Wednesday, July 2, 2008

How to Invest in EEStor or what is Zenn Motor Company Stock worth?

If the fascination of EEStor's ultracapacitor technology ever sets in and everyone's world view becomes slightly modified, the fiscally curious among us may wonder what is the investment opportunity for such an innovation? It jibes with common sense to point out that in most cases, the success of a venture such as EEStor or Zenn Motor Company Inc. is more difficult to predict the earlier they are in their development. But it's precisely that gap between being certain and having an inkling that something may work out that presents the best investment opportunities. For my part, I didnt start this blog as a way to pump Zenn's stock. Rather, I simply wanted to organize information about a potentially exciting technology that could dramatically change how we think about energy in our lives not to mention change the economic landscape tremendously. But in the course of time, I did eventually make a small speculative investment in Zenn Motor. Setting aside all of the rational and intelligent ways of thinking about stock picking, I am invested in this stock more as an interesting bet. I don't pretend to be an expert on all the technical aspects of this technology but I understand clearly it's benefits and advantages and that's what defines it's value. If all goes well, it's a homerun of tremendous proportions. If it doesnt work out, I'm out a little cash. Seems like a good bet to me.



So, since this blog is about EEStor and it's relation to companies like Zenn Motor and it's impact on our world, it's fair to ask what is the investment opportunity? But rather than try to answer a question I have no business answering, I invited a guest author to answer it for me. As you read the article, you'll see clearly this is an optimistic view but realistic in recognizing serious uncertainties still exist. Rather, it takes the perspective of, "what if everything written about EEStor is true? Whats the the investment opportunity?" I"m willing to post a well thought out and interesting piece holding a contrary view just contact me if you are the person to write it.

As for the guest author, it is not a hedge fund manager or financial giant but rather an above average investor who has given this investment alot of thought and research. Hopefully, his article will spawn some interesting dialogue. So, let's get to the article written by Tom Villars.

---------------
Pondering the investment potential of Zenn Motor Company Inc.
by Tom Villars

Although EEStor and its technology are the main focus of this blog, neither EEStor nor its main equity partnerKleiner Perkins Caufield & Byers are publicly traded. The only equity partner that is publicly traded is ZENN Motor Company Inc. (CVE:ZNN ) which paid USD $2.5 million in 2007 for a 3.8% stake in EEStor. This gave EEStor a theoretical market cap of USD $66 million but if EEStor is for real, a true value of the company will need to add a few zeros.
But since ZENN is the only direct way to invest in EEStor, the question becomes how much will ZENN be worth when EEStor begins delivering product? To answer this question (or more accurately take a wild ass guess) I think the most important variables are the specifications of the Electrical Energy Storage Unit (EESU) and expected cash flow from the ZENNergy drive. Assuming EEStor's original business plan from 2002 is still relevant we come up with two specifications that differ based on production volumes:

