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USA: A123 Systems: Green Energy Promise and Peril

NEW YORK (TheStreet) — Reporting negative 85% gross margins and a cost of revenue that is double the actual revenue generated are never good earnings report items, but for lithium ion battery company A123 Systems(AONE_), a woeful first quarter was the expectation.

“We knew it would be a really bad quarter, and sure enough it was,” said CLSA Securities analyst Mark Heller.

The situation for lithium ion battery makers focused on the electric car market took a turn for the even more uncertain after the close on Tuesday, when A123 competitor Ener1 posted a wider than expected loss and effectively exited the electric car market (at least for now) in writing off its investment in electric car market partner Think Holdings.

A123 Systems shares are being described by some analysts as “dead money,” at least in the short-term. However, A123 shares have declined 38% year-to-date, and the earnings actually provided a boost, with a marginal trading loss in the morning being erased and A123 shares finishing higher by close to 4% on Tuesday — and up 7% in the past five trading days. A123 shares spiked a little after 2 p.m. on Tuesday, headed straight up after being close to flat in trading all day.

A123 Systems after-market earnings was one more case of an A123 outlook too reliant on a production ramp at electric car maker Fisker Automotive. Overall, the A123 Systems outlook is back-end loaded, and that creates an atmosphere in which investors will say “show me the execution” before recharging the lithium ion battery company’s shares.

A123 Systems reported an earnings miss of 51 cents, versus the average analyst estimate of a 49-cent loss. The headline earnings number, though, was not a major issue, as the company had pre-reported a weak quarter.

More concerning to analyst Dilip Warrier of Stifel was the -85.5% gross margins, though the Stifel analyst wrote on Tuesday that this measure should improve throughout the year due to revenue ramp and new capacity.

Theodore O’Neill, analyst at Wunderlich Securities, who remains one of the most negative Wall Street analysts on the A123 story with a $3.50 price target, focused in on the cost of revenue issue in the most recent results as one more reason to keep A123 on a very short leash, or just on a short position. “In an effort to put the bricks and mortar in place to support a world populated with electric cars, A123 Systems (AONE) reported battery cost of goods exceeding 2x the amount generated by sales. We are concerned that losses created by this ramp in front of demand will both strain management credibility and inve stor patience.”

A123 Systems reported cost of revenue over $33.5 million, and revenue of $18 million.

There were plenty of more negative items in the earnings, too.
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