A123 Systems – Key negatives on the watchlist

Just read a research piece published by BoA/ML on A123 (Nov 3, 2009). They rightly observe that yes, the company could be $10bn revenue business by 2020. However, a lot of things may become larger impediments than anticipated today. None of the issues are material in isolation and can be addressed, particularly the management issue. However, I’d concur with the conclusions made by the authors that there is time to be a significant holder of equity at this point. In fact at a 6.7x P/S versus Ener1’s 2.6% P/S the stock better delivers on its promises!

Firstly, A123 is still fighting a patent litigation. At worst, a one-off payment or a 2% of Sales royalty could be the consequence. Near term it has been and may continue to be a distraction for management. Management itself could, apparently, do with more experience in the Automotive sector.

Secondly, Asian competitors are likely to have a larger resources pool. BoA/ML lists LG Chem, Panansonic/ Sanyo, NEC, GS Yuasa as key competitors.

Thirdly, battery costs must come down 33%-50% for electric vehicles to be competitive.

Fourthly, although some OEM deals have been signed it needs manufacturing contracts; the deal with Chrysler presents key-customer risk.

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4 comments

  1. brettalan · November 16, 2009

    Ironically I think the hype behind the IPO, pushing an initial pricing in the $9 range all the way up to $25/share after a week or two set up a large correction. This stock has definite value, although not perhaps at the initial levels believed by some excited investors.

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