Prototype / Low Volume
Mass Production
Split The Difference
Energy density (Wh/L)
606
1513
1060
Specific energy (Wh/kg)
273
682
478
Price ($ USD/kWh)
$61
$40
$50
Since EEStor has been working on a production factory since 2006 the mass produced specifications should be closer to what ZENN gets in late 2008, but for this analysis I've decided to split the difference hence the numbers from the fourth column are used in the remainder of the analysis.
Revenue for the ZENNergy drive can be broken into two categories
  • ZENNergy Conversion Kits for which ZENN owns exclusive rights for all four wheel vehicles, regardless of weight
  • ZENNergy drive train for four wheel vehicles for which ZENN owns exclusive rights for vehicles with a curb weight of 3,100 lbs, net the weight of the EESU
For ZENNergy Conversion Kits I did two worksheets that try to shed some light on what ZENN's markup could be for a conversion kit with something close to 12 month payback for the buyer.
For Mid-Size cars the payback period was 13 months when miles per year was around 75,000. For 50,000 miles per year the payback period stretches out to 19 months. This is obviously well outside the average range of the typical commuter but is well within the averages for fleets such as taxi cabs, small delivery vans and police cars. A ZENN mark up of 40% was possible for a 13 month payback for any scenario over 75,000 miles per year.
The Semi-Truck conversion I did more as a lark just to see what the numbers would look like, but was surprised by the following:
  • fuel savings of around USD $490,000 per truck over a 7 year period
  • payback was just over 12 months
  • ZENN mark up of 40%
One interesting thing that came out of the calculations was each semi-truck would need around USD $50,000 worth of EEStor's EESUs. As ZENN will presumably have first dips on EESU production for some time, selling a conversion kit that is mostly EESUs allows ZENN to exploit a market with no significant competitors.
Of course both these types of conversion don't take into account infrastructure cost such as setting up the charging stations. But because both the Mid Size Car and Semi-Truck scenarios both assume a fleet of vehicles, the infrastructure cost should be minor compared to the savings especially when the payback period for fuel savings alone is around 12 months.
And finally there is Ian Clifford's master plan to market the ZENNergy drive train to one or more of the major auto manufactures. I've done a worksheet on this as well, ZENNergy OEM Supplier and the numbers are probably what has Mr. Clifford so excited. If these estimates are correct, Ian will be hiring Bill Gates as his butler some time around 2015. All joking aside, it's extremely doubtful the numbers will pan out like this as undoubtedly either a competing technology will emerge or more likely illegal copycats begin manufacturing EESUs which will prevent ZENN from fully exploiting the exclusive rights it has for selling EESUs to the automotive market. But if EEStor is able to enforce their patents and ZENN can enforce the exclusivity rights, then Ian Clifford could find himself the CEO of a company that had $20 billion in yearly gross profit with only a 20% market share.
Of course if others see the same numbers I'm seeing, it raises the question of whether one of the majors will try to buy out ZENN so they can get the exclusive rights to the EEStor's technology. Even if EEStor releases excellent test results, it will take time for any of the majors to figure what the technology is really worth. But once ZENN can successfully start selling cityZENNs, conversion kits, and ZENNergy drive trains, then I expect a bidding war to develop for ZENN. What ZENN is worth at that point is any one's guess but if you use the cash flow times five rule of thumb, ZENN could be valued at a whooping USD $15 billion in 2012 and USD $50 billion the year after that. Of course whether Ian wants to sell will have some impact on this but at least some the majors are going to see the potential of getting a lock on a huge percentage of global production for at least the next 5 to 10 years.
Now if anyone is thinking they should immediately invest their life's savings in ZENN Motors Inc because of the analysis they've just read, then click this link for some very important information you absolutely need to know before making your stock purchase. If you didn't click the link then keep reading. As a total outsider everything you've seen here is at best back of the napkin estimates and at worst a misleading stinking pile of poo. Personally I have 7% of my investment assets in ZENN and will consider raising that if the permittivity testing is favorable, but I don't foresee going over 10% which is as much as anyone should ever put into such a speculative venture.
Cautions:
When ZENN made the deal with EEStor it was 2004 and gas was selling for around USD $1.80 a gallon. At that price using EESUs for EVs is very very marginal and conversion kits make no sense at all. If prices fall anywhere under $3.00 the things aren't nearly as rosy and anything under USD $2.00 and ZENN is kaput. This dynamic could also explain why EEStor was willing to give ZENN such a great deal as at that time the EV market must not have looked very promising to EEStor.

Another caution is the price of electricity. Unlike gas and diesel, electricity isn't fungible. There are areas in the US where the price of electricity can be as much as 50% over the national average such as in the North East. Of course there are also areas that can be 50% below the average such as in parts of the Mid West and Great Plains states. If EVs prove to be a viable solution for ground freight, it will be interesting to see if there is an increase in migration of manufacturing businesses and jobs to states with low power cost.
Other tea leaf readings to consider:
ZENN Motor Company Inc. (ZNN) is obligated to make a USD $700,000 payment to EEStor on third-party confirmation of permittivity testing of production units and another USD $500,000 upon delivery by EEStor of a production quality EESU. Successful permittivity testing also triggers an equity funding round where existing equity partners can purchase additional shares in EEStor. ZENN can increase its ownership to 6.2% of EEStor for USD $2 million. On May 30th ZENN received gross proceeds of CDN $15,225,000 after issuing and selling 4,060,000 shares.
The share offering by ZENN on May 30th mentioned above triggers a US SEC rule that prevents US residents from investing in the company for 40 days. Although US residents can still buy ZENN through the pink sheets (ZNNMF), stocks on the pink sheets don't have a good reputation. Almost all publicly traded investments funds have internal rules prohibiting the purchase of pink sheet stocks. The 40 days will be up on July 10th which would be a good day for the permittivity test results to be released. US investors would find it easier to purchase ZENN's stock, but whether ZENN has any influence over EEStor on this matter is impossible to say.
Maxwell (MXWL), the only company even remotely in the same space as EEStor, has seen it's stock drop to 10.18 from a recent high of 13.95. If you compare Maxwell's stock to ZENN you'll see the two are diverging from each other as shown in this chart. If Maxwell continues to fall as ZENN continues to rise, this is a clear signal the market thinks Maxwell is headed for significant troubles ahead.

