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Is the Battery Business Getting Charged Up?

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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.

Interested in reading more about the battery business? Add these companies to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

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Fool contributor Travis Hoium owns no shares in the companies mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Staples is a Motley Fool Stock Advisor choice. PepsiCo is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (12)

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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 25, 2010, at 4:37 PM, achalhoub wrote:

    ABAT: Building the chinese empire

  • Report this Comment On October 26, 2010, at 6:42 AM, kayakmastr wrote:

    AONE seems to be very expensive. One is paying alot for optimisim about the future. Does ABAT have a research program? Many efforts are being made to produce better batteries through research in how current batteries work on the molecular level. At that level they are very crude, lots of inhomogeneities that affect performance in a negative way. If some company has a big breakthrough, I would not like to be holding stock in the others.

  • Report this Comment On October 26, 2010, at 10:43 AM, Borisbmx wrote:

    AONE seems inexpensive. It is down from $25 at the start of the year to the $9s. the high was $28 so its down almost 75%, for a brand name franchise.

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