9/9/2009 12:01 AM ET
Plug into electric-car batteries
All the electric and hybrid cars that are in the works will need rechargeable batteries to run on. And the market for producing them sees nothing but growth for a long way down the road.
By Jim Jubak
It's 1967. In "The Graduate," the experienced Mr. McGuire leans over to whisper advice to the inexperienced Benjamin (played by a young Dustin Hoffman).
"I just want to say one word to you. Just one word."
"Yes, sir," replies the polite Benjamin.
"Are you listening?"
"Yes, I am," Benjamin assures him.
"Exactly how do you mean?"
Write that same scene today and McGuire would whisper "Batteries." Especially if he were a savvy investor who followed the trends in the global auto industry.
You've undoubtedly read the stories about General Motors' (MTLQQ) electric car, the Chevrolet Volt, scheduled to go on sale in 2010. That car -- with its $40,000 price tag and GM's claims of 230 miles per gallon -- is either a gimmick designed to convince the U.S. consumer and the Obama administration that the company has turned over a new leaf or a portent of how much things are changing in Detroit.
Whichever it is, the Volt is only one drop in a wave of hybrid electric and plug-in electric cars that is going to wash over the global auto market in the next two decades. In June 2008, Deutsche Bank counted 75 new hybrid electric models set for sale by 2011. And the number has only gone up since then. The National Highway Traffic Safety Administration projects that hybrid cars could take as much as 20% of the U.S. auto market by 2015, up from just 2% in 2007. In Europe, according to marketing company J.D. Power, hybrids and electric cars could account for 50% of the market by 2015, up from 2% in 2007.
And every one of those hybrid and electric cars will need a rechargeable battery. Most of those new batteries will be lithium ion batteries. The automotive market for lithium ion batteries is close to zilch today. Hybrids such as Toyota's Prius run on older nickel metal hydride battery technology. (Conventional car batteries use a lead-based technology.) But lithium ion technology, with its lighter weight and greater ability to stand up to recharging after being completely discharged, is the likely technology of the future.From just about zero now, Deutsche Bank estimates that the automotive market for lithium ion batteries will hit $10 billion to $15 billion in sales by 2010. (The entire market for lithium batteries in things like rechargeable phones and laptop computers was $7 billion in 2007.) By 2020, when the bank projects that lithium ion technology would have just about completely replaced nickel metal hydride technology in cars, the automotive market for lithium ion batteries could reach $30 billion to $40 billion annually.
But just how do you invest in this coming wave of automotive lithium ion batteries? All up and down the battery food chain, that's how -- from the companies that mine lithium to the companies that make the key pieces that form the guts of the batteries, to the battery makers themselves.
The Obama administration is pumping money into batteries, too. For a list of some of the companies that divvied up the first $2.4 billion in government money, see my blog update.
Option 1: The miners
The vast majority of lithium now comes from salt lakes in Chile (about 65%), Argentina and Nevada, and from mines in China.
But that's changing quickly. The global demand for lithium is projected to grow from about 11,000 metric tons in 2012, according to Deutsche Bank, to almost 90,000 metric tons in 2020. Getting to anything like that figure is going to require a huge increase in supply. (It takes about 6 pounds of lithium to make a car battery.)
Big increases in supply look like they'll come from China and (maybe) Bolivia. Both countries have announced plans for new production from salt lakes.
The roster of publicly traded lithium producers is pretty small. The two I'd concentrate on are:
Sociedad QuÃƒÂmica y Minera de Chile (SQM). The company produces about 65% of the lithium that comes out of the Salar de Atacama region of Chile. Recoverable reserves there make up 20% of the world's known reserves.
FMC (FMC). The company produces lithium from Argentina's Salar de Hombre Muerto region, where recoverable reserves are estimated at 11% of global known reserves.
Other lithium producers include U.S. company Rockwood (ROC), Australia's Admiralty Resources (ARYRY) and China's CITIC Pacific (CTPCY).
