Why I’m Long Active Power

This morning I awoke to a comment
from Seeking Alpha contributor Michael
Eisenberg who asked me to lay out my core thesis on why Active
Power, Inc. (ACPW)
merits attention from investors who are interested in the energy
storage sector. While Altenergystocks
and Seeking Alpha don’t
generally like to publish
articles about companies that trade for under a dollar, I believe
Active
Power merits an
exception to the general policies.

As regular readers know, I’ve been a small company securities lawyer
for almost 30 years and immersed in the energy storage sector since
early 2004. During my career I’ve had many clients in
diverse industries succeed and fail. While their businesses have all
been quite different, they invariably go through the same stages of
initial
excitement over a novel idea, disenchantment as the business
model proves difficult and costly to implement, and sustained growth
when diligent pursuit of the business model begins to bear fruit. In
many ways the life cycle of a small company is
like a marriage that begins with an overly optimistic honeymoon, gets
rocky for a period
of years as the reality of paychecks and budgets sinks in, and then
strengthens
over time to become something valuable and enduring.

My favorite example of a typical small company growth cycle is J2
Global
Communications (JCOM),
a company that I got to know first as a customer
and then as a stockholder. J2 went public in July 1999 in at an IPO
price of $9.50 per share (market capitalization $312 million) and
its stock price immediately began a gradual
downhill slide to a low in the $0.30 range (market capitalization $16
million). While the
market obviously hated the stock, I loved the service, believed J2 had
a bright future and bought its stock in the $0.50 range. After living
through the indignity of a reverse split, J2′s stock price recovered
nicely and I ended up selling for a triple in late 2002, which proved
to be dreadfully premature. The full
trading history of J2 is summarized in the following graph.

I began researching Active Power last fall because they manufacture and
sell uninterruptible power supplies based on a flywheel technology
that’s similar to what Beacon Power (BCON)
is developing for
grid-based applications. While Active Power’s focus is data centers and
other facilities that need extraordinary power quality and
reliability, its solutions should be easy to scale up as
demand for grid-based systems develops. When I first began comparing
the two companies, Beacon was sporting a market capitalization of $80
million and Active Power was limping along with a market
capitalization of just $24 million. When it came to business
fundamentals, however, Active
Power had a comparable product, comparable stockholders equity, smaller
operating losses and a far
more impressive business history. That led me to the inescapable
conclusion that
Active Power had attractive upside potential while Beacon had
worrisome downside risk.

Active Power went public in
August 2000 in an IPO price of $17 per share
(market capitalization $640 million) and after an initial run-up; its
stock price
began to tank. The price ultimately decayed to the
point that even after a reverse split it traded as low as $0.22
per share last winter. The full trading
history of Active Power is summarized in
the following chart.

While Active Power’s stock price chart tells a tale of unmitigated
disaster, the selected financial data from its last Form 10-K tells an
entirely different story; a story of sustained growth, improving
margins and declining losses (click on figure for a larger view). In other words a management team that’s
had the courage to stay the course even when times got tough is
successfully implementing their business plan.

During the first six months of 2009, Active Power booked a 24% year on
year sales growth and improved its gross profit margin from 12% to 26%.
In my view these are solid performance metrics for a small company
in recessionary times.

I bought Active Power in the fourth quarter of last year at $0.26 per
share because I saw the same long-term pattern
developing that I experienced with J2. So far the investment has
been very good for me and its market value has increased by 185% in
eight
months. Since I believe Active Power is turning an
important corner in its business development and I’m convinced that
overall growth in the energy storage sector will be spectacular for
decades, I won’t be anywhere near as quick on the trigger as I
was with J2. I may even buy a little more.

DISCLOSURE: The Author is long Active Power

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie
and represents North American, European and Asian clients, principally
in the energy and alternative energy sectors. His international
practice is limited to corporate securities and small company finance,
where he focuses on guiding small growth-oriented companies through the
corporate finance process, beginning with seed stage private
placements, continuing through growth stage private financing and
concluding with a reverse merger or public offering. Mr. Petersen is a
1979 graduate of the Notre Dame Law School and a 1976 graduate of
Arizona State University. He was admitted to the Texas Bar Association
in 1980 and licensed to practice as a CPA in 1981.