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Energy Storage Sector Rallied Yesterday - We Like UltraLife (Nasdaq:ULBI) and Quantum (Nasdaq:QTWW)

Sep 30, 2008
Author: SCP Editor

September 30, 2008 – Several companies in the energy storage sector had blockbuster performance yesterday in spite of the fact that the DJIA closed down a record 777.68 and the Nasdaq, which closed down an astonishing 199.61. For example, Ballard Power (Nasdaq:BLDP) gained 18.34%, China Bak Battery (Nasdaq:CBAK) gained 7.14%, Ener1 Inc. (AMEX:HEV) gained 18.55%, Maxwell Technologies (Nasdaq:MXWL) gained 10.86%, Mechanical Technology (Nasdaq:MKTY)  gained 23.01%, Quantum Fuel Systems (Nasdaq:QTWW) gained 35.51% and Valence Technology (Nasdaq:VLNC) gained 36.51%.

We aren’t really sure why the group performed so well on such an historically dismal session on Wall Street, but we think it is worth bringing to our readers’ attention. In the group, stocks that we like the most are Quantum Fuel and UltraLife Batteries (Nasdaq:ULBI). Interestingly, UltraLife didn’t participate in yesterday’s rallies by so many of the energy storage group. Its stock fell $1.67, or 17%. The fundamentals for UltraLife remain positive, and at a trailing twelve month P/E of about 10 and a P/E (ttm) of about 0.6x.

Our revenue expectations for Ultralife this year are $270 million, a 97% increase over FY2007 results, and net income of $13.2 million, a 135% increase over FY2007. Based on our forecasts that UltraLife is going to post strong Y/Y growth again this year, and our sense that its business is well-diversified across several segments where secular trends for growth remain strong, we think that UltraLife’s stock is significantly oversold. We are forecasting a target stock price for UltraLife in the range of $18.40 to $18.75 based on P/S multiple of 1.25 for FY2008 revenues of $270 million and a P/E multiple of 25 for FY2008 income of $13.2 million.

If, however, the broader markets continue to contract, and reel under so much broader economic uncertainty, we think it may be reasonable to trim our target to a range of $14 to $15, which would be beast on a P/S multiple of 1 and a P/E multiple of 20, respectively. Even in this latter case, the upside opportunity that we think is reasonable for UltraLife in light of yesterday’s closing price of $7.85 is compelling.

As we noted above, we are also bullish on Quantum Fuel Systems. The business is also well diversified into growth markets, including hybrid automotives, with an ownership of Fisker Automotive, advanced lithium power and recently, with a move into solar through its Asola partnership.

Unlike UltraLife, we don’t think that Quantum’s stock is trading at a particularly large discount to where it should be. But on the other hand, we think that at a 6x P/S (ttm) multiple the stock price is reflecting so much of the upside opportunity that Quantum is positioned to capitalize on.

In both cases, with Quantum and UltraLife, revenue growth will be driven by surging global demand for energy. Looking at Quantum’s opportunity with the hybrid vehicle market, consider this: only 12% of the global population drives a vehicle.

Quantum is working right now on General Motors’ Chevrolet Equinox fuel cell vehicles, which are just starting to hit the streets. Note that GM owns 5% of Quantum. Its fuel cell technology broke the world record for mileage w/o refueling – at 357 miles. It is also working with Ford on the hydrogen Ford Escape, displacing the Hummer vehicles which are currently being used on Army bases. It is planning production in 2009 for the Fisker Karma and anticipates introducing 4 new Fisker models by the end of 2011.

Quantum has recently strengthened its balance sheet, with a  $65 million investment from Qatar, so we think it has a demonstrated ability to capitalize its growth even in these challenging markets. As we noted, the 6x P/S multiple reflects, in our opinion, so much of this upside opportunity for growth. Management is projecting $100 million in revenues for FY2009, and profitability. The current market cap of $160 million (based on yesterday’s close of $1.72) reflects a forward P/S multiple of 1.6x, which we think is reasonable. As the business gets closer to proving out its strategy and into the 2009 operating year, we think that these multiples should support higher price targets.

Notes: Ardour Capital has a $2 stock target for QTWW and Merriman has a $2 to $2.50 target. RBC Capital Markets as a $13 stock target for ULBI, Broadpoint has an $18 target for ULBI and Ardour has a $17.50 target.

Important Disclosure Note: SCPEditor does not have any position in ULBI or QTWW. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.  


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