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February 2006: Batteries, Fuel Cells, Photovoltaics

ECD Ovonics (ENER)

It is altogether fitting that this first installment of Energy Equities should focus on ECD Ovonics, symbol ENER, (previously known as Energy Conversion Devices,) because the driving force behind the development of Nickel-metal hydride batteries. They have provided major newsworthy items for BD since the first issue in April of 1995 and currently enjoy a two year stock price ramp up which may be signalling a coming-of-age for this 46 year old company. To BD as a fledgling publication, ENER kindly opened their doors so that we could write an overview which became the cover story of the May 1997 issue. Over the years, ENER has continued to provide major newsworthy business developments in the field of batteries, photovoltaics, and hydrogen storage for fuel cells.

Markets

Our problem in classifying ENER is in deciding which product field ENER should reside. From the 1980s, founder Stanford Ovshinsky created new battery technology with his metal hydrides. Who, other than Stanford and Iris Ovshinsky, could be considered the parents of Nickel-metal hydride batteries with their  persistent quest to make the technology a superior power source?

The amorphous technology was also applied to photovoltaics (PV) with the outcome of thin-film amorphous shingles which look so much like ordinary roofing that many applications have been swayed by their blending appearance. Today, ENER is a major supplier of PV materials worldwide.

An astute or lucky investor who bought ENER at $6.82 on March 11, 2004 has been rewarded with 8 banger performance in less than two years. While some may say that it may be a recovery after the dot-com/Enron bust, there is a special longer term scenario of transition for ENER in which it has finally been accepted and rewarded for creatingits intellectual property in Nickel-metal hydride batteries, begun a new era of product manufacture with Cobasys and expanded production of photovoltaic product.

Underlying these developments has been a gradual increase of attention to the green economy-featuring hybrid autos, photovoltaics, hydrogen and rising oil prices. Having paid its dues in pioneering green technologies, the era of cashing in on acceptance of a cleaner environment energy independence may allow ENER to continue to also grow in photovoltaics and hydrogen storage. The thin film disk and semiconductor memory product also appears to be gaining importance for ENER’s revenues.  (Data from NASDAQ.) +

As fuel cell technology has evolved, the method for storing hydrogen has been a major stumbling block because of hydrogen’s low density. A natural progression for Ovshinsky was to take the deep experience obtained in metal hydrides for batteries and apply it again to the storage of hydrogen, this time in cannisters which become the ‘fuel tanks’ of fuel cell devices and vehicles. This business is still in its infancy as all forms of fuel cells continue to grapple with the problems of cost and reliability. Today, ENER has 100% ownership of two separate companies Ovonic Fuel Cell LLC and Ovonic Hydrogen System LLC.

What may be seen as ENER’s newest business, may also be its oldest. In the 1960s, Ovshinsky made a valiant attempt to make amorphous materials the basics of integrated circuits. Although crystalline won the day, the features of amorphous materials have been redirected to erasable and re-writable CDs and DVDs. The reformability of amorphous material has been extended to thin-film semiconductor memory devices which are programmed to permanently store data, then be erased and finally reused to store new data. This configuration of memory has advantages over flash and DRAM memory.

Shown as a separate organizational block is another core competence of ENER, that of machine building. Being the originators of the various technologies, ENER extends its competence to the construction of machines showing production of hydride and photovoltaic materials which are then made available to licensees and joint ventures.

ENER is then in multiple markets with related but different product offerings. If the corporate culture of inventiveness is added in as a separate entity, the diversity of offerings is overwhelming. And yet, it all connects with amorphous, hydride and material science excellence. Because of the product diversity and the versatility of BDs linking website, ENER is included in all of the categories - Batteries, Fuel Cells and Photovoltaics. While different, the separate categories all gain connectivity and strength as the need for global environmental conservation and energy independence become pervasive.

Management Team

Few, if any, corporations can match the years of experience aggregated by the founders, Stanford and Iris Ovshinksy plus Chairman/CEO Robert Stemple.  The Ovshinskys organized and directed the company as they invented technology for over 45 years. This past November, Stanford was awarded the 2005 Innovation Award for Energy and the Environment by The Economist. He was cited as one who has been instrumental in transforming businesses, industries and markets. His inventions, discoveries and developments have impacted batteries, electric and hybrid autos, electronic memories, data storage and photovoltaics.

Mr. Stemple guided General Motors in its earlier days and continued his dedication to cleaner transportation as he steered the present success of ENER with batteries for hybrids. Rather than gain competence through acquisition, ENER has consistently led the science of amorphous materials and hydrides with internal creativity, resulting in its rich vault of  intellectual property which forms a significant part of its revenue stream in licenses and joint ventures. ‘Not invented here’ stickers are probably reserved for bags of Big Macs brought in for lunch at ENER.

Competition

The diversity of ENER makes it difficult to classify the stock within a particular marketplace. A Morningstar search would show ENER in the ‘Industrial Machinery/Components field. Here it would be compared to companies such as Illinois Tool Works, Deere & Company and Ingersoll-Rand. But ENER is generating major revenues from batteries and battery patent royalties plus residential and commercial rooftop phototvoltaics.

