Don’t Risk an A123 Test Drive

by Tom Taulli | August 8, 2012 3:36 pm

Electric vehicle battery maker A123 Systems (NASDAQ:AONE[1]) surged by 25% at Wednesday’s open. But if you blinked, you probably missed the party.

A123 had a pair of news bits out today — it coupled a horrid earnings report with the announcement of a $450 million investment from Wanxiang Group, China’s largest auto parts maker. AONE shares spiked a whopping 12 cents (“whopping” is appropriate when the previous day’s close is 47 cents), then reality began to set in, and shares finished up just more than 4%.

While the Wanxiang investment will be helpful, the deal is expensive. It involves a bridge loan, as well as senior secured convertible notes and warrants. If all of these were turned into stock, Wanxiang would own a staggering 80% of A123!

Not to mention, the transaction still has not been finalized, and needs approval from government authorities in both the U.S. and China.

A123 had little choice but to take on an onerous investment; just last month, the company indicated that it would have enough cash to operate for only four to five months.

And its earnings report out today showed no end to the hemorrhaging. In the second quarter, AONE suffered a hefty loss of $82.9 million (56 cents per share) — worse than last year’s $55.4 million (44 cents) loss, and under the low bar of a 42-cent loss forecast by Capital IQ analysts. Revenues also plunged by 53% to $17 million.

On its face, A123 would seem to have a few things going for it. It has marquee customers like General Motors (NYSE:GM[2]), BMW and Fisker Automotive. The company also continues to make major breakthroughs[3] in EV battery technologies. For example, it recently created a cell that deals with extremely high and low temperatures without the need for extra heating or cooling mechanisms, which should lower the costs of batteries and improve performance.

Still, the problem remains that the world has been slow to adopt EV products.

Any new energy technology usually faces enormous headwinds because of the huge investments in infrastructure, the uncertainties of the science, and the necessary large-scale marketing to achieve buy-in from consumers. Solar faces it, wind power faces it — even champion-of-late natural gas had its early difficulties.

In the case of the EV market, many think it could be a decade or more for the technology to really start sticking.

And worse for A123: It’s not alone. A number of major battery players are fighting for customers, including Sanyo Electric, Hitachi and Samsung Electronics.

When you add it all up, it’s easy to see A123 having to raise capital merely to stay afloat for years — and that could keep shares to the right of the decimal point for a long time.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[4], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[5] and “All About Commodities.”[6] Follow him on Twitter at @ttaulli[7]. As of this writing, he did not own a position in any of the aforementioned securities.

  1. AONE:
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