Green Energy Losers: A123 Systems

(Green energy losers, A123 Systems story, updated for Thursday trading decline, analyst commentary, IPO discussion)

NEW YORK ( TheStreet) -- Shares of lithium ion battery maker A123 Systems ( AONE) fell sharply in trading on Thursday, the continuation freefall in A123 shares this week after the high-profile, cash-burning company said it plans to offer 18 million shares to the public in a secondary offering, as well as proceed with a $125 million convertible bond deal. The deal was announced after the close on Monday, when A123 Systems began to fall. By mid-day Tuesday, A123 Systems shares were declining by more than 10% on twice its average daily volume of shares traded.

After Thursday's decline of 8.7% and another heavy volume day -- more than 7 million shares traded versus an average daily volume of 1.5 million -- A123 shares are down almost 20% this week.

The deal had not priced as of Thursday afternoon, yet the freefall in A123 shares suggests that investors are betting the deal will price in the range of $6. A123 shares closed at $6.35 on Thursday. When the secondary offering was first announced after the close on Monday, A123 shares were at $7.80. Analysts consulted by TheStreet on Monday expected the deal to price at a discount to that $7.80 Monday closing price, but still at a potential price of $7.

On Thurrsday afternoon, one green energy analyst who cannot be quoted on A123 for compliance reasons but closely follows the company said the weakness in A123 shares this week means the deal may price roughly $1.50 below A123's original expectations.

"Every day that it doesn't close is another day of uncertainty, and investors are now looking at a $6 price given recent weakness," the analyst said.

The recent slide in A123 shares is a double-edged sword. The green energy analyst said that when an investor considers a $6 share price relative to A123's all-time high and IPO price, it may look like a very cheap deal. This could lead the price to be oversubscribed. Regardless, the deal will ultimately raise less money than A123 may have been banking on since its shares have fallen so aggressively since the secondary was announced.

"Based on my conversations with the buy side, people are interested in the deal with the recent weakness in the stock. Just look at where it is today and where it went public and it's all-time high and psychologically it appears cheap."

On Monday, when A123 announced the secondary deal it also lowered its first-quarter revenue guidance because of supply constraints stemming from the devastation in Japan following the earthquake and tsunami there earlier this month. It saw its stock fall 9% to $7.11 in the after-hours session on Monday, and by mid-day Tuesday, A123 shares were at the $7 mark.

A123 Systems' IPO was oversubscribed in 2009, and its secondary may be oversubscribed as well -- but under a very different set of market conditions and sentiment about the company.

Its 52-week high is just short of $15. After pricing its IPO offering in Sept. 2009 at $13.50, A123 shares jumped the next day above the $20 mark. Shortly after its 2009 IPO A123 Systems traded near the $26 mark.

Thursday's trading action, on the other hand, touched a new all-time low for A123 Systems.

The secondary offering and convertible bond deal could have raised roughly $305 million, Wunderlich Securities analyst Theodore O'Neill estimated, based on the $7.80 closing price on MondayOn. Securing $300 million would be significant for A123 as O'Neill estimated earlier this month the company needs to raise at least that much by 2012 to continue to fund its operations.

"AONE will functionally run out of cash by the end of 2011. How much will it need? ... The company will need to fill a $300 million hole in 2012," O'Neill wrote.

On Tuesday, Mark Heller, clean tech analyst at CLSA, estimated that assuming a $7 share offering price and excluding fees, the deal would raise about $250 million in capital. A123 ended 4Q10 with $228 million in cash; however, CLSA estimates that the company will have negative free cashflow of about $260 million in 2011 and $180 million in 2012. Those assumptions now need to be revisited with A123 shares closing at $6.35 on Thursday. Heller wrote in an email to TheStreet on Thursday afternoon that a deal in the low $6 range now seemed likely.

The Wunderlich analyst is one among several on Wall Street who expressed concerns about the cash-burn issues at A123. The secondary offering for an unprofitable company that has watched its shares decline by 50% over the past year should not be a surprise, even though the deal dilutes its existing base of shareholders. The CLSA analyst Mark Heller titled his A123 capital raise wrap, "Mo' Money, Mo' Problems."

