What is there to say about the high-tech battery sector today? Advanced lithium batteries are still the most likely clean-tech option to get traction in the auto sector, but large-scale rollouts are still off in the distance. In the meantime, investors have certainly turned on the smaller, riskier names in this sector and sent the stocks down while the overall market has done alright.
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The Quarter that Was
A123 once again came up short on the revenue line this quarter, as sales totaled a bit under $23 million. Transportation revenue (which is close to half of the total) was flat sequentially, while consumer revenue and service revenue both grew nicely. The company did not record any electric grid revenue this quarter, and the company shipped 10% fewer megawatts on a sequential basis.
Unfortunately, higher sales relative to the year-ago period did not really give the company any meaningful operating leverage - gross margin held more or less constant around negative 13%. The company's operating loss also grew by almost 50% as the company increased its spending on R&D and general overhead and recognized some production start-up expenses in the quarter.
A123 did finish the quarter with about $335 million in net cash, but that do es not seem like it will be nearly enough to last until the company becomes cash flow positive, unless the company can secure commercialization deals that give them upfront cash.
The Road Ahead
Ironically, if the prior three paragraphs really matter to you, this is probably not the right stock for you at this point. It would be nice to see improvement in shipments and margins, but these are very early days in A123's commercialization process. Right now, deals are arguably much more important than current revenue.
To that point, the news has been mixed lately. A123 has a relatively broad customer base and clients like Fisker and Navistar (NYSE:NAV) still seem to be on track to ramp up in 2011. Unfortunately, the company is seeing delays in grid orders (apparently an "order timing" issue) and the company is no longer working with Chrysler. On this later point, it looks like A123 walked away or refused to match a lower-priced bid from a rival - is this a sign of A123 prudently turning down self-destructive business, or a warning sign that A123's cost structure could be problematic?
The Bottom Line
I still like A123's technology, and I still think the company has a fighting chance to be a significant player in the emerging high-end battery market. It is clearly going to be a crowded market, though, and large companies like Sanyo (Nasdaq:SANYY), Panasonic (NYSE:OC), and Johnson Controls (NYSE:JCI) have ample R&D resources and long histories in the industrial battery markets. Apart from that, there are other emerging tech rivals like BYD (Nasdaq:BYDDY) and Ener1 (Nasdaq:HEV) that could steal a march on A123.
Heck, while we are at it, why not also think about playing the underlying chemistry? Lithium is a major component in almost all of these next-gen batteries and that makes the likes of Rockwood (NYSE:ROC) and SQM (also known as Chemical and Mining Co. of Chile) (NYSE:SQM) potentially interesting as well.
As for A123, it is all about the hope and promise. The company is liable to post negative free cash flow for long enough that cash flow modeling just does not work well, and the revenue and EBITDA base are too small to make ratio analysis worth well. So it comes down to this - do you want to pay $1 billion for a company that could be a player in a market worth $20 billion or more a year in 2020 and have upwards of $1 billion in revenue by 2015? There is no right or wrong answer today, but it is a question risk-tolerant investors need to ponder. (For related reading, take a look at Evaluating Green Equity Investments.)
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