That “new boom is born” the subject line of the email ads/articles I’ve been receiving from Andrew Mickey for his Prudent Investing newsletter from Q1 Publishing — which I think is still just him at this point. My understanding is that Mickey started Q1 after getting fired from Taipan a couple years ago, long-time Gumshoe readers may well remember some of his overheated teasers for picks at BreakAway Investor during those Taipan years, and his current stuff seems downright boring by comparison … less fun for me, but probably a good thing overall.
His new teaser intrigued me, though, so I thought I’d sniff around a bit today. He does not give much in the way of clues, but I’m not against doing some guessing every now and then (Stock Gumshoe policy: if I’m not at least 99% sure of my solution to a teaser ad, I’ll be clear about telling you that I’m making a guess … or, as the analysts like to say, an “estimate.” Usually there’s enough detail given to be definitive, but not always.)
This time, Mickey is telling us about a trend in the car business — specifically, about what we might think of as an “interim” step toward improving fuel efficiency. The technology is called “start-stop”, and it’s basically the easiest part of what a hybrid engine does: the engine is turned off when the car stops, and immediately restarts when the gas pedal is pressed, saving the fuel that’s wasted when idling.
This is apparently in pretty wide use already in Europe, where gas taxes make for much higher fuel prices (and a clearer economic incentive for consumers), and Mickey makes a pretty good case for this as a low-cost way to immediately improve efficiency to help meet new federal fleet efficiency standards (particularly the updated CAFE standard, which is consistently fought over but seems likely to climb 20-30% in the next few years). I’ve seen estimates that range from 5% to 20% for how much more efficient this can be than standard engines, so there’s plenty of variation depending on who you ask, and on what kind of driving and what size of car — clearly this technology gives the biggest bang for the buck for urban drivers who stop and start a lot.
The problem, we’re told, is that conventional lead-acid auto batteries can’t handle this stop-start for very long — it’s too much load to both run the accessories while you’re stopped and to restart the engine so often without enough driving time to recharge inbetween. So a stronger battery technology, which isn’t as fancy, untested or expensive as lithium-ion batteries that are touted as the solution for electric cars, is needed to provide more punch at a reasonable price.
Mickey tells us, “Problem Solved” — here’s how he puts it:
The early leader in the start-stop battery boom is an advanced lead-acid battery called Absorbed Glass Mat Lead-Acid (the industry abbreviates it as “AGM”)…
“AGM batteries are already the standard in marine, RV, audio, and stand-by power applications. Notice these are applications which require a battery to start a motor many times a day just like stop-start will require.
“Simply put, AGM batteries are stronger, more durable, and are designed for the stresses of starting and restarting an engine many times throughout the day.
“Best of all, AGM batteries only cost about $40 to $80 more than a regular car battery.”
So … sounds pretty compelling, right? If there are going to be tens of millions of cars sold in the next few years that are likely to require a battery upgrade, and this AGM battery, which is basically just a newer evolution of the traditional lead acid battery, can do that at low cost, shouldn’t people be getting rich along here somewhere?
Well, perhaps — but Mickey doesn’t actually tease us about the specific company. Well, that’s not true — he teases, but he doesn’t provide any very specific clues. Here’s what he says at the end of his ad/letter:
“That’s why a few days ago I recommended Prudent Investors buy into the one ‘pure-play’ on the coming battery boom necessary to make the stop-start evolution a reality.”
“Pure play,” in case you’re not aware, usually means that you’re talking about a company that has a very focused business in a small area that you find thematically compelling — so in this case, though there are dozens of companies making AGM batteries we would be looking for one that focuses a fair amount of its business on AGM batteries for the automotive (or similar) markets, and that doesn’t do much of anything else.
So with the caveat that with batteries any “pure play” is almost always going to be a pretty small company that’s competing with gigantic conglomerates. There is always a risk to looking for pure plays, in that we seek out the stories that fit our thesis but sometimes ignore the “impure” competition, particularly in industrial technologies where conglomerates dominate. In this case we might remember companies like Panasonic and Sanyo, among the biggest players in almost every advanced battery segment, or Johnson Controls, a huge auto technology company with a big lead acid battery business and AGM technology … none of which could fairly be described as a “pure play” on anything very specific, but all of which help to create a very competitive marketplace for the usually smaller “pure play” companies.
But let’s take Mickey at his word and think of a “purer” play on this AGM battery technology, one that might do well if the market suddenly becomes far larger for this product with demand from stop-start technology.
There are several fairly large lead acid battery companies who build batteries with AGM technology, and that are publicly traded — interestingly enough, this is an area where the oft-teased Chinese battery companies don’t really play a big role, most of them that are publicly traded are in Li-ion or NiMH batteries or focus on other parts of the lead acid business and avoid the automotive market, probably in part because of the intense competition. I assume that many of these companies manufacture in China, but if it’s really all about AGM lead acid batteries, he’s definitely not teasing a stock like China BAK (CBAK), Hong Kong Highpower (HPJ), Ritar Power (CRTP), or BYD (BYDDF). Likewise, though there are plenty of other well-respected battery manufacturers who are selling AGM lead acid batteries, or even focusing on that segment, a lot of them are private — like PowerSonic or EaglePicher.
So who could it be? Well, there are two big, publicly traded US companies that are close to being “pure plays” on lead acid batteries, and both of them sell these “absorbed glass mat” batteries — which are indeed already in heavy use, just not broadly used in standard automotive batteries. Those two companies are Exide and Enersys (ENS), and given their relatively larger commitment to transportation batteries to and to buildout of AGM battery capacity for the automotive segment, I’d guess that Mickey is pitching Exide (XIDE).
Why? Well, mostly because it seems to me after just some preliminary research that Exide is better positioned than at least some of their competitors for this expected surge of demand for more capable automotive batteries, and that positioning and their frequent talk about AGM batteries on conference calls leads me to think that they’re levering the company to this demand, which does make them at least somewhat of a “pure play.”
It’s a bit of a stretch, I suppose, but, as I said, this time I’m left to guesstimate. And if you are wishing to wager on an expected surge in demand, you could probably do quite a bit worse than XIDE — they’re reasonably priced, they have solid brands and have expanded manufacturing capacity, and they’re certainly experts at lead acid batteries in general. Of course, if the demand is as dramatic as some posit, then Johnson Controls and Enersys will undoubtedly ramp up and do well, too, and I assume others would also jump eagerly into the market. Likewise, if this incremental improvement to lead acid batteries also fails to meet the increasing demands of stop-start, perhaps it will be some further evolution or revolution in energy storage that gets the cheese.
I don’t know much about the technology, so when I look into this kind of energy storage stuff I always like to check up on John Peterson’s articles, posted at SeekingAlpha and elsewhere. If you’d like his more thorough technical look at these technologies, he wrote about “first movers” in stop-start last Spring and has plenty of more recent articles, including this one from November — I don’t know if he’ll be right, but he does a nice detailed job of writing up his opinions and he covers this segment more consistently than anyone else I know.
So what do you think? Eager to stop-start your way to battery riches, or does the tale fail to entice? Let us know with a comment below.
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