On December 14th the U.S. Energy Information Administration,
a policy-neutral
statistics and analysis agency within the Department of Energy, announced the
release of reference case statistics for its Annual Energy
Outlook 2010, an exhaustive compendium of current data and expected
trends that covers the entire spectrum of energy production,
consumption and pricing at the regional and national level. For numbers
freaks like me, the EIA
worksheets are a bottomless well of fascinating minutiae. Since
most investors would find the raw data mind numbing, I spent some time
pouring through the EIA’s data in an effort to wrap my arms around
their current view of the automotive sector.
The core data for this article was taken from Table 57,
which forecasts light-duty vehicle sales by drive technology type for
the years 2007 through 2035. To simplify the presentation I’ve
consolidated all data for passenger cars and light trucks into five
broad classes and then prepared a simple stacked column graph to
present a market forecast snapshot at five-year intervals.
What are not clear in the 2010 statistics are the changes from 2009. A
detailed discussion of the individual changes would be too detailed for
a blog, however the general overview is that the EIA increased market
penetration for ethanol-flex fuel vehicles by almost 100%, reduced
short- to medium-term penetration rates for plug-in vehicles by almost
50% and reduced long-term penetration rates for HEVs by a like amount.
Apparently the EIA believes that budgets matter to most consumers and
high-end electric assist vehicles will be priced out of the market for
the foreseeable future. For those that are interested in tracking the
specific changes, the archived workbook for the Annual
Energy Outlook 2009 is available here.
Many people have invested in lithium-ion battery companies based on the
widely publicized promise that plug-in hybrid electric vehicles and
pure electric vehicles, which have recently been christened
grid enabled vehicles, or GEVs, by the Electrification
Coalition, would be the rising superstars of the automotive markets
over the next 25 years. As of two weeks ago the EIA expected GEVs to
represent 0.86% of the U.S. market in 2020 and a whopping 2.63% by
2035. Even this cynic was shocked. To drill down a bit further and
attempt to translate the EIA’s automotive market forecasts into revenue
expectations for battery manufacturers I assumed:
- Revenue of $250 per vehicle for advanced lead-acid starter
batteries; - Revenue of $1,000 per kWh for automotive grade lithium-ion
batteries; - A 1.5 kWh battery requirement for an HEV;
- A 4 kWh battery requirement for a PHEV-10;
- A 16 kWh battery requirement for a PHEV-40; and
- A 24 kWh battery requirement for a pure electric vehicle.
Based on those assumptions and my Excel workbook, which you can
download here, the
following table shows the aggregate revenue to battery manufacturers,
in millions of dollars, for each year shown in the graph.
While there are many EV advocates who will strenuously argue that a
battery cost estimate of $1,000 per kWh for lithium-ion batteries is
way too high, it’s well within the price range cited by the National
Research Council in its recent report titled “Transitions to
Alternative Transportation Technologies – Plug-in Hybrid Electric
Vehicles.” While future lithium-ion battery prices may in fact
decline significantly, I’ve always wondered how rapidly falling battery
prices will be a good thing for the shareholders of battery
manufacturing companies that presumably would rather make money from
selling a reasonably priced product than struggle with the problems of selling a
commodity product on paper thin margins. I guess some sophisticated business concepts are above my pay grade. In Joseph Heller’s classic
novel Catch 22, Milo Minderbinder planned
to buy eggs for a dime, sell them for a nickel and make it up on
volume. That’s not a business plan I want to buy into.
Two of the three largest lead-acid battery manufacturers in the world
are publicly held. Johnson Controls (JCI)
is a diversified auto-parts manufacturer that derives roughly $3.9
billion per year, or roughly 16% of its total revenue, from the
lead-acid battery business. Exide Technologies (XIDE) is
a pure play lead-acid battery manufacturer with global revenues of
roughly $2.5 billion. The industry newcomer is Axion Power
International (AXPW.OB),
a developer of advanced lead-carbon batteries for the micro and mild
hybrid applications that entered into a global
supply relationship with Exide in April, was selected
with Exide to receive a $34.3 million ARRA battery manufacturing grant
in August, and recently completed a $26
million private equity placement lead by Special Situation Funds,
Manatuck Hill Partners and Narragansett Strategic Master Fund.
The leading publicly held companies that operate in the U.S. and plan
to manufacture lithium-ion batteries for automotive applications are
Johnson Controls (JCI),
A123 Systems (AONE),
Ener1 (HEV), Valence Technologies (VLNC)
and Altair Nanotechnologies (ALTI).
The following table provides summary information on the stock price and
market capitalizations of each company:
(millions)
I’ve always believed that successful investing requires a growth
industry, a well-managed company, a good product, reasonable profit
margins and an objectively low entry price based on current earnings or
future potential. If the EIA forecast is even close, the market
seriously underestimates the future potential of the lead acid group
while fully valuing, if not overvaluing, the future potential of the
lithium-ion group.
The lead acid battery manufacturers also trade at far lower multiples
of sales and book value than the lithium-ion manufacturers. Under the
circumstances I think that substantial short-term appreciation is far
more likely in low-priced stocks like Exide, Axion and Altair than it
is in high-priced stocks like JCI, A123 and Ener1.
I got nothing but flack and disrespect in November of 2008 when I had
the gall to suggest that cheap
would beat cool. As my year-end review will show next week, the
last 12 months have proven me right. The good news is that much of the
valuation disparity that existed last year is still present and some
very solid companies remain available at attractive prices.
DISCLOSURE: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock. He also
holds a small long position in Exide Technologies (XIDE)
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