Maxwell Offers Energy Tech With A Real Model

By Stephen D. Simpson, CFA | March 12, 2012 AAA

Energy tech is a perennially exciting market, even as the attention shifts from year to year among fuel cells, solar panels, wind power, batteries and so on. What makes Maxwell Technologies (Nasdaq:MXWL) unusual, though, is that it's a company with real revenue, real products and actually just a bit of profitability. While there is still very much a "build it and they will come" aspect to the company's targeted markets, Maxwell looks like a better play on the future of power alternatives.

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Rare Profitability
A lot of energy tech has been divvied up between unprofitable speculative companies with little more than patents and prototypes and giant industrial/technology concerns. That makes Maxwell's profitability rather uncommon.

For the company's fourth quarter, for instance, revenue rose 24% (with 30% growth in its key ultracapacitor business). Gross margin improved by more than a point from the prior year, and operating margin was not only positive, but a point higher than in the year-ago period.

Reasonable Starting Points
Right now, Maxwell has two principal addressed markets for its ultracapacitor business - hybrid diesel buses and wind turbines.

Hybrid buses are a solid starting point or proving ground for the company's automotive hopes. Although they're called "hybrids," these buses are similar in many respects to diesel-electric locomotives. and it's not exactly a missionary sale to get transit authorities to try them.

Wind turbines are more of a mixed blessing at present, as budget problems across the world have led to governments curtailing their subsidies for more installations. That said, Maxwell, like Zoltek (Nasdaq:ZOLT), in a good place insofar as being a "platform neutral" supplier of components instead of a soup-to-nuts proprietary builder.

Will More Promising Markets Develop?
The big question for Maxwell investors is when (or whether) larger, more promising markets will develop into real commercial opportunities. Car companies like Toyota (NYSE:TM) and Honda (NYSE:HMC) have had success with their hybrid vehicles, but Maxwell has yet to land a major headline-grabbing vehicle content deal. Yes, the company has agreements with Continental AG and its ultracapacitors are used by PSA Peugeot Citroen, but ultracapacitor content in hybrids is still well below what it could be. (For related reading, see Auto Stocks Driving Higher.)

Likewise, the vehicle start-stop market has yet to take off as a lot of bulls once projected it would. Peugeot is using Maxwell products for this application, and companies like Porsche and Mercedes are pushing the technology, but it's still many years away from being conventional.

In the meantime, there are other markets that Maxwell can address. The company has already targeted the uninterruptible power supply market (a popular market for energy tech ideas) and additional applications like truck engine starters and brake recuperation systems in trains could pay off.

Does Maxwell Need More Competition?
Odd as it may sound, the fact that Maxwell has a near-monopoly in ultracapacitors may be working against it. Potential customers like leading car companies are going to be cautious in investing millions of dollars designing around a product that can only be supplied by one company (and a small one at that), and there is likewise only so much that Maxwell can spend in promoting its technology.

Panasonic (NYSE:PC) does have some interest and technology in ultracapacitors, but a great deal more attention is given to companies working on advanced battery technologies. Unfortunately, companies like A123 (Nasdaq:AONE) and Axion (OTCBB:AXPW) have had a great deal of difficulty in getting traction for their own products. That leaves a lot of the likely long-term winners locked within larger companies like Johnson Controls (NYSE:JCI).

The Bottom Line
Assigning a fair value to Maxwell is a thankless task. So much of the real value of the company lies in the development of markets that are presently tiny (hybrid vehicles, start/stop, and so on) and may never become significant. Likewise, while Maxwell is profitable today, there's no guarantee that they can develop a model that will deliver economic returns over the long-haul.

As a cash flow model here would be nothing more than a dressed-up guess, perhaps it's worthwhile to consider the present revenue multiple on the shares. Maxwell currently trades at an EV/revenue of 3, while promising growth tech companies can often support multiples in the high single digits or low teens. This is not to suggest that Maxwell is 50% or more underpriced (it seems unlikely to capture the same margins, free cash flow productivity, and returns as those other tech companies), but it does suggest that the shares could still be worth serious consideration for risk-tolerant investors who can buy into a story that will take years to develop. (For related reading, see How To Use Price-To-Sales Ratios To Value Stocks.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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