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:

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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.