Option 2: Companies that make battery guts
My preference here is a specialty chemical company called Polypore International (PPO). In these batteries, during discharge lithium ions travel from one electrode, the anode, to another, the cathode, through an electrolyte and a membrane separator. Polypore makes membrane separators for lead acid and lithium ion batteries. The company's energy storage segment accounted for 71% of sales in 2007, with lead acid separators making up 55% and lithium ion separators 16%. (I'm using 2007 figures here because it was the last normal year before the economy went into free fall.)
Japan's Asahi Kasei (AHKSF) is another big player in battery membrane separators.
Option 3: The battery makers
Technology is important here. Lithium ion technology is still changing as companies try to make the batteries safer, more reliable and, perhaps most importantly, cheaper. Lithium battery makers are trying a variety of technologies to prevent what's called thermal runaway. In a collision, a lithium battery could catch fire as the chemical reaction that normally generates electricity instead generates excessive heat. In addition, lithium ion batteries aren't very reliable at very low or very high temperatures.
Research into all three problems has concentrated on finding ways to make the electrodes more stable and more powerful, and on re-engineering the cells of the battery to add more effective separators that prevent fires.
I'd call A123 Systems the current technology leader. The company's lithium iron phosphate cathodes seem like they solve many of the safety issues, and since iron phosphate is so much cheaper than the manganese, cobalt and other materials demanded by competing battery technologies, I think the company has a leg up on cost as well.
Unfortunately, A123 is still a private company. And still very much at the startup stage.
That means you can't buy into it before its much-anticipated (but still unscheduled) initial public offering. The company first filed for an IPO with the Securities and Exchange Commission in 2008 and filed a fourth revision to that offering in June.It also means that A123 is a small company with small revenue swimming with some very big fish, including the battery divisions of Toyota Motor (TM, news, msgs), Panasonic (PC, news, msgs) and Toshiba (TOSBF, news, msgs). Most of those big-fish companies have too many fish to fry to make them attractive to me as battery plays, however.
Best bet: Buy the manufacturer
But technology is only part of the game. The car battery market is one with huge production volumes where manufacturing smarts count as much as technology. To succeed, a company has not only to build a better mousetrap but produce a lot of them at the lowest possible cost.
Nobody does that better than Johnson Controls (JCI).
The company owns about 35% of the global market for lead acid car batteries. And it's shown its experience in cost control during the auto industry's recent meltdown by taking so many costs out of its business that it managed to swing to positive earnings of 27 cents a share in its fiscal third quarter -- after two straight quarters of losses -- while recording revenue that was down $2.9 billion from the third quarter of fiscal 2008.
The company filled a large part of its technology gap by creating a joint venture with Saft Groupe (SGPEF), a French battery maker with substantial experience in making nickel hydride and lithium ion batteries for industrial and transportation customers. (The deal gradually will give Johnson Controls a bigger and bigger share of the joint venture as it puts in capital.)
Advanced lead battery technologies look like they'll extend the life of Johnson Controls' business in that segment, too. In Europe, advanced valve-regulated lead acid batteries look like an especially promising technology for what are called micro-hybrids, which offer efficiency gains of 10% or so without adding much to the purchase price of a car.
Which one to buy now? The potential payoff is big enough and far enough away so that I think you can add one (or more) of these to your portfolio now without worrying too much about temporary market gyrations. (As long as you can hold patiently.)
My choice here would be Johnson Controls, and I'm adding it to my Jubak's Picks portfolio with this column. I'll spell out the reasons for that pick in somewhat greater detail in an entry that you can find on MSN Money's Top Stocks blog.
At the time of publication, Jim Jubak owned shares of the following company mentioned in this column: Johnson Controls.
Jim Jubak has been writing Jubak's Journal and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, "The Jubak Picks," and writer of the Jubak Picks blog. He's also the senior markets editor at MoneyShow.com.