This Power Stock Is Out of Juice

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: A123 Systems (Nasdaq: AONE  ) . Is this maker of electric car batteries the real thing? Let's get right to the numbers.

Foolish facts

Metric

A123 Systems

CAPS stars (out of 5) ***
Total ratings 381
Percent bulls 89.5%
Percent bears 10.5%
Bullish pitches 60 out of 66
Highest rated peers Emerson Electric, Roper Industries, Cooper Industries

Data current as of Oct. 13.

There's no doubt that batteries are key to the future of almost everything we do. Mobile phones need them. Computers need them. And most of all, electric cars need them.

Trouble is, batteries don't last anywhere near as long as we need them to. A123 is one among a handful of companies attempting to solve that problem. The difference? A123's approach involves nanotechnology. Some Fools see that as a competitive advantage.

"This is a long term speculative bet. If the new tech comes through and electric cars become the norm, A123 could be set to go through the roof. I think the stock has bottomed out after its initial IPO slide," Foolish investor davfoo wrote last month.

Certainly, A123 is acting as if its opportunity is massive. The company recently opened North America's largest lithium ion auto battery manufacturing facility in Livonia, Mich., funded partly by a $249 million grant from the feds, A123 said in a press release.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth (71.2%) (59.2%) (71.8%)
Revenue growth 6.4% 32.9% 65.7%
Gross margin (7.3%) (3.0%) (17.9%)
Receivables growth 16.3% (0.1%) 81.9%
Shares outstanding 104.6 million 102.6 million 7.7 million

Source: Capital IQ, a division of Standard & Poor's.

Looking at this table, it's easy to see why federal funding was necessary. Let's review:

  • Revenue growth has all but disappeared over the past 12 months, one-tenth what it was just two years ago. Ugh.
  • Profits, too, are nowhere to be found. True, innovators often need time to generate positive earnings. But that's usually preceded by years of outrageous revenue growth. A123 doesn't have that. (Not yet, anyway.)
  • Even receivables growth is disappointing. Why? A123 is a manufacturer that's paid when it delivers. A big receivables balance would mean loads of unfilled yet ready-to-be-paid orders.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 years)

A123 Systems Not available
Altair Nanotechnologies (Nasdaq: ALTI  ) Not measurable
Ener1 (Nasdaq: HEV  ) Not measurable
EnerSys (NYSE: ENS  ) 21.6%
Johnson Controls (NYSE: JCI  ) (1.2%)
Valence Technology (Nasdaq: VLNC  ) Not measurable

Source: Capital IQ. Data current as of Oct. 13.

I don't need to tell you how this table looks, so let's just focus on the best looking of the group: EnerSys. Not only does the company have a history of providing specialty batteries for submarines and other military vehicles, its stock appears attractively priced at roughly 12 times next year's estimated earnings.

Grade: Unsustainable
I'll grant that A123 could be on the cusp of a battery breakthrough that puts tens of thousands of electric cars on the road. As a rebel investor, I find the possibility enticing. Even so, it's tough to believe in A123's future when its financial past shows so few signs of improvement.

Now it's your turn to weigh in. Do you like A123 Systems at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring A123 Systems:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Emerson Electric is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2010, at 2:17 AM, aseflong wrote:

    I think A123 is a dead duck. Some years ago, I invested in ALTI. Altairnano had a battery that is far superior, being able to charge in 10 minutes. It was also successfully evaluated in a grid frequency regulation application. It didn't take off due to the high cost of its batteries. Axion Power makes Lead Carbon batteries which has been successfully evaluated jointly with BMW in idle stop-start applications. A joint paper has been prestnted in the recent International Lead Acid Battery Conference. This is potentially a high volume application and Axion's PbC batteries are inexpensive enough to make the pay-back period from fuel savings attractively short. Perhaps you may wish to look at AXPW.

  • Report this Comment On October 14, 2010, at 6:28 AM, VenturePhil wrote:

    I´m with you guys on the A123 sentiments. They´ve done a great job marketing their firm and the IPO but the demand for their product just isn´t there. The large forecast valuations out there are based heavily on traction in the EV/HEV markets but my feeling is these will take a long time to take off. Right now the cost and safety challenges facing Li-ion in EV/HEV are just too great. Automakers will be able to satisfy the increasingly stringent fuel economy and emissions requirements in Europe and US for at least the next several years without going all the way to EV platforms. Less expensive, lower risk platforms such as microhybrids will dominate- remember, automakers are conservative, risk averse- they have to be with such wafer thin margins!

    My prediction: microhybrids (powered by advanced lead acid batteries) and HEVs (powered mostly by good old Ni-MH, and some limited Li-ion introductions) will dominate until at least 2020. EVs will only become viable for the mass market after this. As a result there will be significant overcapacity in Li-ion which will lead to heavy consolidation. Only the fittest will survive!

    As Aseflong suggests Axion Power is a good bet. The technology addresses the limitation of existing lead acid batteries in microhybrid applications, they have a reasonably strong cash position, manufacturing looks feasible at the right price...anyway just look at the share price over the last few days- 20 % up yesterday. Just think where it could go if some REALLY solid news comes through!!

    I should disclose that I´ve recently moved into a long position in Axion- its only small but maybe enough to pay for my MBA if it keeps going!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1331028, ~/Articles/ArticleHandler.aspx, 8/20/2014 1:13:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement