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Time to Power Down on Maxwell
12/22/2011 3:23 pm EST
I’ve been looking for an exit on Maxwell Technologies (MXWL) for a couple of weeks now.
I was hoping for something closer to $18, but after repeated drops to $14.95 (on December 19) and $14.77 (on December 14), the $16.09 close on December 21 looks to be about as good as I’m going to get in a market that isn’t treating anything that smacks of technology or China any too kindly.
As of December 22, I’m selling Maxwell Technologies out of my Jubak’s Picks portfolio with a gain of 28% since I added it to the portfolio on January 23, 2007.
Why sell Maxwell now?
Maxwell’s bright future is built (mostly) around its ultracapacitors. These energy storage devices can store and then release energy faster than a battery, and operate more efficiently than batteries under unfavorable conditions such as low temperatures.
They’re winning greater and greater acceptance in the market for uninterruptible power supplies on wind turbines (you have to keep those blades pitched correctly all the time or winds can damage the turbine), on hybrid buses, and in stop-start systems for cars and trucks that improve fuel efficiency and reduce emissions by turning off and then restarting engines when the car slows or stops.
Getting ultracapacitor technology into turbines, buses, and cars is a long process. Maxwell calculates that getting its product qualified by PSA Peugeot Citroen, the second biggest carmaker in Europe, took about four years.
(Subsequently, qualifications by other automakers would take less time because they would be able to see the results from PSA Peugeot Citroen, the company estimates. In its third-quarter conference call with analysts, the company said it expected another major qualification about 15 months from November 2011.)
Now, however, product orders are starting to ramp up, with the company estimating that 300,000 cars using its ultracapacitor product will be on the road by the end of 2011 and 1 million by the end of 2012.
European Union rules require that 65% of cars produced in Europe next year reduce CO2 emissions to a level equal to fuel efficiency of 42 miles per gallon (if they use gasoline) and 48 miles per gallon for diesel. Stop-start systems can reduce fuel consumption by about 15% in urban driving.
I don’t have any doubts about the eventual market for stop-start systems—or about the advantages of ultracapacitor-based systems, since they provide greater reliability in cold weather and allow automakers to use smaller batteries in their cars.
My problem is timing. I’m looking for Europe to slip into a recession (or near-recession) in 2012. That will slow sales of cars just at the time when Maxwell is looking for ultracapacitor sales to makers of stop-start systems to ramp up quickly.
The increase in sales will come, I’m convinced, but I think the schedule is likely to be more drawn out than the company now projects. In its November 3 conference call to discuss third-quarter earnings, Maxwell Technologies said that it expects sales growth in 2012 at a rate similar to the 30% growth it projects for all of 2011. That seems very aggressive to me.
And Europe isn’t the only one of Maxwell’s big markets that’s either slowing or looks likely to slow in 2012. The company sells a big chunk of its ultracapacitor production to China’s makers of wind turbines. That industry has seen slowing growth in the last half of 2011 that is likely to extend into the first half of 2012 (at least).
Maxwell has also had good success in penetrating the Chinese urban bus market through a supply agreement with Zhengzhou Yutong Bus, China’s largest bus producer. But here too sales seem to be slowing as all the 25 Chinese cities that are eligible for government subsidies to purchase hybrid or electric buses are running behind schedule in actually deploying buses.
Given this picture in the company’s two main markets (Maxwell so far gets very little revenue from ultracapacitor sales in the United States), I recommend exiting the shares now and looking to re-enter around the middle of 2012, when the risk of a major disappointment is lower and some of the global economic uncertainty is out of the market. (For more on my outlook for 2012, see my recent post.)
This timing also appeals to me, since by 2013 Maxwell could be seeing the beginning of sales into the utility transmission market, either for grid upgrades—such as the recently signed contract for high-voltage capacitors for upgrading Russia’s grid—or for the build out of smart grids.
In addition, I think the second half of 2012 will be a much stronger period for sales of other Maxwell products, such as tiny ultracapacitors used in solid-state drives at data centers.
Maxwell is profitable on a non-GAAP basis, is generating positive cash from operations, and finished the third quarter with $31 million in cash, up $1.2 million from the end of the second quarter. I don’t think the company will have trouble riding through any tough times in the first half of 2012 and getting to stronger sales in 2013.
But I think I’d like to watch that ride from the sidelines.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares in Maxwell Technologies as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.
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