On A123 and Air Conditioning

Last Friday, I drew attention to the seemingly lofty valuation of A123 Systems (Nasdaq: AONE  ) , which has yet to achieve positive cash flow, and yet sports a market capitalization greater than any of the following companies:

Company

Sales (in Millions)

Earnings Before Interest and Tax (in Millions)

Anixter International

$5,540

$273

Columbia Sportswear

$1,259

$115

Holly (NYSE: HOC  )

$4,333

$250

Manitowoc (NYSE: MTW  )

$4,386

$379

Panera Bread (Nasdaq: PNRA  )

$1,325

$126

Titanium Metals (NYSE: TIE  )

$970

$130

Data from Capital IQ. Figures are 12-month trailing results.

In response to my article, several of you urged me not to get too hung up on standard valuation ratios like enterprise value-to-sales and price-to-earnings. After all, this is a young company in a revolutionary new industry with massive growth potential. Now where have I heard that sort of reasoning before?

Another reader compared energy storage -- the area of A123's expertise -- to refrigeration, in that it will be both ubiquitous and game-changing.

That's an interesting analogy, and quite close to the one employed by James Grant in an old column entitled "The Economic Consequences of Air Conditioning," reprinted in his new book Mr. Market Miscalculates. This is an excellent opportunity to both plug Grant's book, which is stellar, and challenge a certain line of thinking with regard to hot growth industries.

In his article, penned during the bubbly summer of 1999, Grant draws a parallel between the rise of the Internet and the rise of air conditioning. He notes that "[r]evolutions, once begun, rarely proceed as the revolutionaries intended, and the chief beneficiaries of new inventions are not always the people who dreamt them up, invested in them or promoted them."

Grant then introduces us to Willis Haviland Carrier, the original A/C patent holder, and the company bearing his name. Carrier Corp., which was acquired by United Technologies (NYSE: UTX  ) in 1979, remains the world leader in air conditioning equipment. That's an exceptional demonstration of staying power, which I would largely attribute to the low rate of technological change in the industry. Even as it clung to this No. 1 industry ranking, however, Carrier still didn't outperform the Dow Jones Industrial Average over 50 years as a public company.

While A123 could very well become a runaway success, as First Solar (Nasdaq: FSLR  ) has in its own hot growth industry, investors should think long and hard about the degree to which the benefits of the energy storage revolution will accrue to them, rather than to utilities, consumers, and other stakeholders.

Columbia Sportswear is a Motley Fool Hidden Gems recommendation and Titanium Metals is a Stock Advisor selection. First Solar is a Rule Breakers pick. Seeking to revolutionize your portfolio? Check out any of our Foolish newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (3)

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  • Report this Comment On September 30, 2009, at 2:39 PM, KillaCycle wrote:

    Unlike other battery companies, A123 Systems is "salted" with "battery geeks" from MIT. They are are in management at all levels. The cornerstone of the company is "NanoPhospate" technology. The name "A123" is the tensor that governs the forces between nano-scale particles.

    They have figured out how to make what is called a "self-assembling" battery. That is, the particles in the paste are sized optimally to attract one another. This make the paste hold itself together over time rather than crumbling. This gives their cells the HUGE power that make my drag bike, the KillaCycle, go so fast. It also makes the cells last much, much longer than other rechargable batteries.

    They also have a recent patent on the the paste chemistry. They figured out how to make the path for the Li Ion more direct within the paste molecule. This greatly boosts conductivity and thus the power of the cells. It also boosts the charge and discharge efficiency.

    These folks don't make "ordinary" batteries. That is why folks that really understand battery technology "battery geeks" are buying up the stock.

  • Report this Comment On September 30, 2009, at 8:58 PM, jerryguru69 wrote:

    Like you, I am agnostic about AONE and have not yet made a CAPS call, though I am extremely interested.

