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) -- The lithium ion battery makers

A123 Systems





may be similar, but the green energy stocks have hit a fork in the road. The stocks have been moving in different directions since both reported extremely weak first quarters.

Over the past month, shares of A123 Systems are flat, while Ener1 shares have declined 50%. There's one obvious reason for this: even as A123 Systems posted

negative gross margin of 85%

in the first quarter, it had already raised cash earlier this year in a secondary to push out a little further the cash burn issue.

Ener1, on the other hand, which

took a huge $70 million write -down

in the first quarter in throwing in the towel on its electric car market deal with Think Global, said during its earnings conference call that it will have to raise more money. Ener1 CEO said that given its shares price -- now at $1.30 -- it won't be doing a secondary offering. But even a private offering could include warrants that dilute existing shareholders by as much as 50%, said Wunderlich Securities analyst Theodore O'Neill.

This week, Bank of America/Merrill Lynch upped A123 Systems to a buy, though shares remain down for the past five trading days. However, if some analysts are getting more constructive on A123 Systems given the fact that the stock has declined by 38% this year, A123 Systems' own CEO has recently been selling shares. The recent sales, made on April 12 and May 16, were at share prices of $5.32 and $5.83. Granted, the A123 Systems CEO David Vieau only sold 2.2% of his shares for a value of $123,000, and the A123 Systems CEO still has a huge stake in the company. Additionally, the sales were made under the executive's 10b5-1 plan, the Securities and Exchange Commission rule that allows executives to design insider trading plans for financial portfolio planning and investment diversification purposes.

Still, some insider sales watchdogs say the SEC rule merely provides cover for executives to sell shares without having to admit they are making a call on the company's stock value. Additionally, Wunderlich's O'Neill wonders how the A123 Systems CEO could have been selling right after completing a secondary that valued the company's shares at $6, higher than either of his recent share sale transactions. The 10b5 plan allows the A123 Systems CEO to sell, but the Wunderlich analyst says that the CEO would not have been precluded from stopping the SEC rule from kicking into action if he had wanted to, and given the secondary going off at $6 at the end of March.

The real issue, though, remains the future for both of these lithium-ion battery companies, who went public based, at least partially, on the idea that the electric car market adoption would be swift and wide in scale. Ener1 has more or less thrown in the towel, while A123 Systems is banking on its niche electric car market partner, Fisker, to start selling cars in large numbers in the second half of this year to make its guidance.

The Wunderlich analyst O'Neill, who rates both stocks a sell, said that investors interested in A123 Systems should be calling Fisker dealers and asking them directly how many cars they expect to sell this year, instead of reading Bank of America reports. "Investors really should take the time to call Fisker dealers," O'Neill said.

O'Neill admits, though, that there has been a perception shift among investors about these two companies, even as both reported terrible first quarters. Ener1 wrote off the investment in the ThinkCity electric car, more or less deciding "not to give the batteries away," while A123 Systems continues to give the batteries away, the Wunderlich analyst said.

"When Ener1 investors discovered that the ThinkCity is history, it was as if their car customer was taken out and shot, and we would see the same reaction if Fisker was dead," O'Neill says. A123 Systems also took an equity stake in Fisker, something at least worth noting by investors given the huge write-off that Ener1 just took on its Think investment. Both companies, in effect, had to make investments in niche electric car companies to win the battery business.

Fisker is far from dead -- and recently raised another round of private capital -- however, its ability to execute in 2011 and allow A123 to meets its revenue target remains a wild card.

A clean tech analyst who can't be quoted because of firm compliance restrictions said whether it is Fisker or Think, the lithium ion battery makers aren't going to be successful unless they get a deal with a major automobile manufacturer -- and even in this market, they are being outgunned by the large Asian industrial and chemical conglomerates that can afford to take a loss on the lithium ion batteries with their larger businesses. Upstarts like A123 Systems and Ener1 can't effectively compete against an LG Chem -- which has the Chevy Volt deal -- when Ener1 and A123 Systems need to show profits today from the electric car battery market.

"Fisker is another startup and no one knows if it will even be around three or four years from now. It's going to be hard for these upstarts to get into the big OEM platforms," the analyst said.

A123 Systems has indicated that it will announce next year a deal with a major auto manufacturer, though it won't publicly disclose the name now, and it does have support from high-profile investors. Whereas Ener1 is backed primarily by a Russian oligarch - which has helped it to strike energy storage deals in Russia - A123 Systems has the more high-profile U.S. capital markets backers, from General Electric to green energy venture capital giant Kleiner Perkins. Fisker is also now considering an IPO, though analysts said it should sell at least one car before moving ahead with its planned offering.

