Catch the Hybrid Wave

06/10/2005 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

"It's time to catch the latest wave that's poised to make big changes in the world," says Tobin Smith . In his typical way of finding emerging, long-term investing trends before the crowd, he highlights the promise of both hybrid cars and solar energy.

"Surely, you've heard about the trend toward hybrid autos; these cars use a pairing of gasoline engines and electric motors powered by rechargeable batteries to produce better fuel mileage than a gas engine would alone. According to R.L. Polk & Co., the hybrid market has grown 960% since 2000 and hybrid registrations increased 81% in 2004 to 83, 153, mostly vehicles from Honda and Toyota.

"Hybrid autos are in the perfect position for growth when you consider that hybrids represented less than 1% of the 17 million new cars sold last year. Rising gas prices, federal and state tax credits as well as the ‘social responsibility’ factor are driving sales, and an expanding list of choices will continue to drive the trend as a dozen or so new hybrids are expected to be introduced in the next three years.

"Want an example of the growth of hybrids? During the first three months of 2005, Toyota sold 22,880 of its popular Prius, double the year-ago sales, and plans to produce 100,000 of the model for North America this year. Honda's Civic is second in the market and the company just introduced a hybrid version of its popular Accord last fall. And the hybrid power train is expanding into the SUV market, led by Ford's Escape hybrid that will soon be joined by models from Lexus, Toyota, and Mercury as well as trucks from GM and DaimlerChrysler.

"Toyota buys rechargeable batteries that license their high-powered systems from Energy Conversion Devices (ENER NASDAQ), our new recommendation. Energy Conversion (also known as ECD Ovonics) invents, engineers, and develops new materials and products in the fields of alternative energy technology and information technology. Its products permit them to design and commercialize products, such as thin-film solar cell (photovoltaic) products, nickel metal hydride (NiMH) batteries, and phase-change memory devices.

"The firm’s Cobasys joint venture with ChevronTexaco has a manufacturing plant that can turn out over 1.2 million NiMH batteries per year at full capacity (right now they are at 60,000). The joint venture has spent nearly $200 million in development of the battery and manufacturing system and is now ready for prime time. They are bidding on more than 20 contracts for NiMH batteries. Toyota is already in the bag and Toyota is licensing their hybrid technology to other carmakers. And unlike a few years ago when all ENER’s patents were tied up in lawsuits, the legal ledger is all clear now as Panasonic settled and cannot sell NiMH batteries for use in cars until 2010 and must pay a 3%-5% royalty thereafter.

"And there is more to ENER than just batteries. They also own the leader in photovoltaic roofing (i.e., roofs that create electricity). Using their proprietary thin-film a-Si alloy materials, ENER has developed the most cost-effective solar cell on the market. Not only do their solar cells absorb light more efficiently than crystalline counterparts, but also their thickness can be 100 times less, thereby significantly reducing materials cost. This is an exploding technology in the more energy-efficient world. For example, 14 San Diego schools are adding the new solar roofing systems. It is estimated that this project will save the schools millions in roofing and energy costs during the next 20 years, especially considering California’s requirement to generate 20% of its electricity with renewable sources by 2017.

"We get a double-play on alternative energy with affordable solar energy and hybrid vehicles. With nearly $90 million raised in a recent funding, they have all the funding they need. There is no doubt that these guys have been an over-promising, under-delivering group of engineering nerds. They went public in the mid-80s and have taken about 20 years to get to the point of breaking out. But all the regulatory and energy stars are now in alignment, and there is simply no purer play on the 'hybrid' and 'affordable solar energy' waves."

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