I know I said I would start generally and move toward specifics. I changed my mind. I dug into AONE first and will branch out to HEV and TSLA as I learn more about the group and industry.
What better place to start than transcripts and notes?
I will say upfront that I have mixed feelings about this thing. I can see reasons to rent the stock as well as opportunities to short it hard.
AONE is covered by a bevy of analysts. Fourteen of these little buggers gots stuffs to say about the thing, and so far I am not impressed. For my purposes (figuring out the numbers that go into the estimates), Goldman and Barclays provide the detail needed in their notes.
The big concern – if one infers the focus of most notes as indicative of investor concern – is that AONE will need more cash at some point. Well, duh, of course it will need more cash and more than what it thinks our government will provide. It does not make a profit, and even sell-siders fishing for banking business with overly optimistic models don’t think this thing makes money until at least 2014. It gets worse, but we will save that for later.
All sorts of shenanigans are pulled in these notes. Things like doubling of sales year after year but no investment in working capital, or talking about share sales but providing estimates with flat share counts, or declining year-ahead capacity requirements, or gross cash balances declining to obviously too low levels. DB even comes out and says we should value off-balance sheet arrangements in book value in order to show how cheap it is in relation to one of my favorites, the former criminals at MXWL.
The short of all the above assumes the P&L models are valid. It shows AONE needs to sell shares again within a year as management quickly burns cash in the expansion its shareholders clearly want them to perform…after all, why did they give them all that money?
Worse, the P&L presented by Consensus is off. Consensus estimates say AONE will post positive gross margin in 1Q12. This after the latest report where the company reported NEGATIVE 86% gross margin. Even taking out underutilization (depreciation), you still get to significant negative cash product margins this quarter. Sometime in the next 12mos AONE will find religion and overcome underutilization and price declines with other cost reductions? I don’t think so. And if estimates are off that bad near term, how about longer term which should be more optimistic given the hazy visibility that allows analysts to dream up whatever fairy tale mathematics flutter into their half empty skulls?
On this last call, the CEO commented that price declines should amount to 50% by 2015. OK, we’ll give him that one, but my experience elsewhere tells me we need to pull that expectation in somewhat. We’ll stick with 2015 but understand that 2014 is more likely. The required yearly decline to reach 50% by 2015 is ~15%. How do the models stand up?
- Barclays models a 9% decline in 2012.
- Goldman models 50% decline for the Fisker customer, 45% for overall transport, and 35% for all segments, through 2015.
So now we have overly optimistic price declines baked into numbers – meaning sales estimates are overstated – and gross margin estimates based upon higher prices are likely too optimistic as well. And if gross margin estimates are off, cash burn is worse than expected. Uh oh.
Now, I am no fool…most of the time… and certainly no Henry Fool who is much better at picking stocks. But I do know that the only time company closets open with skeletons on display is at earnings, and as long as AONE does not give specific margin or earnings guidance, we won’t know how bad things are until the quarterly reports. In the meantime, I expect investors to be squarely focused on the things they can observe. This is where we come to the idea of renting the stock.
Cash burn and yet another follow-on offer is a widely known issue, and the stock still trades at $6. The bad news is in the stock. There is plenty of good news coming, and one potential bad bit of news.
1. Fisker
A company called Fisker Automotive, of which I know virtually nothing at this point, is set to take AONE’s batteries. The concern is that Fisker goes belly up, or does not sell as many cars as expected. However, the numbers bandied about do not seem especially heroic, and companies survive and prosper even when they should not. Housecats would have made toy poodles extinct years ago, yet through human intervention toy poodles still exist. Go figure. My bet is that Fisker sells the cars in AONE’s sales forecast.
2. GM
The worst kept secret with this company is that some unknown major auto manufacturer will take AONE’s product. Watch the stock double the moment GM announces it will take AONE batteries.
3. Withdrawal of incentive programs
Here is the unthinkable in the alt energy and new technology world. I am sure we can get the masses yapping uncontrollably about this one. If government incentives in the form of grants and low-cost loan programs were to be pulled, every US-listed alt energy stock would be cut in half no matter what its current valuation. There is a distinct chance these programs are severely curtailed within the year as Congress debates what to do about spending cuts. The DOE is one of weakest in the stable and is unlikely to defend itself well against interests opposed to alt energy or new technology industries. I don’t care what Obama says about fostering these industries, he has shown little to no interest in defending them. It would be a big surprise if he suddenly started putting an effort into defending these things.
So there you go. Rent the stock between quarters for positive Fisker and GM datapoints, and either sell or short the stock ahead of the quarter or into DOE program cuts. It is due for a bounce toward $8-$9 given the amount of effort the big boys on the sell-side are putting in to promote the stock, but the longer term trend for this thing is toward zero.
I personally do not think another company would want to buy out AONE, but then I did not think anyone would be stupid enough to buy SPWR, either.
