A Different Approach to Energy Efficiency

Saul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Imagine a small energy company that lost $0.24 a share 2009, broke into the black and made $0.05 in 2010, almost quadrupled that and made $0.18 last year, and will come close to tripling that again this year with perhaps $0.50 in adjusted earnings. (After the third quarter, its 12-month trailing earnings were $0.47).

The company made $0.21 in the just-reported third quarter, more than it made all last year. To give you an idea of the size of the company, it has about $165 million in twelve-month trailing revenues.

Now imagine that this little company is dominant in its technology field, and that its products are used in everything from the build-out of the Russian electric grid, to Chinese bus fleets (a bigger market than the bus fleets in all the rest of the world combined), to the turbines in Chinese wind farms (among others), to Lamborghini sports cars. In fact, the company's technology can be found in 500,000 other cars on the road today, including in trucks, buses, and in heavy duty construction equipment that has to start in extremely cold winter weather where batteries won’t work. Now are you getting an idea of the scope of this company’s potential market?

The company is Maxwell Technologies (NASDAQ: MXWL), and their most rapidly growing product, which they seem to have a lock on, is ultracapacitors. Ultracapacitors now make up about 60% of the company's revenue. Ultracapacitors store energy, and thus an ultracapacitor is a sort of battery; but ultracapacitors and batteries are very different.

First, ultracapitors can be made of a variety of readily available substances and don’t require the metals like lead and lithium needed in batteries. Secondly, they work by mechanical processes, not chemical ones like batteries, so they can work at any temperature. If you think about that, it’s an ENORMOUS advantage!

Third, they don’t degrade. A battery can be recharged a limited number of times, getting slightly weaker each time, and then eventually it’s finished. In contrast, an ultracapacitor can take and release a charge millions of times with no loss of strength. And fourth, ultracapacitors charge and discharge almost instantaneously, so they can take a charge very rapidly and emit it in a pulse of energy when it is needed.

Note that this last quality isn’t necessarily better than how a battery works, just different. For a trivial example, consider a flashlight, where you want a gradual drawdown of the electrical charge rather than a quick pulse. In general, ultracapacitors and batteries work together, batteries giving duration and ultracapacitors giving a sudden spurt of energy. I read somewhere that an ultracapacitor is like a small bottle of energy with a large opening so it can fill quickly and empty quickly, while a battery is like a big bottle of energy with a tiny opening so it fills very slowly and empties very slowly.

Ultracapacitors are used in windmills for the burst of power to adjust the angle of the windmill. No one wants to climb up 400 feet on an external ladder to change a dead battery.

Ultracapacitors can be used for regenerative braking. They capture some of the energy that would be lost in braking, and then release it in a jolt to aid reacceleration. This saves on gas mileage AND gives better acceleration. In May 2011, Maxwell announced that it had been selected by Flextronics (NASDAQ: FLEX) to supply ultracapacitors for Flextronics' energy recuperative system to help vehicles meet the European Union’s stringent emission standards. In 2012 they were selected by Bombardier (NASDAQOTH: BDRBF.PK) to do the same thing for a system to recuperate braking energy for trains.

Banks of ultracapacitors are also used in utilities to give a burst of energy to bridge the gap when turning one massive generator off and another on.

In March 2011, Maxwell won a $7 million collaborative research contract from the US Advanced Battery Consortium, sponsored by General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F), to lead a team develop a hybrid auto energy storage system for electric cars. It’s a relatively small amount of money, but it indicates that General Motors, Chrysler, and Ford are considering using ultracapacitors from Maxwell for their electric cars. Each of them has already produced electric or hybrids cars (such as the Volt and the Focus).

Working with Continental, a global auto parts company, and Citroen-Peugeot, Maxwell has already introduced a “stop-start idle elimination system.” This system is almost magical: when you stop at a red light, for instance, the motor doesn’t idle and continue to use gas and emit exhaust. It switches off; then when you step on the gas, the ultracapacitor gives such an instantaneous jolt of energy that you’re never even aware that the motor had been off. If they are using it in a Lamborghini sports car, you can be sure it works. It cuts air pollution AND gas consumption, and protects the battery from being drained.

Maxwell doubled its production facilities in 2010 and is enlarging them again. Management has said that stepping up production to meet demand now requires very little increase in SG&A and most revenue goes direct to the bottom line. This is evident from the last three quarters, where earnings went from $0.07 to $0.12 to $0.21 on just a 12% sequential increase in sales.

This sounds like a company to which you’d give a P/E multiple of 30 or 40 times trailing earnings, and which would thus sell at $15 or $20.

But there’s a problem side to this story too. In April, this little company, which had indeed been selling in the high teens to lower twenties, announced that they had to be more cautious in their outlook because of the European economic crisis and the Chinese slowdown.

This should have been no surprise to anybody, but there had been hopes that their ultracapacitors would be installed rapidly in millions of European cars. In addition, uncertainty in China, especially with a change of regime coming this fall, and thus possibly a change in policies, caused more cautiousness. The price of Maxwell stock dropped more than 50% in two months, from about $19 to between $7 and $8.

Analysts had cut their estimates for adjusted earnings for the September quarter to $0.05, but last week Maxwell reported $0.21, beating estimates by over 300%.

However, the company also said that due to the slowdowns in Europe and in China, as well as a mechanical problem that is slowing production of buses for one of their large Chinese customers, they expect fourth quarter revenue to be about the same as first quarter revenue (i.e. down 12% sequentially). Also, first quarter revenue next year will be sequentially down from there, as always, because all of China closes down for a few weeks in the first quarter for the Chinese New Year. In response, the stock sold off to $6.30.

How much of a disaster is this going to be? The fourth quarter revenue will be the same as in the first quarter; in the actual first quarter they made $0.07 cents. But since then the company has completed cost-savings that have improved margins. Let’s figure $0.08 cents for the fourth quarter. And say they underestimated revenue slightly, so they could beat their estimates. It’s reasonable to anticipate earnings of $0.10 cents, which will give them $0.50 cents for the year and a P/E of under 13, given the current price.

The mechanical problem at their customer will be fixed in the first quarter, and the new regime in China certainly won’t totally cut subsidies for wind power, especially in the midst of an economic slowdown. Europe will surely stay depressed for a good long time, but it won't last forever. Europeans WILL start buying cars again.

If you think the world is coming to an end, don’t look at Maxwell. But consider the possibility that the world isn’t coming to an end. Maxwell's potential market in trucks and buses is probably 10 times what they have now, and their market in automobiles could be 1000 times their current market if the stop-start system gets incorporated in cars world-wide.

When Maxwell’s revenues rise again they will have that tremendous leverage we talked about above. Four quarters with revenue no larger than this September quarter would give them earnings of $0.84 cents. And if revenues really rose they could easily make $2.00 or more in 2014. At under $7.00, Maxwell seems a real bargain.


SaulR80683 has a long position in Maxwell Technologies. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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