range far beyond a pure EV's -- comes from Korea's LG Chem (which beat out A123). Sales of both autos have been ramping up slowly since they began a few months ago. Through March, 1,210 Volts and 452 Leafs had been delivered this year. (Last week, Nissan said it would repair more than 5,000 Leafs in Japan and the U.S., to fix a software flaw.)
Tesla, a specialty high-end electric-car manufacturer, says Panasonic is one of its major suppliers. BMW chose SB LiMotive, a joint venture between Bosch and Samsung SDI, to supply the battery to its i3 electric vehicles, which might debut in 2013. The electric version of the Ford Focus�expected at the end of 2011 -- will use a battery from Compact Power, a subsidiary of LG Chem.
If the industry takes off, more car makers will produce electric vehicles, probably giving the U.S. battery makers an opportunity to win business. But so far, the EV projects haven't gained traction, despite federal aid, and neither have their efforts to build industrial batteries for utilities.
According to the Department of Energy, A123 (AONE) was awarded a $249 million grant as part of the American Recovery and Reinvestment Act of 2009; EnerDel, a unit of Ener1 (HEV), got $118 million. The DOE has granted $2.4 billion for battery and electric-car development, but U.S. battery companies have had to seek more funding. "
"They all seem to be overvalued and under-delivering," says Steven Minnihan, a Lux Research analyst. Earlier this month, A123 raised $253.9 million by selling 20 million shares and $143.8 million of convertible debt. Its stock, which traded in the low 20s after its 2009 IPO, recently was at $6.05. Analysts expect the company, which lost $1.46 a share last year, to lose $1.52 this year and 94 cents in 2012.
Ener1's story is similar. It developed batteries for start-up urban electric vehicle manufacturer Think City, in which Ener1 has an investment. It also developed a battery for the Volvo C30 electric vehicle, which has yet to go on sale, according to Ener1's annual report. Sales to Think Global have represented nearly all of Ener1's automotive revenue. But in January, Think Global stopped buying batteries as it "rebalanced its overall inventory levels" of cars in Europe and the U.S.
Ener1 raised $25 million in January by selling stock and debt. That followed similar sales last year that generated more than $160 million. Its shares, which in 2008 were bouncing between $7 and $8, now are below $3.00. Ener1 lost 48 cents a share last year and is expected to lose 25 cents this year and 16 cents in 2012.
Altair shares (ALTI) traded north of $10 in 2007, but have slid to under $2.00. It makes a battery used in an electric bus made by Proterra, a private firm. But only five buses have been sold (six are on order). It has also has agreed to license its technology to Cannon, an Asian company that bought 51% of Altair for 38.82 cents a share. With no earnings, Altair in March raised $6.4 million (before fees) by selling shares at $1.784. It's likely to lose 39 cents a share this year, after losing 84 cents last year. Officials of all three -- A123, Ener1 and Altair -- declined to speak with Barron's.
ONE WAY TO INVEST in the battery space is to buy into OM Group. Its specialty is processing cobalt, a material that's mined along with nickel. "We have relationships with many of the folks making [batteries for] electric vehicles today," says Troy Dewar, OM's investor-relations chief.
OM's stock now is around 34, about 13% below its 2010 close. Reason: Cobalt prices have fallen to about $16 a pound, down from around $19 recently although modestly above the long-term average of $15, and traders expect supplies to grow as new nickel mines come online. Over the years, cobalt has traded anywhere between $6 and $45.
OM is also exposed to the battery industry through its 2010 purchase of EaglePicher Technologies for $172 million�a deal that was expensive, says Northcoast's Ludwig. EaglePicher designs batteries for the defense, aerospace and medical industries. It's also developing batteries that wind- and solar-power systems could use to store energy.
The Bottom Line
If the electric-vehicle market takes off, OM Group shares could double in two years. But the outlook remains gloomy for A123, Ener1 and Altair, all of which are losing money.
Fortunately, OM Group has other businesses that throw off oodles of cash. For one, it provides products that improve vehicles' rust resistance. Its chemicals are also used in circuit boards, paint and steel.
OM is expected to earn $2.70 a share this year and $2.84 next, giving its stock an 12 multiple on 2012 earnings. But what really gets some institutional investors excited is its $400.6 million of cash, against just $30 million of debt.Since the company has only 30.65 million shares (fully diluted), it has enough money to pay a sizeable dividend or buy back about a quarter of its outstanding stock.
However, OM Group does much of its manufacturing in Finland, so roughly $350 million of the total is overseas. It would have to pay income taxes on any cash repatriated. So, says Dewar, "our priority is going to be on acquisitions."
Tesla's Stock Looks Overcharged
One of the electric-vehicle makers that has generated the most excitement -- and debate -- is Tesla Motors. Its sleek roadsters and sedans are undeniably attractive. Its stock…well, that's another matter.
After an initial public offering in June 2010 at $17, Tesla's shares (ticker: TSLA) raced to $36 before settling down to a recent $27.
The company, which isn't expected to report net income until 2014, has sold only 1,500 cars, none of which it has assembled entirely on its own. Analysts see it posting per-share losses of $2.10 this year and $1.54 in 2012, on annual revenue of $170 million and $598 million, respectively. And Tesla is expected to tap the capital markets to fund future operations. Yet it boasts a stock-market value of $2.6 billion. The rosiest Wall Street research report comes from Morgan Stanley, which has a Overweight rating and a $70 one-year target. In projecting the stock's future value, the investment firm uses a 15-year discounted cash-flow model. By 2020, Morgan Stanley forecasts $9.5 billion of sales and $1.2 billion of operating profit for the company.
Carter Driscoll, a clean-technology analyst at Capstone Investments, is less optimistic. "On any meaningful, objective valuation, it's overvalued," he asserts. Driscoll has a Sell recommendation and a $19 stock-price target, and says that the bulls are dramatically underestimating the auto business's voracious appetite for capital.
Tesla officials declined to comment on financials.
Tesla's roadster, which has a starting price around $109,000, has found favor with some eco-conscious celebrities.
The company currently sells Tesla Roadsters, made primarily by Lotus, with a starting price of $109,000. In mid-2012, Tesla hopes to add the Model S, a $50,000 luxury sedan to be built at its California plant. And the people's Tesla -- the Model X -- is supposed to arrive in 2014. Its projected starting price: around $30,000.
Of course, Nissan is already selling an electric car for the masses, the Leaf, with a starting price below $33,000. And just about every luxury-car maker is considering selling some form of electric vehicle. "There is plenty of room in the marketplace for all of us for at least five years," says Kurt Kelty, Tesla's director of battery technology.
One plus for Tesla: Both Toyota and Daimler have equity stakes in the company, so it's always possible that it will be acquired. But, even if it is, the price paid could very well be more fit for a Hyundai than for a Rolls.
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