Long Dormant, the Battery Industry is Innovating Again
A Stock Suggestion for Lovers of Cars--and iPads
With two growing daughters--a three-year-old and an 18-month-old--my wife and I knew we needed to abandon the small, sporty cars we've been driving and trade up to a bigger vehicle.
In deciding what to buy, we had to work around each others' varying preferences. My wife does not like SUVs because of their poor gas mileage and their sheer size. Personally, I believe (as I have written about before) that one's money should go into appreciating assets, not depreciating ones. So I see spending a lot of money on a car as frittering away money best directed elsewhere, especially since so many luxury vehicles are simply marked up versions of their parent company's mass market marquees.
We both wanted good gas mileage and good legroom in the front and back seats. Perhaps highest on our list of features: We wanted a car that had a trunk large enough to hold our double stroller and plenty of supplies for sledding in the winter and hiking in the summer.
That whittled down our universe of potential cars pretty fast to the mid-size segment populated by Ford, Hyundai, Nissan and other major brands. We ended up buying a Mazda 6 because it has the biggest trunk available, and it also appealed to my wife's love of sporty cars (she still thinks the zippy Mazda Protege is the best car she's ever driven) and to my sense of value: We paid 32% off MSRP, primarily because we bought the last available premium trim of the prior year's model.
I love getting a deal and I loved the fact that buying the former model year version reduced the excise tax we have to pay on the car. (We have to pay a percentage tax on our car's value every year, even the year we buy it, having already paid sales tax! For my money, it's the most annoying tax we have to pay in Massachusetts.)
So now we drive around with not only the double stroller but also a single stroller in the trunk and have no problem fitting everything else I used to cram into the trunk of my 3-series BMW. And, I'll admit that I like the car's sporty look, even if it's worth half of what I paid for it already.
The reason I bring this up isn't to brag about my car-buying prowess, but the fact that our list of finalists didn't include one electric or hybrid vehicle. That's unusual because as editor of Cabot Green Investor, I've been foreseeing the sharp rise in energy prices for years, and my wife feels strongly about trying to be environmentally responsible.
But we're also realists. No electric vehicle of sufficient size was available and the hybrids are typically just a converted gasoline body with a large battery pack taking up valuable trunk space. I wish there had been a realistic alternative though because I filled up my car yesterday and about half a tank cost me $35. Ouch! But it won't keep me from driving.
This lead me to wonder, how much does gasoline have to cost before you'd consider an electric or hybrid car?
The consulting firm Deloitte recently conducted a study of consumers on this very question. The answer? $5 a gallon will get 78% of Americans to seriously consider an electric car. Interestingly, the survey, which polled 12,000 people worldwide, found that at less than $5 a gallon just 54% of Americans would even consider putting an electric vehicle on their list, compared to 93% of consumers in China and 69% in Europe.
However, that may just be because Americans have more realistic expectations of car pricing, with most saying they expect to pay less than $30,000 net of government incentives--about where the Nissan Leaf falls--while that price expectation drops to $20,000 in China and Europe.
Expectations of what electric vehicles (EV) can do also appear to be different from the current reality. Most people want EVs to charge in less than two hours and have a range of 300 miles per charge, with a smaller majority requiring wide availability of public charging stations. Electric vehicles fall about 40 to 60 miles short on range right now and take longer to charge, but not too much longer if you have a high-powered connection. At a 240-volt connection, the Chevy Volt will charge in four hours, the BMW Mini E in three hours and the Tesla Roadster in under four hours. Using standard household 120V, each will take much longer, however.
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Batteries ... Playing Catch-Up
Charge time and range are heavily dependent on the battery installed in the vehicle. That has the long-dormant battery industry charged with excitement these days. Until a few years ago, the two greatest innovations in batteries in the past 70 years were changing the chemistry in the 1980s to make home rechargeables possible, and adding mercury to battery packs in World War II to withstand the heat in the North African desert while chasing Rommel.
Now we're seeing a wholesale changeover in the types of batteries used in vehicles, from conventional combustion-drive cars to hybrids to EVs and from lead acid to lithium-ion (li-ion), and a barrage of technologies designed to make li-ion batteries work better and last longer, as well as technologies designed to complement li-ion systems. This includes everything from nanotech alteration of chemical properties to re-application of long-proven technologies in innovative new ways.
Right now, we have five stocks related to the next generation automobile and fuels industry in the Cabot Green Investor portfolio that we either own or are watching for an entry point to buy (other stocks in our portfolio cover commodities, energy-saving electronics, energy infrastructure construction, making fossil fuel plants burn cleaner and organic food). I can't tell you all their names of course, since that information is reserved for subscribers, but there is one I'd like to recommend to you today.
It's a company that makes high tech filters used inside lithium-ion batteries (and lead-acid, in which it is market leader), in the filtration and separation processes of manufacturing energy storage products and in pharmaceutical production and desalination. Its li-ion battery products are currently used in Apple's (AAPL) wildly successful iPad tablet computer and are seeing a surge in automaker interest as that industry gears up to roll out new hybrids and electric vehicles in coming years.
The company? Polypore (PPO).
I first recommended PPO to Cabot Green Investor subscribers in May of last year at 22 and it has been a consistent riser every since. At 53 now, my subscribers are enjoying a healthy triple-digit gain, yet I still think the stock has excellent upside. Apple and iPad have been behind much of the past year's price growth, helping Polypore double sales since 2005 through last year. It's safe to say the iPad is built into the current share price, but the hybrid and electric vehicle segment is what will provide the truly exceptional growth I see ahead.
By 2015, one estimate says that automakers will roll out or have serious designs for over 80 new models of hybrid and electric vehicles! A mere 5% of automotive builds going to EVs would more than double demand for the type of high tech li-ion membranes that Polypore produces. The low estimate of EV world demand has market penetration of 4% by 2015; the high estimate has nearly 10%. Given rising automaker interest, Polypore is expanding its North Carolina facility this year, adding another plant in that state and expanding its Korean facility. By 2012, the company will have 200% the capacity it had during the latter half of 2010.
But will demand be there to support all the EV investment being made by Polypore and automakers? As we enter summer, I foresee even greater pressure on gasoline prices, which will heighten consumer interest. At the start of the year, I dismissed expectations of $5 a gallon gas as over exuberant. With Libyan supply now largely gone from the market, $5 a gallon gas is much more likely, especially since the turmoil in the Middle East has essentially removed the industry's room for error. If $5 a gallon gas happens, even I'll feel my new car isn't the bargain I thought it was when I hand over $93 to fill that 18.5 gallon tank.
All the best,
For Cabot Wealth Advisory
P.S. You could buy Polypore here and hope for the best, or you could check out Cabot Green Investor, where you'll find Brendan's latest recommendations on this and other top stocks.