Tesla Motors, Inc.’s (TSLA - Analyst Report) decision to build a $5 billion Gigafactory to meet its requirement of lithium-ion battery packs brought glaring focus on the shortage of supply of this emerging energy storage technology. Lithium-ion batteries are used by many auto manufacturers, including General Motors Co. (GM - Analyst Report) , Navistar International Corp. (NAV - Analyst Report) , BMW AG (BAMXF - Snapshot Report) , Daimler AG (DDAIF - Snapshot Report) , and Ford Motor Co. (F - Analyst Report) .They are also used in cellphones, laptops, and other electronic devices as well as in the aerospace and defense sector.
However, the market for lithium-ion batteries has a lot of untapped potential. Tesla, for example, is facing problems in meeting the demand for its electric cars due to shortage of battery packs, which is limiting its production capacity. This was one of the chief reasons behind its decision to build a large-scale factory to produce lithium-ion batteriesin collaboration with various partners.
Back in January, it was reported that Panasonic Corp. (PCRFY - Snapshot Report) agreed to invest up to $1.6 billionin Tesla’s Gigafactory. Kazuhiro Tsuga, President of Panasonic, said that "We are sort of waiting on the demand from Tesla. If Tesla succeeds and the electric vehicle becomes mainstream, the world will be changed and we will have lots of opportunity to grow.”
By 2020, Tesla expects the annual lithium-ion battery production of the Gigafactory to exceed the global production in 2013. The factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars annually by 2020.
However, Tesla’s Gigafactory will not start production until at least 2017. Until then, the focus will be on other lithium-ion battery manufacturers. Thus, it would be a good idea to invest in some companies that manufacture these batteries.
Let’s take a look at two stocks that are looking good at the moment:
Arotech Corp. (ARTX - Snapshot Report) has two business divisions: Training and Simulation, and Battery and Power Systems. The Battery and Power Systems division manufactures and sells Lithium and Zinc-Air batteries and smart chargers for the military and to the private defense industry in the Middle East, Europe, and Asia.
Arotech reported a 300% positive earnings surprise in the third quarter of 2015. This Zacks Rank #2 (Buy) stock is expected to report 180% year-over-year growth in earnings per share (EPS) in full-year 2016, based on the Zacks Consensus Estimate of 12 cents.
Arotech has a price-to-cash flow (P/CF) ratio of 7.22, lower than the industry average of 9.07. Its Debt/Equity ratio is a solid 0.21, meaning it has less debt to equity and matching the industry average as well.
Johnson Controls, Inc (JCI - Analyst Report) is a global market leader in automotive systems and facility management and control. In the automotive market, it is a major supplier of seating and interior systems, and batteries. For non-residential facilities, Johnson Controls provides building control systems and services, energy management and integrated facility management.
The company offers a portfolio of lithium-ion battery technology for a range of vehicles, including advanced start-stop vehicles, hybrid electric vehicles (HEVs), micro hybrid vehicles, and plug-in hybrid vehicles (PHEVs).
Johnson Controls, a Zacks Rank #3 (Hold) stock, reported an average positive earnings surprise from each of the trailing 4 quarters of 1.13%. The Zacks Consensus Estimate for the company’s current quarter (ending March 2016) is 82 cents per share, reflecting an estimated 11.99% year-over-year growth.
Johnson Controls has price-to-book (P/B) ratio of 2.03, below the industry average of 2.51. Its price-to-sales (P/S) ratio is 0.64, while its price-to-earnings (P/E) ratio is 9.49, lower than the industry average of 10.10. Its projected EPS growth rate for has been pegged at 5.46%.
According to Frost & Sullivan, the global market for lithium-ion batteries is expected to double to $22.5 billion in 2016 from $11.7 billion in 2012. Consumer goods and automobile sectors are driving the demand.
The share of the automobile sector in the lithium-ion battery market is expected to grow to 25% in 2016 from 14% in 2012, per the data from Frost & Sullivan. This represents a Compounded Annual Growth Rate (CAGR) of 37%.
With the increasing use of lithium-ion batteries in consumer electronic products as well as efforts to promote the use of electric cars by many governments to curb pollution, the demand for these batteries is expected to rise.
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