If we really want to analyze the competition for ENER, it would be more advantageous to look at the longer term competition from Lithium-ion batteries used in hybrid autos and power tools. Today, the choice falls with Nickel-metal hydride, but there is a lot of work being applied to the improved safety, reliability and cost reduction of Lithium-ion for automotive applications. The field may be big enough for both Nickel-metal hydride and Lithium-ion suppliers. Early in the production offering of Ford’s Escape hybrid, delivery was limited by the unavailability of Nickel-metal hydride batteries. Many more hybrids are being added in both the mainline and luxury automotive lines. Government incentives are continuing to sweeten the reasoning for buying a hybrid beyond the gas refueling costs. There are those who pay lip service to the greener and economic aspects of hybrids, but as a nation, the majority of U.S. consumers really does not embrace hybrids when  compared to their euphoric interersts in driving monster truck/SUV vehicles. Portable tools powered by Lithium-ion have the advantage of greater run time for equivalent size batteries. This is still an infant application and the final sharing or winner-take-all condition is to be determined.

If we page forward to the days of $3-$5/gallon gasoline, the howls of public frustration will give way to real transportation efficiency solutions which could see the resurgence of the plug-in commuter auto and fleet electric vehicles which were scrapped with the California electric vehicle program in the 1990s. Such a situation, which most economists think unlikely, would add dramatically to the value of ENER if it could meet production demands.

There is a similar situation in the solar field. ENER is a leading manufacturer of thin-film solar panels. The company, United Solar Ovonic Corp. is 100% owned by ENER. This past year, building began for a new solar module manufacturing plant in Auburn Hills, MI; full operation in this plant will double manufacturing capability. The plant is scheduled to open in May 2006. Another PV business unit, Sovlux PV is a joint venture with KVANT/MINIATOM; it is 50% owned by ENER.

In all the ENER PV thin-film product, the materials are 100 times thinner than crystalline product and do  not use silicon, skirting the world shortfall which will keep the price of crystalline PV high. The thin-film PV panels have the advantage of accurately resembling roof shingles, adding a degree of architectural attractiveness unavailable from crystalline and polycrystalline solar panels. BD provided an in-depth description of the technology and a large ‘solar farm’ application built and operated by Chevron Texaco in Issue 98, pp 1-11. As the price of oil and natural gas has escalated this past year due to increased global demand led by China and India, the desirability of capturing ‘home-grown’ solar energy begins to look more like a good economic alternative. Complicating the issue of PV acceptance is the growing acceptability of clean burning coal and new attitudes toward nuclear power.

Photovoltaics (PV) might be viewed like undertakers. You can either visit them sooner or later, but you will eventually have to visit them. PV is that ‘undertaker’ for energy, because other than radioactivity and geothermal, all other energy is derived from the sun. In the case of fossil fuels, a few million years are involved; and in renewables, a growing season is involved, but with PV, what-you-see-is-what-you-get right now. Today, PV is more expensive than hydrocarbons, but as oil becomes more scarce relative to global demand, PV will be standing there ready to deliver for a few billion years. (Oh yes, it is also ecologically pristine clean and locally available.)

To verify ENER’s position in the PV market, we only have to look at an example such as the recent agreement with  Actus Lend Lease to provide 7 MW of UNI-SOLAR® PV for the Army power grid for new and renovated homes in Oahu, Hawaii. The sun power is targeted to reduce fossil fuel use by 30% for a complex of 7,894 new and renovated homes. Not only does UNI-SOLAR®, a core business of ENER, supply the product, but ENER also holds the patents on the continuous roll-to-roll manufacturing of thin-film amorphous-silicon alloy multi-junction solar cells and related products.

Do not rule out clean coal or nuclear as enemies of ENER completely. If oil prices continue to escalate, the availability of cheaper grid electricity could ‘fuel’ the return to the aforementioned electric vehicle, providing big needs for batteries. If a new cheaper-than-oil electric grid took hold, there could also be a change of heart about rail transportation which, if implemented as it is in Europe, could mean a resurgence of the rented electric town car to supplement mobility at the expense of private autos.

The field of fuel cells may be the most elusive short term segment of ENER’s business. With the Ovonic Fuel Cell Company LLC and Ovonic Hydrogen System LLC business units, both 100% owned by ENER, the market demand has not yet evolved. While revenues may incrementally increase, the future for stationary, portable and consumer fuel cells is still a way off because of pricing and durability limitations. Still, one can think back to the late 90s. As the California Air Resources Board’s electric vehicle and associated needs for Nickel-metal hydride batteries dried up, a new ned for Nickel-metal hydride batteries reappeared with the hybrid auto. Similar  discontinuities such as technical breakthroughs, restructured thinking or oil price escalation could open the field of fuel cells faster than expected,  allowing experienced companies such as ENER to share in  the growth.

