Lithium Battery Stocks: Who Will Rally in 2011?


NEW YORK (TheStreet) -- As electric car trends continue to move forward into 2011, investors want to know what's in store for makers of the rechargeable batteries that will be powering them.

The rising stars of the rechargeable battery space have, of course, been light-weight, but energy-dense lithium batteries, which are expected to experience a growing adoption rate in the global push for fuel economy.



According to Wunderlich analyst Theo O'Neill, for lithium batteries to penetrate a meaningful fraction of the world's car market, prices need to fall by about 50%. He estimates this will occur in 2014, or when the industry has produced more than 50 million individual battery cells, or 150,000 electric cars.

The lithium battery business could become very large depending on the market's acceptance of electric cars and hybrids, how quickly battery costs can be lowered and the extent of government subsidies," O'Neill says. In one instance of electric car acceptance, General Motors ( GM) has now raised its planned production rate of plug-in hybrid electric Chevrolet Volts to 60,000 a year by 2012, from the initial planned production rate of 30,000 a year, according to D.A. Davidson analyst Avinash Kant, who cites industry sources in an equity research report. General Electric ( GE) recently announced that it will buy 25,000 electric vehicles by 2015, almost half of them from GM, including the 2011 Chevy Volt.

Read on for a sense of where a handful of lithium battery stocks that dropped in 2010 are going as we enter 2011.

ENER1 ( HEV)

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When Needham analyst Michael Lew initiated coverage of lithium battery maker Ener1 ( HEV) earlier this year, the company was ramping production to help Norwegian electric vehicle producer THINK fulfill a backlog of orders for over 2,000 electric vehicles and increasingly present in the world's number one vehicle market, China. His saw a lot of opportunity in the company.


Lew said if Ener1 was able to ramp up its battery production to 900 packs a month while fulfilling Think's orders, it would "elevate the company's stature" in the emerging electric vehicles market, and furthermore, lead to more business supply agreements with "tier-1" automakers. He was also optimistic about the possibility of long-term financial gains for Ener1 through its growing presence in China through a joint venture (JV) agreement with Chinese tier one auto parts supplier Wanxiang for developing battery systems, and relationship with Chinese automaker Geely via its partnership with Volvo; Ford ( F) recently sold its stake in Volvo to Geely's parent company. The company recently also signed a $40 million supply agreement with Russia's Federal Grid.


Nevertherless, Goldman Sachs analyst Mark Wienkes maintains a neutral view of the stock, noting that the ramp up in Think sales in 2010 and 2011 was occurring more slowly than expected and that Ener1-Wanxiang bus and truck projects remain in prototype form given the still ongoing JV negotiations.

"We still see solid technology and asset-light capital build, offset by ongoing shifting industry alliances and a promising, but multi-year adoption," Wienkes notes. He sees consolidation between Ener1 and Think on the horizon, as the former recently raised its stake in the latter to 48% from 33%.

Deutsche analyst Dan Galves thinks the company's cash requirements will be significantly lower in 2011, and that free cash flow will improve.

A123 ( AONE)

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Earnings and revenue consensus views for lithium battery company A123's ( AONE) future quarter are thought to be going through revisions after the company recently told investors that the timing of its automotive OEM customer production ramp up was to be pushed out to the second quarter of 2011, from the fourth quarter fourth quarter of 2010.

Goldman Sachs analyst Mark Wienkes sees the OEM delays as "normal growing pains," but remains neutral on the stock. "Despite a leading technology and rapid capacity expansion, we believe the investment cycle ahead of the revenue ramp will take longer and require more capital than expected," he explained in a client note. Craig-Hallum analyst Robert Brown was lowering his estimates for the company, but believes that A123 remains "well-positioned" to capture growth in the hybrid-vehicle and grid-storage markets given its "best-of-breed" products.

The OEM delays were in line with Stifel Nicolaus analyst Dilip Warrier's thesis that electric vehicle production ramps will occur more gradually than expected. "Coupled with aggressive Asian competition, this could lead to a gradual reduction in aggressive consensus estimates for 2011, 2012 and 2013," Warrier said in a note.

A123 management remains optimistic about a major contract with a big OEM in 2012 or 2013; Warrier believes this customer could be GM.

Recently A123v noted significantly lower production yields at new facilities, which was costly for the company, but assures that it has identified the problem and found a solution for it. Such issues are commonly encountered by manufacturers trying to ramp up production, said Warrier.

A123 also recently announced the resignation of CFO Michael Rubino effective Jan. 14, 2011, without naming a successor. Analysts have responded to this with mixed views -- some looking for a stock overhang owing to the element of uncertainty; others saying his departure won't affect the future of the company given that Rubino was rarely involved in pursuing new business deals.

ADVANCED BATTERY TECHNOLOGIES ( ABAT)

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In the coming quarters, investors will want to know what Advanced Battery Technologies ( ABAT) ends up doing with its $30 million capital injection via the issuance of millions of additional shares.

This diluting move was a disappointment for many investors -- announced just as the stock was strengthening on strong third-quarter results. A sharp selloff of the stock ensued.

Just before the offering, ABAT stock had peaked at $4.28.

"The market is anxious to see what this surprise was about," says Olympia analyst Paul Resnik. "The company already had so much cash before the announcement -- cash and cash equivalents of $74 million reported in Sept quarter and no long-term debt."

"Maybe they actually have plan for money. If they feel there are more opportunities to grow internally or externally, having additional funding would facilitate that. Let's see what they do with the money."

On Nov. 30, Advanced Battery Technologies announced that it was raising $30 million in capital through the issuance of 7.5 million shares, at $4 a share to institutional investors. It was also issuing for investors warrants to buy up to about 3.8 million shares of common stock, which if fully exercised, would provide an additional $15 million in gross proceeds to the company. ABAT said it would likely use the proceeds for acquisitions and expansion of the company's battery manufacturing facility.

Advanced Battery Technologies ( ABAT) reported third-quarter net income increase of 118.8% year-over-year to $11.1 million, or 16 cents a share, from about $5.1 million, or 8 cents a share a year ago. For the quarter ended Sept. 30, ABAT generated revenue growth of 46.4% to $25.9 million, from $17.7 million the same time last year, partly driven by its recently-acquired electric vehicle business. At the end of April last year, ABAT said it completed the acquisition of Chinese electric vehicle maker Wuxi Angell Autocycle for RMB 70 million or $3.6 million.

Analysts, on average, had expected earnings of 12 cents a share on revenue of $27.5 million.
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-- Written by Andrea Tse in New York.

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