    I would like to add a rather technical note (I hit paydirt over this at candlepowerforums.com). There are 4 different types of rechargeable lithium batteries:

    1) Lithium-Cobalt

    2) Lithium-Iron

    3) Lithium-Manganese

    4) Lithium-Nickel

    2, 3, and 4 are considered to be “safe” inasmuchas they are not prone to melting, exploding, or burning. 3 & 4 are already in production, and in use in some rechargeable tools. 2 is the type made by AONE. It already makes them, albeit in small quantity in the Orient, but it has not exactly set the world on fire.

    I have an 18650 sized cell made of 2 for a custom flashlight, and it is pretty impressive. While 2 can be recharged twice as fast and is tolerant of abuse (a good thing), it also has 20% less storage capacity for the same volume (a bad thing). It is not really clear to me that 2 is really significantly better than 3 or 4. At best, it is an evolutionary improvement rather than revolutionary.

    These are the questions I have:

    **has the hype and speculation out-run the earnings potential?

    **if they make it, will car makers actually buy them?

    **does AONE have firm, contractual commitments from Detroit to buy them when they make them?

    **Even if Lithium-Iron is technically better, will it win against the others? Remember the war of Beta vs. VHS? Beta was technically better, but lost anyway due to business considerations?

    **Is a domestic lithium battery manufacturer really going to win sales over its Oriental competitors?

  • Report this Comment On October 02, 2009, at 6:13 AM, 60Chevy wrote:

    Pumped Storage Hydroelectric Power Stations work fine, if you have a steep hill next to you with a big lake on top. I live in the Mid-West where it’s flat.

    I want a battery that fits on my garage and stores enough energy to run my entire house for two days in the summer with the air conditioner running. And then a set of solar panels on my roof, connected to my battery, starts to look very interesting to me. Nuclear power plants have to pay money to put power on the grid at night; the price for electricity can actually go negative for a several hours at night.

    A123 is at the forefront of the nano-technology revolution. We are talking about structures that are measured in dozens of atoms across. The ability to manipulate matter on this scale is very new and very powerful, and in many ways analogous to the ability to manipulate matter at the micron scale that was developed in the 1970’s which lead to the micro-chip revolution. [If my 6th grade English Teacher is reading this, she would tell me I am using run-on sentences again… I know!]

    How to invest in a technology that benefits everyone? I honestly don’t know. AONE is here now. How about FPL Group? This looks like a well managed, forward-looking, energy generating company. And do you know where I can get some Neodymium? Whatever happens, we are going to need more rare-earth magnets. Neodymium: it’s not just for hi-fi speakers and model cars anymore.

    The internal part of the battery, where the energy is stored, is governed by Chemistry. New Chemistries develop slowly, over years. The cathode of the battery, where the energy goes in and comes out, is governed by Physics. New Physics can develop very quickly, in a moment of brilliance. This new cathode material was developed at MIT several years ago. The past several years have been spent doing all the long-term durability testing, vehicle crash tests, and all that. The technology has proven itself to be safe and effective. These batteries are ready for prime time.

    People are busy doing the Math. Does this new technology, or that new technology, make economic sense? The real questions are: do we want this technology and can we afford it. Does driving a Hummer make economic sense? People drive a Hummer because people like to drive a Hummer. And they can afford it.

    I want to drive by the Power Station in my town and tell my grandson that the car we are driving gets its energy form that big building. I do not want to buy any more oil. And soon I will be able to afford it.

  • Report this Comment On October 23, 2009, at 8:45 PM, dividendgrowth wrote:

    My feeling is that AONE is just another Netscape.

  • Report this Comment On April 18, 2014, at 4:55 PM, elizalawrence wrote:

    I feel like the air conditioning business would be really hard to get into. There are so many different businesses out there competing for the top spot. Some of them will need to ligate their businesses in order to catch up.

    Eliza Lawrence | http://hillcrestplumbingandheating.com/contact/vancouver.htm

  • Report this Comment On April 18, 2014, at 4:55 PM, elizalawrence wrote:

    I feel like the air conditioning business would be really hard to get into. There are so many different businesses out there competing for the top spot. Some of them will need to ligate their businesses in order to catch up.

    Eliza Lawrence | http://hillcrestplumbingandheating.com/contact/vancouver.htm

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