If Fisker executes on its plans, it's a huge revenue opportunity for A123 Systems, as much as $16,000 per car, analysts note. If Fisker produced 15,000 cars per year, it's $220 million to $250 million in revenue, and "that's why A123 has been bending over backwards for Fisker," one green energy analyst said.

Yet even if A123 is simply bending over backwards as opposed to writing off the investment like Ener1 just did, Fisker still has to get to 15,000 cars, and analyst remain firm in raising the risk red flag, with A123 revenue guidance almost completely reliant on Fisker. "Fisker needs to produce 6,000 cars in 2011 for A123 to make its guidance, and I would think 3,000 would be a success," one green energy analyst cautioned.

For Ener1, the issue is more existential in nature, as opposed to a question about overpromising and under-delivering on earnings. When Ener1 laid out its vision of the electric car market future for the lithium ion battery makers, analysts referred to the plan as noble, but likely to be a noble failure. "Pie in the sky," said one analyst in reference to the plan.

Ener1 CEO Charles Gassenheimer said without more government incentives and a new model for battery pricing, the electric car market can't be successful for these niche lithium ion battery companies. "The price is the issue and comes back to secondary use," Gassenheimer said. What is needed is life cycle management companies to lease the batteries to consumers and repurpose the batteries for secondary and tertiary uses like data center back up storage, and it's a leasing role that could be played by the utilities, Ener1 said.

Since a car will only be used for as long as 20% of a lithium ion battery's life, it would make sense to have companies buy the batteries, lease them for use in cars, and then re-sell the batteries after the car is no longer in service. This would allow the price of the battery per car to come way down, from 50% of the electric car price currently.

Ener1's CEO said trials involving this concept would be seen in 2011, and making the auto market work the battery makers is not "five years away."

Analysts were in line in saying that the Ener1 CEO deserves credit for working overtime to find a model that works, however, the battery leasing concept seems a stretch in today's business reality.

Ener1 CEO Gassenheimer had said on the earnings call that he didn't believe generating negative gross margin of 80% or 100% and making it up in volume was the right business model. In stark contrast, even after writing of its big investment in Think, Ener1 was able to generate gross margin of 24% in the first quarter.

Yet it's the company that posted the negative 85% gross margin in the first quarter, A123 Systems, that is finding at least a little more favor with investors these days.

Ener1 had a 35% gross margin in its grid storage business in the first quarter, though the long-term viability of the business remains open to debate.

'If you are running a business and need to make money, and you have a choice of where to put your batteries, A123 may have a grand plan for light duty transport, but Ener1 is taking the approach of looking for where there is the most value. Light duty isn't it. It doesn't have the margin profile to do it. Ener1 is finding better margins in other places, but the question is, will it hold?" explained an analyst who said he feels Ener1 has been unfairly left for dead after being the company to actually post positive margins.

The difference between A123 Systems and Ener1, ultimately, may be that A123's big inflection point is coming up, while Ener1's may have just occurred with the Think write-off.

A123 still has more interest from investors, and if Fisker ramps, A123 still has the opportunity for revenue to pick up and a roadmap to profitability that improves. Yet A123 Systems need to stop overpromising.

"Electric car battery companies won't be profitable for four to five years, but they need to price today at point where it's attractive enough to customers so they can increase volume over time and make profit in the out years," said one green energy analyst. "Unfortunately, a startup like A123 or Ener1 can't afford this model, while to LG Chem, a multi billion conglomerate, the battery business is a small portion of overall business."

"A123 looked at the market and said "it's too small to ever matter. Fisker is Tesla," said Wunderlich's O'Neill. "It was a back-handed way of saying the pricing doesn't make sense," the analyst added. As Ener1 shares continue down, from the $2.45 closing price before it announced earnings to $1.31 on Thursday afternoon, O'Neill says it continues to be the fallout from the earnings and write-down, and the fact that they are raising more money now. "Someone will take a million shares at 80 cents a share, a significant discount, and get warrants and it has dilution risk built into it."

If the Wunderlich analyst is correct, Ener1 warrants would be more attractively priced than the electric car market is for lithium ion battery maker profits at this point, and one can argue, still more attractively priced than those buying into A123 Systems shares based on the belief that Fisker executes this year.

-- Written by Eric Rosenbaum from New York.


>>A123 Systems: Green Energy Promise and Peril

>>Ener1 Posts Wide Loss

>>Electric Car Market Stalls

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