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It's hard to argue the auto battery business has been anything but a fixer-upper with a lot of potential up to now. But there comes a point when even a master mechanic has to cut his losses and move on to the next project. That's why this earnings season is so important for battery manufacturers who need to start showing revenue growth and decreasing cash burn.
Our first glimpse was mildly encouraging. Valence Technology (Nasdaq: VLNC ) , a company focused on the commercial electric market, announced preliminary sales that topped expectations. No word on whether that means the company swung into profitable operations, but I'll take 100% plus revenue growth from last quarter as a start.
The first traction in the battery business appears to be in the commercial vehicle market. Last month, Frito-Lay, a division of PepsiCo (NYSE: PEP ) , announced it would buy 176 battery-powered delivery trucks made by Smith Electric, which uses Valence as a supplier. Last week, Staples (Nasdaq: SPLS ) announced that 41 Smith vehicles would be added to its fleet. Electric vehicles make sense in the commercial market because drivers have set routes or territories, so we may see the most progress here initially.
Previewing another quarter of losses
I am looking forward to hearing if our two big U.S. battery producers made any progress in the quarter when earnings are announced in November. A123 Systems (Nasdaq: AONE ) is making slow progress on a number of fronts this quarter, including opening the largest lithium-ion battery plant in North America. Investors are also hoping Ener1 (Nasdaq: HEV ) will show progress to go along with another quarterly loss. What we should be watching for is sales growth and how program launches are progressing.
In developing businesses, sales growth will be first to materialize and analysts aren't expecting a lot, leaving room for companies to surprise on the upside. A123, for instance, had $23.6 million of revenue in the third quarter last year and expectations are for an increase only to $25.9 million this quarter. At Ener1, analysts expect more aggressive growth, from $8.1 million to $22.2 million.
Of course, neither American company will be profitable, something China-based Advanced Battery Systems (Nasdaq: ABAT ) has been for years.
Is this bandwagon moving?
It's time for the battery business to start showing some signs of life before investors and car buyers give up on the business. A123 and Ener1 have built lots of capacity and if they don't start showing sales to fill that capacity, shareholders will be left holding the bag. Watch for revenue growth and updated forecasts for projects during earnings next week.
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