Hybrid Battery Plays

By Aaron Levitt | February 11, 2010 AAA

Toyota's (NYSE:TM) recent recall problems aside, the Prius has been a remarkably successful vehicle, highlighting the nations appetite for such cars. The upcoming much-hyped Chevy Volt and its rated 230 miles per gallon is just one of the slated 75 new hybrid electric models expected to make their debuts in the 2011 model year. And that number is growing. Reports from the National Highway Safety Commission estimate that nearly 20% of the United States auto market will be hybrid cars by 2015. Similar findings from J.D. Power and Associates show Europe reaching 50% hybrid saturation in the same time frame.
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Storage Solutions
This surge in hybrid and plug-in automobile usage will result in one thing; storage solutions. Each of these vehicles will require some sort of rechargeable battery. Currently, nickel metal hydride (NiMH) batteries rule the roost, finding their way into the popular Prius. However, many analysts predict that old style NiMH batteries will soon be replaced outright, by lighter, better-charging lithium-ion units. Deutsche Bank (NYSE:DB) estimates that just the automotive market place for these L-ion will reach $10-15 billion in sales through 2010, dwarfing the entire market for L-ion batteries in electronic devices. This echoes the bullish stance from auto makers and the Obama administration, who handed out $2.4 billion in stimulus grants to companies involved in the engineering and design of batteries. Deutsche estimates that advances in L-ion technology could replace NiMH style systems completely by 2020.

The Portfolio Power Plays
Adding a charge of lithium stocks to a portfolio is easy, if investors skip the end manufacturers and go the pick and shovels route. Most of the larger players in the industry are either large conglomerates, in which L-ion batteries make up a small portion of revenue, and many of the pure players still represent speculative bets. By going with the miners of lithium, the component manufacturers and the companies that make the charging systems, investors can profit no matter which automotive manufacturers prevails.

Sociedad Quimica Chile Inc. (NYSE:SQM) may not look like a traditional technology play, with 77% of its revenue coming from fertilizer. Sociedad Quimica, however, is the world's largest lithium miner, holding 20% of the planet's recoverable reserves. Forecasts estimate that 200,000 tons of lithium will need to be mined in 2015, as it takes about six lbs of lithium to make one car battery. Investing in SQM gives a portfolio access to both the hybrid battery trend as well as the global need for more food. In addition, the stock rewards investors with a 1.7% dividend yield. Both Rockwood Holdings (NYSE:ROC) and FMC (NYSE:FMC) offer a way to play the mining angle.

Making both separation filters for both traditional lead acid and lithium batteries, Polypore International (NYSE:PPO) is a way to play the component angle. The company was one of the recipients of the ARRA stimulus grants, receiving $49 million in order to continue development of its filters. Polypore is bullish on its future, committing to building a new plant in Charlotte to add to its overall production.

Defense firm AeroVironment (Nasdaq:AVAV) makes most of its revenue from creating spy drones for the U.S. military and its allies, but the company does have a history of quirky projects. In this case, one has paid off in spades. Automotive producer Nissan has partnered with Aero in the creation of home vehicle charging stations for its new Leaf plug-in hybrid. The deal represents a potential pipeline of new business for AeroVironment, and the shares have rallied accordingly.

The Bottom Line
With energy conservation and efficiency becoming a top priority, the shift to more hybrid vehicles is almost assured. By playing the companies that provide the components for lithium battery systems, we can avoid the pitfalls of model popularity. The previous stocks are good examples of these pick and shovel plays in the hybrid industry. (Learn more about green tech, read: Clean Or Green Technology Investing and Special Feature: Green Investing.)

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