John Petersen
Monday morning a reader sent me a link to a December 23rd press release announcing that the OM Group, Inc. (OMG) had agreed to buy EaglePicher Technologies LLC, a well regarded name in the battery industry, for $171.9 million, or roughly 1.4x sales. While I overlooked the release during the build-up to Christmas, the transaction is important because it provides a current bright-line reference point for energy storage investors on the difficult question, “what is a battery company worth?”
EaglePicher was previously a unit of Eagle Picher Holdings, a public company that filed a voluntary petition under Chapter 11 of the Bankruptcy Code in April 2005. While I can’t find detailed disclosures on the reorganized company’s lines of business and profitability, EaglePicher’s website describes a variety of battery chemistries ranging from lead-acid to lithium-ion and the press release indicates that approximately 60% of revenue comes from its defense business, 31% comes from its aerospace business and the balance comes from medical and commercial battery systems. The EaglePicher acquisition seems to be a logical step in OMG’s vertical integration and diversification strategy.
Since the details are limited, it’s hard to perform a meaningful analysis of the various factors that give EaglePicher value. Nevertheless, the 1.4x sales number is very interesting because of the huge disparity in price/sales ratios among the 17 pure play energy storage stocks I follow. The following table identifies the companies in my tracking group, shows their December 31st closing price, shows their current market capitalizations, and shows the price/sales valuation ratios reported by Yahoo finance.
While price/sales ratios have little or no utility when it comes to evaluating emerging companies that have not yet hit their stride when it comes to product sales, it can be a useful screening tool when comparing established operating companies that have relatively stable sales histories. Based solely on the price/sales ratio from the EaglePicher acquisition, I would conclude that the following companies might be undervalued:
- C&D Technologies (CHP), which trades at 12% of sales;
- Exide Technologies (XIDE), which trades at 20% of sales;
- Ultralife (ULBI), which trades at 43% of sales;
- Enersys (ENS), which trades at 68% of sales;
- China BAK Battery (CBAK), which trades at 84% of sales; and
- China Ritar Power (CRTP), which trades at 87% of sales.
Investors can’t rely on a single metric in making an investment decision. Nevertheless, since the level of investment success frequently has a direct correlation to the initial entry price, knowing how the market price compares with recent real world deals can be very enlightening.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also holds small long positions in C&D Technologies (CHP), Exide Technologies (XIDE), Active Power (ACWP) and ZBB Energy (ZBB).
John,
You really need to adjust the P/S ratio to reflect the fact that Eagle Pitcher is not public. Publicly traded companies usually trade at considerably higher price multiple compared to private buyouts.
For the P/S ratio, the median is 0.6x for private buyouts, and 1.6x for public ones.
Source: Keating
Capital [ppt]
Slide 28.
I understand that public company P/S ratios are typically higher than private company ratios, but I have a hard time estimating what a justifiable adjustment would be. Even so, if something in the 0.6 to 1.6 range would be considered normal, public companies at 0.1 and 0.2 seem to offer interesting opportunities for value hunters who like the restructuring work that is either in process or recently completed.
Good point. The adjusted number would be somewhere in the 2x to 5x range (1.4×1.6/0.6=3.7), so I’d say that any company with a P/S below 2 would seem to be a relative value by this measure. Reinforcing your point about all the “Cheap sustainables” and making Ultralife an interesting object for further research. (I’m not comfortable using this metric on Chinese companies.)
Tom, I’m a real weenie when it comes to Chinese companies because I’ve spent enough time in Asia to know that I really don’t understand the business culture. Since I hate risks that I don’t understand and can’t quantify, I generally stay away from Chinese companies and leave them to investors who understand more than I do.