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 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 popped in 2010 are going as we enter 2011.

POLYPORE ( PPO)

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Needham analyst Michael Lew believes that lithium battery separator producer Polypore ( PPO) is positioned to "usher in a new era of transportation," owing to its technical advantage. In an equity report, Lew says the company's Celgard division, which makes this separator material, sets itself apart from competitors by using a lower-cost "dry stretch" manufacturing process; competitors are using a "wet process" technology. Its "breath" of product offerings -- monolayer and trilayer configurations -- also gives it an edge. Demand for Celgard's products are "accelerating" with the launch of various electric vehicle programs and scheduled rollouts, which Polypore is getting ready for, according to Lew.

Polypore recently announced a $32 million lithium separator production expansion project to meet the expected rev up in electric vehicle demand, adding to a number of its other expansion projects around the world. "This is not a 'build it and they will come' strategy, in our view, as management noted definitive 'line of sight' into demand linked to specific customer vehicle programs," BB&T analyst Kevin Maczka said in a note. The analyst sees sustained plus 20% growth potential in the company's lithium business -- Polypore's highest margin unit -- in the coming years.


Reflecting Maczka's view is Ardour analyst JinMing Liu, who views Polypore's ramp up of production capacity and debt-load reduction as a sign of its "prudent decisions" with capital. He sees strong growth in the company's lithium battery segment in 2011 and notes that the repayment or refinancing of the rest of its senior subordinate notes, which is anticipated, will further lower Polypore's interest expense.

"The replacement of older debt with new debt at lower interest rates will help reduce the interest rate for the company in calendar year 2011," D.A. Davidson analyst Avinash Kant said in an investor note.

William Blair analyst Brian Drab notes that he expects the company to have increased its lithium battery separator production capacity by more than 150% by mid-2012.

VALENCE ( VLNC)

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Needham analyst Michael Lew notes that while there is no guarantee Valence ( VLNC) will find a favorable resolution for its intellectual property disputes, and no guarantee it can lower costs and expenses to make its products more affordable or stay competitive amongst peers with larger assets, he sees "accelerated" market adoption of the company's products due to its reliable technology.

Fleets, including those of transit buses -- one Valence customer group -- require reliable technology to deliver "on time" services, Lew pointed out. MDB Capital analyst Jon Hickman tells clients that though Valence's fiscal 2010 revenue of $16.1 million was lower than he had expected, he's encouraged by the company's recent order trends and management's comments about its large and growing backlog of orders. He also notes the expansion of Valence's patent portfolio to more than 420 U.S. and international grants and patent applications in fiscal 2010.


Needham's Lew said he'll become increasingly optimistic about Valence stock once it resolves its intellectual property dispute with the University of Texas. At the same time, Wm Smith analyst Rob Young expects the company's overall intellectual property disputes to find a resolution, as they have so in the past. He thinks that quarterly legal costs will fall to $500,000 from around $1.5 million.

Still, Young cautions that Valence's gross margin will eventually consolidate in the low 20% range from 22% sequentially, and that this will require continued prudence in cost management in the face of possible pricing pressures.

SOCIEDAD QUIMICA Y MINERA DE CHILE ( SQM)

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According to Morningstar, industrial chemicals, fertilizers, iodine and lithium producer Sociedad Quimica Y Minera De Chile ( SQM) bears believe the company faces possible oncoming pricing pressures in its lithium segment owing to the possibility that Australian miner Orocobre could add as much as 40,000 metric tons of lithium production over the next several years; over the last few years, Chinese producers have already accelerated production. Morningstar also notes that SQM has in the past resorted to more expensive energy sources during natural gas shortages in Chiles. "This situation is expected to continue, eating away at the company's profits."


Potential SQM bull scenarios highlighted by Morningstar include a surge in lithium prices owing to strong demand for lithium batteries in the electric vehicle space, and the usage of lithium-aluminum alloy in next generation airplane models. Morningstar says bullish developments at its other units including any SQM ramp up of potassium chloride production in an already "oligopolistic market" and increased biofuel production partly through government mandates. The latter should drive up corn, sugar and palm oil prices, Morningstar points out, giving farmers more incentive to use fertilizer to increase crop yields.

"We predict SQM will maintain its market share leads," Morningstar analyst Jeffrey Stafford says in note. "However, this is not a foregone conclusion, given that the company will always be susceptible to irrational pricing in all of its markets.

JOHNSON CONTROLS ( JCI)

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S&P analyst Efraim Levy estimates that Johnson Controls ( JCI), which specializes in auto interiors, building efficiencies and vehicle batteries -- especially lead acid batteries, but also increasingly lithium batteries -- will see revenue rise by 10% in fiscal 2011, owing to an increase in vehicles sales and production in the U.S. and most other regions. Levy said battery sales will advance at the fastest pace, while the building efficiency unit will add on more customers over in the longer-term. The company should also benefit from greater business from emerging market auto OEM customers, said Levy in an equity research report.

The analyst also expects to see improved operating margins in fiscal 2011 owing to the stronger domestic and foreign demand, benefits from restructuring activities and a reduction in restructuring costs. "We expect JCI's long-term sales and earnings growth to exceed that of peers, and for the company to show greater earnings stability, aided by its diversification in geography, products and customers," Levy noted.


However an increase in raw material costs and pricing pressures from customers could offset these positive trends, he said.

In a note, Morningstar analyst David Whiston said Johnson Control's heavy investment in lithium ion batteries and its purchase of the battery business of auto parts supplier Delphi -- the same one that helped Delphi build a presence in China -- will contribute to growth over the years. However, it's still unclear whether Johnson Controls will ever become a leader in the emerging lithium battery market, Whiston says.
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-- Written by Andrea Tse in New York.

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