Electro Energy: Drained, or Ready to Recharge?

Bottom-Fishing for Batteries

I believe that we have only seen the beginning of the current market decline.  You should take that with a grain of salt, since I’ve been unremittingly bearish since 1999 and for more than half that time, the market has been going up.

Even if the market has much further to fall, some stocks may have already taken most of the damage they are likely to take.  Knowing that I might be wrong, I’ve started to do a little bottom fishing among companies that people have been starting to dump as the realize stock prices can also go down.  One of those stocks is Electro-Energy Inc. (EEEI).  Even casual readers of Alternative Energy Stocks know that I’m a big fan of batteries of all sizes, because I view storage of electricity as essential to both improving the way we produce electricity, and using it to run our vehicles.

Over the next five to ten years, I expect that rising fuel prices will mean most new cars will come with hybrid drivetrains, and that some of those will be Plug-in Hybrid Vehicles (PHEVs – now being tested in Japan and Europe.)   The demand for secondary (rechargeable) batteries is projected to grow 50% between 2007 and 2012 solely on the basis of greater use of secondary batteries in electronic devices.   The total demand for secondary batteries in the US in 2007 was about $8 billion, or about 35 million kWh of capacity, but a single PHEV-25 (a Plug-in Hybrid with an all-electric range of 25 miles) would need about 8 kWh of battery capacity, while the current Prius has about 1.3 kWh of batteries.  Annual production of 4.5 million PHEVs (60% of the current number of cars sold in the United States) would double US demand for secondary batteries.  

Clearly, a 60% penetration rate for PHEV passenger cars will take a long time.  Yet we are likely to see a continued rise in the percentage of hybrid vehicles, an increase in the number of electric vehicles (EVs), and continued penetration of hybrid drivetrains into public transport, commercial and industrial vehicles.  One factor which is likely to drive adoption is the new move towards leasing batteries currently being pursued by Th!nk and considered by GM, allowing customers to purchase EVs and PHEVs without an additional upfront cost.

Battery Technology: Harder than it Looks

Batteries have been around almost as long as humans have known about electricity.  The word was coined by Benjamin Franklin, although what he was working with was a type of capacitor.  The first electro-chemical battery, which produced electricity through an electro-chemical reaction like batteries used today, was invented in 1800.  

Over 200 years later, we’re still struggling to concoct affordable batteries that can store energy at sufficient density and be recharged enough times to be used in practical Plug-in Hybrid vehicles without exploding.  Despite the recent burst of interest in advanced lithium-ion (Li-Ion) batteries, history shows that battery technology is tricky.  This isn’t rocket science… it’s more difficult.  Even if you’re convinced that one particular battery chemistry is far superior to all the others, this report on the limits of available Lithium makes a convincing case that we’ll have to use a mix of battery chemistries just on the basis of resource availability.

Given all that, makes sense to hedge our bets by looking at companies whose fates do not rest on perfecting new technology to succeed.

Electro-Energy (EEEI) is one such company.  Their core technology is a method of manufacturing bipolar cells, an innovation that’s been around for years but has resisted commercialization due to electrolyte leakage.  Bipolar cells are a different battery geometry which lessens a battery’s resistance to current flow, and allows a smaller battery to produce comparable power to a conventional cell.  They currently use this technology with several battery chemistries: including the familiar Nickel-Cadmium (NiCd), Nickel Metal Hydride (NiMH), and Li-Ion battery chemistries.   This implies to me that if other companies succeed in improving batteries with better chemistries, separators, or electrodes, EEEI will likely be able to further boost the power of the new battery with their bipolar geometry.

My attention was recently drawn to Electro Energy in an interview with Kirby Beard, COO of Porous Power Technologies, a battery membrane developer.  He pointed out that their plant near Gainesville, Florida is the largest battery production facility in North America.  While the facility requires some re-tooling, it would be valuable to a company wishing to expand battery production in North America. 

Bipolar Depression

EEEI has had a baleful performance since the stock price peaked around $13 in December 2004.  The big price drop in August was triggered by their disappointing second quarter results.  The move was probably accentuated by a lessened willingness of investors to take on risk.  EEEI has explicitly stated that they need to secure additional funding to cover operating costs until they can reach positive operating cash flow, and on Thursday they announced that they announced they had engaged a specialist law firm to help them with debt restructuring, a move which spooked investors again on Friday.  

However, interest in alternative energy investment remains high among sophisticated investors.  EEEI is a company with interesting technology, as well as Gainesville plant, which they acquired for $21 million in stock and warrants in April 2006.  With the decline in stock price, EEEI’s entire market capitalization has fallen to $12.37 million.  You can now buy a piece of the Gainesville facility for 40% less than they paid for it 17 months ago, and you get their technology, their other facility in Colorado Springs, and a management team described by Torc Investments as "impressive" thrown in effectively for free. 

While institutional investors have been dumping EEEI stock by the truckload, President and CEO Michael Reed bought his 65,000 shares last winter and spring, at prices between $1 and $1.50, although no other officers own stock in the company.  I have not yet been able to determine if Mr. Reed’s purchases were voluntary, or part of the company’s stock incentive program, so his ownership is not necessarily a sign that he is bullish enough to buy the stock on his own accord.  The balance of the roughly 28% of the company owned by insiders is the stake which was exchanged for the Gainesville facility, so we cannot draw conclusions from their continued ownership.  

Given the tightening credit markets, getting funding is likely to be much more difficult than it would have been just six months ago.  Does the stock have further to fall?  Quite possibly.  Is it currently well valued, even given the risks?  I think so.  In such situations I usually buy small amounts with limit orders near current prices, and and then buy more if the stock falls further.  Stocks that are this beaten down and lightly traded can provide excellent buying opportunities to investors with extremely strong stomachs, because even a small order can move the price considerably in any direction.

More Than the Sum of its Parts

Given the rapidly growing interest in hybrid, plug-in hybrid, and electric vehicles, and my expectation that the market for secondary batteries of the type EEEI makes will grow faster than current consensus projections, I believe that the company’s value if it were broken up and sold off would be higher than the current market capitalization.  If EEEI can obtain financing to ramp up production at the end of this year and during next year as planned, the gains for investors today are likely to be considerably greater.

Many investors are currently depressed about this bipolar battery company.   I’m waiting for the next manic episode.

DISCLOSURE: Tom Konrad  and/or his clients have positions in the following stocks mentioned here: EEEI.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.