Alice in EVLand: Cracks in the Looking Glass

In his 2006 State of the Union Address, President George W. Bush said:

Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology.

What a crock of balderdash! If you compare U.S. fuel prices with those in other industrialized countries, gasoline is a screaming bargain and the same can be said for electricity. It's not the energy we use that's a problem. The problem is the immense amount of energy we waste, and that problem will keep getting worse until higher prices force us to change.

The world can't stop using oil without immeasurable suffering. Since we can't simply quit, the best we can do is accept the ugly truth that we're all wasteful petroleum gluttons who need to cut our consumption to more sensible levels. You don't cure drug addiction with better and cheaper drugs, and we can't cure our oil addiction with magic technologies mandated by Congress. We must accept personal responsibility and change our wasteful habits instead of blaming others or looking for a painless solution. In the final analysis, the solution to our problems is visible in every looking glass we pass.

Three weeks ago I wrote "Alternative Energy Technologies and the Origin of Specious," an article that examined the serial failures of panacea energy policies that promised independence without pain. Since then I've seen a number of reports that strike me as cracks in the EVLand looking glass, including:

• A February 28th earnings release from A123 Systems (AONE) that reported 69.2 million watt-hours of battery shipments, $73.8 million of battery sales, and $94.3 million of production costs for the year ended December 31, 2010; which pencils out to an average customer price of $1,067 per kWh and an average production cost of $1,363 per kWh.
• A March 2nd report from hybridcars.com that cumulative sales of the GM Volt and Nissan (NSANY.PK) Leaf for the first two months of this year were a whopping 756 units, as compared to cumulative HEV sales of 42,726 units.
• A March 3rd Bill Ford Jr. interview at the ECO:nomics Conference where he characterized the Volt and Leaf as "talismanic vehicles" and expressed grave reservations about meaningless sales projections, the lack of charging infrastructure and the grid's ability to support electric vehicles if they ever became mass market products.

Many readers assume that I have an irrational hatred of electric vehicles and the companies that make them when in truth my only concern is whether those companies are good investments at current prices. During his recent presentation at the United Nations Climate Change Conference in Cancun, Dr. Steven Chu, the Secretary of Energy, said:

"And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. And then all of a sudden you have a comparably performing car; let's say a mid-sized car which has a comparable acceleration and a comparable range."

...Now, how soon will that be? Well, we don't know, but the Department of Energy is supporting a number of very innovative approaches to batteries and it's not like it's 10 years off in the future, in my opinion. It might be five years off in the future. It's soon. Meanwhile the batteries, the ones we have now, will drop by a factor of two within a couple of years and they're gonna get better. But if you get to this point, then it just becomes something that's automatic and I think the public will really go for that."

When Dr. Chu tells the world that battery manufacturers won't have a competitive product unless their prices fall into the $300 per kWh range, and A123's annual earnings release reports that its production costs overshot that goal by a whopping $1,000 per kWh last year, I don't see a lot of upside potential. When a poorly capitalized company like Tesla Motors (TSLA) trades at 11.5 times book value and 20.4 times last year's sales I wonder what the markets are smoking. When more than half of Ener1's (HEV) equity is in mushy balance sheet categories like intangible assets, goodwill and investments in money losing subsidiaries, I can't help but think back to the asset impairment charges that crushed C&D Technologies last year. I'm completely baffled by the valuation disconnect at Valence Technologies (VLNC) which is upside down to the tune of $67 million but sports a $243 million market capitalization.

I hate to be the bearer of bad news, but these companies are just starting their journey into the valley of death. They may survive the trek, but their bloated stock prices can't. The EV dream may be beautiful, but for the next decade EV investments will be ugly as sin.

Each of us knows that we need to go on a petroleum diet, but none of us is willing to starve in the process. For the next decade, at least, the only real solution will be aggressive steps toward increasing fuel efficiency. Observant investors saw the writing on the wall when the EU and the US adopted stringent new CO2 emissions and fuel economy regulations that will start taking effect this year. I saw the impact last week in Geneva where the press headlines gushed over grand plans for plug-in cars but the vehicles on display proved that manufacturers are turning to diesel and natural gas fuel systems, direct fuel injection, dual clutch transmissions and stop-start systems as their mass market solutions. We all know that actions speak louder than words. I'm here to tell you the automakers' actions don't have plugs.

Two weeks ago I identified a list of five fuel efficiency stocks that should outperform the market by a wide margin over the next couple years because the die is cast and the solutions are being implemented today. To keep things interesting, I'll use last Friday's closing prices to formalize that list in a hypothetical $25,000 long portfolio structured as follows:

Company	Symbol	Shares	Investment
Johnson Controls	JCI	121	$4,998.51
Enersys	ENS	139	$4,984.54
Maxwell Technologies	MXWL	281	$4,993.37
Exide Technologies	XIDE	431	$4,995.29
Axion Power	AXPW.OB	6,172	$4,999.32
Cash			$28.97
Total			$25,000.00

I'll also use last Friday's closing prices to formalize my long-standing and oft-repeated position on vehicle electrification with a hypothetical $25,000 short portfolio structured as follows:

Company	Symbol	Shares	Investment
Tesla Motors	TSLA	-200	-$4,990.00
A123 Systems	AONE	-599	-$4,995.66
Ener1 Inc	HEV	-1,428	-$4,998.00
Altair Nanotechnologies	ALTI	-1,953	-$4,999.68
Valence Technology	VLNC	-3,144	-$4,998.96
Cash			$49.982.30
Total			$25,000.00

In coming months I’ll revisit both hypothetical portfolios on a regular basis and either gloat or eat crow as the circumstances dictate. It will be fascinating to see whether the cracks in the looking glass spread or heal themselves.

Disclosure: Author is a former director of Axion Power International and has a substantial long position in its common stock.