Elon Musk's Crystal Ball: Are Supercapacitors Superundervalued?
T. M. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tesla Motors CEO Elon Musk claims that capacitors will eventually supersede batteries in electric cars. (Whether or not electric cars will supersede fossil fuel ones is another story...) His company’s plans to ramp up production 40-fold means that businesses like Maxwell Technologies (NASDAQ: MXWL), one of the few publicly-traded supercapacitor manufacturers in the United States, may become yet more vital in the emerging alternative energy economy.
Competitors like Tecate, Ioxus, EPCOS AG, and National Semiconductor Corporation are still privately held; those that are publicly traded are primarily based in China, and I don’t recommend investing there without thorough research backing the decision. Does that make Maxwell, currently trading on the cheap, the bargain growth stock of the moment?
Under the Hood
Maybe. Maxwell has not fared well in the global recession, blaming austerity measures in Europe and cutbacks in China's wind program; it's a falsely reassuring explanation when a business takes no responsibility for its fortunes, ebbing or otherwise. Poor revenue growth of 6.22% and an increase in receivables (12.4% from last quarter) suggest, at first glance, a business that is stagnant and increasingly unable to be rid of its inventory in a market glutted by foreign competitors.
However, with a price-to-book ratio just above 2 and a wholly-manageable debt-to-equity ratio hovering below 1, this is a safe buy at its current price -- with little to no overvaluation of the stock, it is unlikely to drop significantly from its current low price. Maxwell’s dependency on government spending in Europe and China means that when the global recession fully recedes and austerity measures are lifted (as they inevitably will be), the still-afloat manufacturer will be positioned to continue storing and transporting the energy produced by the green energy initiatives mushrooming in both regions.
The Panasonic Corporation (NASDAQOTH: PCRFY) is one of Maxwell's primary competitors in the ultracapacitor sector, and their close work with Toyota has positioned them to take advantage of the electric car industry -- if it ever takes off. Indeed, the story of the $15 billion Panasonic seems to be one of 'waiting', lately: the company reported increasingly negative net income until its most recent quarterly report, taking home only 2% of its operating income. Their return on equity is over -30%, which, paired with their recent -6% revenue growth, means that this company is far, far, far from profitable for anyone involved.
Further worrying investors, cash and equivalents have dropped on average 10% the past four quarters, while short term debt has increased by 14% in that same period.
On the other hand, Panasonic did finally pull itself into the realm of positive income; the previous quarter's poor income (and this quarter's improvement) is largely due to a large, one-time expenditure on R&D gulping down 36% of that quarter's sales. Meanwhile, long term debt continue to be paid down at roughly 7% a quarter. The current ratio is still 1, indicating that Panasonic remains unstable in its liabilities, but that may improve if it can also manage to take care of its ballooning short term debt.
Alternatives
Exide Technologies (NASDAQ: XIDE) offers an alternative to supercapacitors in stop-start technology; the stock itself is notably affordable, with declining profits suppressing, but not depressing, the growth of the stock, as it hovers between its 52-week high and low. Their profit margin has declined to just below 14%; this past quarter their return on equity dipped into the negative at nearly -12%.
What reassures me about this risky company is its not-as-bad-as-you'd-think with a current ratio of 1.6 and price-to-book of 0.9: not ideal, certainly, but Exide remains somewhat more valuable than what it's been priced at. If the company can hold on and improve sales, it will likely inch back towards its 52-week high. Going beyond that would require a stronger effort on Exide's part than it current seems capable of making, but today's losers are, after all, tomorrow's winners...
A Better Tomorrow?
Exide is ultimately a bet that the company can pull through and improve profits. Do I think it will? R&D is approximately 0% of its spending, and for a technology company in a relatively new field (alt-energy automobiles) that is worrisome, to say the least.
I don't recommend buying Panasonic as it is, but it is looking healthier, and with a market cap of $15B, it will likely endure for the foreseeable future. Keep an eye out for future reports, positive ones, on Panasonic's fortunes.
Undervalued as it is, Maxwell's return on equity of 4.58% in its season of discontent is reason to believe in this company’s ability to grow; with R&D increasing YOY by 25%, Maxwell seems to feel similarly. Since April, insiders have been snatching up the stock at its current bargain prices, suggesting yet further confidence on the part of Maxwell in its ability to exploit the incoming rebound in government funding.
Maxwell's minor cutting of R&D in Q2 warrants some caution, as does the forward march of receivables. However, EPS looks to increase, and Zacks continues to trend upwards in its estimates. Investment is for the future; buying Maxwell is essentially a bet that the global economy will rebound, and governments will once again begin the hungry hunt for energy.
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