Still on Track, Just Not the Fast Track
06/22/2010 4:49 pm EST
2010 marks a very important transition for Maxwell Technologies (Nasdaq: MXWL), one that, unfortunately, won’t make life easy for the company given the state of the auto industry. You can see the results of that transition in the company’s somewhat disappointing earnings for the first quarter of 2010.
Maxwell really runs two businesses.
One business is composed of the older microelectronics (radiation-hardened components and computers for use in space) and transmission (capacitors used in high-voltage electrical transmission lines) product lines. Back in 2006, these product lines accounted for two-thirds of the company’s sales.
The other business is composed of the company’s newer ultracapacitor BOOSTCAP products. These fast-charge, fast-discharge energy storage devices are gradually winning design competitions and getting built into products from auto, truck, and bus electrical systems to wind turbines. In the first quarter of 2010, sales from the BOOSTCAP business finally exceeded sales from the other microelectronics and transmission businesses. And, according to estimates from Needham & Co., BOOSTCAP will account for 55% of sales in 2010.
In the long term, this trend is exactly what investors want to see. Needham estimates that BOOSTCAP revenues will grow by 52% from 2010 to 2011.
In the short term, however, this trend is a problem for Maxwell Technologies for two reasons.Reason one is because the recession really slowed BOOSTCAP revenue growth. BOOSTCAP revenue actually declined from 2006 to 2007 as the global recession crushed car sales and slowed automaker’s adoption of new technologies. Maxwell Technologies has been growing revenue in this business by better than 50% a year since then, but the setback in 2007 means the growth has been from a lower base.
That’s especially important because of reason two: Margins in the new business were really, really low. A former management had booked ultracapacitor sales at negative margins in order to win initial contracts. The last of those contracts is set to expire by the middle of 2010. Margins have started to climb for the ultracapacitor business—Needham estimates to 23% in the first quarter of 2010 against 15% in the fourth quarter of 2009.
This low-margin period for the company’s fast-growth business wouldn’t have been quite so big a problem except that sales in the higher-margin old business have been relatively stagnant—$53 million in sales in 2008, $57 million in 2009, and $55 million projected for 2010.
That’s meant the company has been slower to move to profitability after the 2007 slump than I had projected. (It also hasn’t helped that the Securities & Exchange Commission and the Department of Justice are investigating the company’s Chinese sales representative for possible violations of the US Foreign Corrupt Practices Act. Amounts that the company paid in commissions to this sales agent actually, the government charges, wound up being paid by that agent to individuals at customer companies. Maxwell Technologies has set aside $9.3 million against a settlement of the charges.)
In my estimation, the story is still intact but just moving at a slower pace—that’s the story with many new energy technology companies right now. (For a status report on the state of alternative energy industries right now, see this post.)
As of June 22, I’m lowering my target price to $20 from the previous $25 and stretching out the schedule to April 2011 from September 2010.Full disclosure: I own shares of Maxwell Technologies in my personal portfolio.