Financials

ENER is unique in that the company has existed for decades as a scientific invention generator. Founder Stanford Ovshinsky has an innovative mind which has created the amorphous and hydride  sciences, and as a result, ENER amassed a great deal of intellectual property which provides revenues directly. As Stan becomes the elder statesman of related creativity, we see a growing focus on the competitive production of Nickel-metal hydride batteries and photovoltaics seriously contributing to sustainable  revenues. Because there is a movement to capitalize on the inventions with production in fields which earlier were not able to accept the product costs, one might see ENER not just as a 45 year old company, but as a company whose time has come to capitalize on the hard work of inventing unique batteries and PV.

Better mousetraps do not take the day as Sony found out with the Betamax video tape business. Similarly, ENER having a new lease on life must develop brand recognition, product acceptance, and manufacturing expertise.

In the current year, (2006 ending in June) the projected earnings are a negative 63 cents per share. This is not a great number for a 46 year old company which has experienced high stock price growth of the last 2 years. But in 2007, earnings are projected to turn positive with an  estimated 26 cents per share. At the current ballpark price of $55/share, that means an aggressive 200+ P to E. This is a pretty rich number which compares to many of the dot-coms of the late 90s which made money for some at the right time, and lost tons for others as the experience unfolded.

Adobe Photoshop ImageOn January 9,2006, Cobasys announced that they had been selected by GM’s Saturn division to provide the Nickel-metal hydride battery system for the Saturn VUE Green line SUV to be available in the summer of 2006. The package consisting of a 36/42 Volt system contains battery and electronics. It provides battery assist during acceleration, engine-shut-off at idle and regenerative braking. This is a major step in the growth for Cobasys, establishing it as an OEM to the U.S. auto industry. Cobasys LLC is a joint venture between Chevron Techonolgy Ventures LLC (50%) and The Ovonic Battery Company (50%). Ovonic Battery is 91.6% held by ENER with the remaining 8.6% held by Honda, Sanyo and Sanoh. (Photo is courtesy of Cobasys.) +

A reason for the acceptance of the rich valuation of ENER may be based on recent revenue increases. After quiet performance in 2003-2004, ENERs revenues more than doubled to  $156 billion in 2005. This was accomplished with no increase in operating expenses.

News from ENER has been very good recently as indicated by the  long-term license agreement with Samsung for its phase change memory which carries a promise of faster write and erase speed plus endurance than flash memory.

BD will be the first to admit its accounting analytical skills limitations, so an overview of the financials is not in order here. But we can look to a few simple indicators which could assist in thinking about investments. After profitability our next concern is for free cash flow.  As of the September 30 quarter, operating cash flow was a negative $ 33.54 million with revenues of          $157 million. Total debt of $ 0 is extremely good and there is $88 million in cash. Although it is desirable to have return on equity (ROE) greater than the P/E, ENER’s 34% ROE cannot stand up to the present forward 200+ PE.

A recent sale of ENER’’s equipment and plant to produce metal hydride  powder to Great Western Technologies may signal a new attitude of ENER to focus on current positive cash flow. While the operation has future possibilities, today the project is still considered in the development phase.

It is a breath of fresh air to see that all of the top 5 ENER executives together are paid  less than $1.5 million. The group also exercised less than $5 million in options for the past year.

In an environment which sees CEOs, sport figures and entertainers gobbling up multimillion dollar packages for jobs carrying minuscule risk compared to our military, police and firefighters, the three order of magnitude pay gap is growing more suspicious to potential or current stockholders and may be an indicator that shareholder value may not be of much concern behind the boardroom doors.

ENER Today

As this account was being written, ENER stock was in a major dynamic condition. A major move from $30 which started in December peaked in mid-January at $55. One might suggest that the combination of production news, new associations and the anticipation of oil alternatives increasing importance fueled the growth. At mid-month, words of caution from analysts such as Herb Greeberg of Marketwatch put a cloud over the stock which retreated to $47 dollars. While the future direction is yet to be determined, there could be additional volatility.  

ENER Tomorrow

In the past 10 years, ENER has cycled from a low of $5 in 1998 to a prior high of $45 in 2000. ENER’s traditional focus on innovation  carries problems including technology acceptance which did not produce success in amorphous semiconductors of the 1960s. Then the focus on Nickel-metal hydride with the electric vehicle program in California in the 1990s did not happen. Commercial and home photovoltaics, while environmentally clean, cannot compete with fossil fuel costs, and can only find implementation beyond niche markets where significant government subsidies are available. Part of the January price growth was due to the California Public Utilities Commission approval of its Solar Initiative  which provides about $3 billion in incentives from 2007 to 2014 to develop and promote solar power. Meanwhile, protecting intellectual property carries high litigation expenses, and limited time of patent ownership, requiring continual innovation additions to keep relevant. Past battery and PV production  programs have not  produced growth but as world demand for oil grows, the desire for both hybrids and photovoltaics increases, providing ENER an opportunity to demonstrate sustainable growth. Posting competitive growth in earnings will be the key for ENER.

Information for this overview was obtained form Yahoo Finance, NASDAQ, the ENER Website, ENER press releases, and prior BD stories. ENER did not respond to BD requests for additional information.

Neither the author nor Teksym Corporation holds stock in ENER.  
BD