Inside the Markets: Electrifying Deal Brings in the Green
One insider tells you how.
June 28, 2007
by Jonathan Moreland
DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.
For years, Active Power (NASDAQ: ACPW) has been a company long on promise, but woefully short on profits. That remains the case today.
What has changed over the past year, however, is that important steps have been taken to move the firm towards profitability. At the same time, the company’s shares have given up most (hopefully all) of the overvaluation optimists had placed on it.
Insiders have been willing to shoulder the risk in their shares for years. The last bout of major insider sales came in 2001, after the company’s stock plunged from a $70 plus peak at the top of the bubble. But seven executives and directors trickled more than $1 million into ACPW, paying between $1.13 and $4.60 from 2002 to 2005. Four individuals from that group were smart sellers of the stock when it still fetched over $20 -- although they were obviously early in betting that the stock had bottomed.
More recently, two long-time directors finally decided that the price was right to substantially increase their exposure to beaten-down ACPW. Richard Anderson picked up 50,000 shares as they traded between $1.51 and $1.58, nearly doubling his holdings. Ake Almgren bought 15,000 shares on the same day.
The confluence of the inverse moves in business strategy and stock price finally have us ready to take a (still) high-risk bet that the worst may be close to over for ACPW.
As CPA Insider™ readers may not know, Active Power makes systems that provide uninterrupted power on a large scale. The company’s legacy products use flywheel technology that ensures the availability of electrical current for critical functions when blackouts or lesser hiccups occur in the power grid. They are particularly useful in regions with undependable power, including fast-growing countries like China and India.
But, power problems are hardly relegated to the third-world. In the U.S., two-thirds of power interruptions last three seconds or so. The average person may not mind a briefly flickering light in their home, but such glitches can wreak havoc at manufacturing and data processing sites. These locales need more power than backup batteries can provide as well.
Active Power’s solutions are one of the few available, and the firm competes by offering products that are more reliable, take up less space and use less energy. Indeed, there is a “green” component to Active Power’s products that can only help business as environmental impact is increasingly considered in business decisions.
But, being green is no substitute for business fundamentals. ACPW arguably got ahead of itself two years year ago when it began trading consistently above $3 even though the firm had yet to even achieve positive gross margins. Throw in an options review and delayed financial filings that threatened to force a delisting, and ACPW’s fall over the past year is quite understandable.
Management has not sat still, however. They have focused on developing Active Power into a proper sales-oriented firm by diversifying sales channels both in type and geography. OEM sales used to be Active’s mainstay, but a new focus on building an internal sales force is a big positive in our minds. Not only do direct sales give Active better insight and control on its pricing. It also gets the firm in front of customers in order to offer value-added products and services.
This approach is already bearing fruit. Price increases of seven percent to 11 percent implemented last year are starting to show through in margins. Gross margin in Q1 increased to 5.6 percent from being negative the year before. Granted, reaching gross profitability is a small step, but an important one that Active has clearly made.
What Active cannot change quickly, however, is its vulnerability to very lumpy revenues. Though trending higher, the firm’s revenue base is still small enough that one large order can make or break quarterly comparisons. For that reason, we expect news flow regarding new orders to be more important to our making money near-term than a stellar quarterly release. In this regard, ACPW’s risk profile is more akin to a development-stage biotech investment than an operating firm.
While we applaud management’s moves to diversify sales channels and focus on offering higher-margin solutions rather than just pushing boxes out the door, the risk to investing in ACPW remains large. Unfortunately, there is no obvious valuation metric to catch shares of this loss-making, cash flow-negative company should sentiment remain negative. Although investors used to prepare a floor for this stock up around $2.50 during 2004 and 2005, those supporting investors appear long gone. And even at its present price of around $1.65, ACPW trades for over three times its firm’s trailing (and lumpy) revenues.
We also see trading risk in the near future from the company’s need to raise cash by the end of 2007. A desperate PIPE offering could dilute any holdings picked up now by an annoying amount. On the flip side, securing financing on reasonable terms could get past bulls on the stock interested in the firm’s next run at becoming profitable. Importantly, we do not foresee liquidity risk from an inability to raise cash. Active has been around too long, and has too good a product line to think that pessimistically.
At some point, internal and external trends affecting Active Power should make its stock bottom out, and reverse course. We are finally ready to expend some money with the insiders betting that that time in near.