"While a significant portion of A123's market cap will be in cash following the offering, we remain cautious on the shares given the company's high cash-burn rate and potential risk to 2011 estimates," CLSA's Heller wrote, and lowered his price target on A123 Systems shares from $10 to $8

The CLSA price target reduction was still bullish in comparison to Wunderlich, which took down its A123 price target from $6 to $3.50. Wunderlich analyst O'Neill wrote on Tuesday, "The current capital raise will fill a $300 million hole we identified on March 1, 2011, but this only buys it 12 months breathing room until it has to go back to the capital markets in mid-2012. In our model for 2012, we assume a $200 million raise, split between debt and equity. But that follow-on raise will need to be repeated again in 2013 and every year until the firm turns a profit. It will be net negative cash in about 18 months, according to our forecast."

Considering that A123 Systems has a marquee lineup of private investment backers, including General Electric ( GE), going back to the market for a secondary may also indicate there's little interest among its existing backers to invest more in the company. "GE likes to buy companies out of bankruptcy," O'Neill said.

O'Neill estimates that including the oversubscription rights and the convertible offering ultimately leading to additional common stock, the Wunderlich analyst estimates dilution could run as high as 17% to 20%. A123 have fallen just short of 20% this week.

A123 also said in a Form 8-K filing with the Securities and Exchange Commission that it now expects revenue of $16 million to $18 million for its fiscal first quarter, down from its prior outlook of "upper teens to low twenty million dollars."

Despite the weak view for the quarter, the company reaffirmed its full-year outlook on Monday, and that's an important item for investors to monitor. Wunderlich's O'Neill and a second analyst who covers the stock said the message from A123 is that it needs to raise the money before it is forced to take down its full year guidance as well.

Wall Street was expecting revenue of $20 million in the first quarter. A123 forecasts revenue in the range of $210 million to $225 million for the full year, and expects second-quarter revenue to double from its first-quarter level.

The first-quarter warning marks the third time that A123 has reduced expectations, but analysts said even after this series of misses the company can't afford to be more conservative in its guidance.

"Investors need to wake up and look at this. The company has now taken guidance down three times in a row. This is the game that's played, giving guidance they say they can beat but then they don't, but if you don't give strong guidance you can't raise money," said the green energy analyst who cannot be quoted on A123 Systems for compliance reasons.

The Wunderlich analyst stated it plainly. "They can't raise money if they make their guidance lower. They will run out of cash and guidance gives them a cushion to raise money," O'Neill said, and concluded "they are not going to achieve their full year 2011 guidance either, so better to raise money now."

A123 attributed the weak revenue outlook to the suspension of operations by a Japanese supplier of battery-coating materials because of the earthquake.

"If the situation in Fukushima relating to the damaged nuclear power plant does not worsen, the supplier has informed us that it expects to resume manufacturing operations within six months," A123 said in a statement.

Analysts, including Wunderlich's O'Neill, who remain skeptical of the company's full-year guidance, said the comment on Japan only offered another excuse for A123 to down the road take down its full year guidance.

O'Neill noted the company stated that its revenue guidance is dependent on the Japanese supply issue being resolved as well as the ramp-up of its electric car partner Fisker Automotive. The Fisker issue is one that A123 can always use when it misses earnings, saying it is dependent on the ramp of production at Fisker and any delays at Fisker are out of A123's control.

CLSA's Heller noted that in addition to the specific Japanese supplier issue and Fisker automotive ramp moving target, A123 also highlighted risks to its 2011 forecast due to component supply disruption in the automotive supply chain more broadly. "As noted in CLSA's recent report, 'Ripples across Asia', Renesas, Freescale, Texas Instruments and Rohm have chip production facilities in the Tohoku region of Japan (about 30% combined share in automotive semiconductors). Several automakers have already suspended production including Toyota and GM due to parts shortages."

Last week, A123 Systems lithium ion battery peer Ener1 ( HEV) announced layoffs equaling 3% of its work force related to the slower-than-expected ramp in the electric car business of its partners Think City. Ener1 is a major shareholder in Think City.

-- Written by Eric Rosenbaum from New York.


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