27 comments:

David said...

Great. Interesting blog. But any idea how long before EEstor can actually deliver a working product? Are we talking weeks, months, years?
ZNN stock rose nicely past couple of weeks - is it in anticipation of EEStor product release?
Thanks.

Tom Villars said...

According to Ian Clifford, ZENN's CEO, EEStor is suppose to start shipping production units by the end of 2008.

I think it's safe to say almost all of ZENN's market cap is because of EEStor. ZENN's existing product is a sad little EV that has a max speed of 25 mph.

Harvey said...

I am aware of the pink sheets symbol for Zenn, but how does one buy the stock on a different (which one?) exchange?

Tom Villars said...

ZENN trades on the Canadian Venture Exchange (CVE) under the symbol ZNN.

To trade on that exchange you'll need to trade in Canadian dollars. e*Trade has a simple way to handle this, but as I mentioned in the article, you'll need to wait until July 10th if you are a US resident.

Gary said...

A friend of mine and I just bought "znn" though Scottrade and we are U.S. citizens. There was nothing said to us about July 10??

Tom Villars said...

"A friend of mine and I just bought "znn" though Scottrade and we are U.S. citizens. There was nothing said to us about July 10??"

All I can say is my experience was different when I tried this through e*Trade back in the first week of June. You have made me curious enough though to try again.

Gary said...

We could not do it though their site on the Internet. They had to do it for us though their office and they charged us $27 for the trade. It shows up in our account as "znn" and not "znnmf". Hope this helps

Tom Villars said...

I tried it again and got the following error on e*Trade,

"Opening orders for this security cannot be accepted online at this time. For assistance with placing this order, please contact Customer Service at 1-800-ETRADE-1 (1-800-387-2331)."

This is the same error as I got before and if you call the phone number (and wait ten to fifteen minutes to be connected to the global trading desk) they'll tell you have to wait.

I'm curious how Scott Trade is getting around this.

Gary said...

Since e-trade doesn't have any local offices, I would suggest that you try a local office.

B said...

What exactly is wrong or risky about buying ZNNMF (pink sheets)? It tracks the ZNN.V exactly as far as I can tell. I bought about two grand worth at $4.13 I believe in early June and it hasn't looked back (over $6 last check). Got it through Tradeking, and I had to call in (but they only charged me the usual 4.95.)

Now you worry me saying the pink sheets "have a bad rep" - what exactly do you mean? What are the pros and cons?

Thanks

Tom Villars said...

b said, "Now you worry me saying the pink sheets 'have a bad rep'"

Most public investment funds aren't allowed to purchase Pink Sheet stocks has there just isn't enough transparency and liquidity. It's much easier to get listed on the pink sheets so quality range of listed companies will vary from good to bad to out right crooks.

You are right the ZNNMF will track ZNN.V but there is also a currency risk as ZNNMF is dominated in USD while ZNN is in CND. That is why you see a something around a 0.1 difference in price between ZNN and ZNNMF.

Parry said...

Go to: pinksheets.com and read all about the WHEN,WHERE,WHY and hows of this type of stock trading. some of the biggest companies in the world trade there. They merely do not want to put up with the SEC hassles.
PARRT

Beale said...

Could you say that BASF is sort of in the same "space" as EEStor? Doesn't BASF have some patents about very thin, perfect layers?

Tom Villars said...

I believe the BASF patent you are referring to is 7023687

As BASF is more of a chemical company than a manufacturer of end products, I'm not sure what to make of this. The manufacturing technique seem quite different than EEStor's process but this way outside my skill set.

I'll look into this more. Thanks.

Investor said...

I purchased ZENN stock over one year ago. I sold this week at a very good price. EESTOR was to release the technology mid to end of 2007. They did not. I spoke with Ian at ZENN several times before I purchased the stock. Now, no one at ZENN will return my calls or emails. I am sure ZENN is equally frustrated with EESTOR. Businesses frequently have production delays. But when they go completely silent this means something is substantially wrong. I am hopeful that EESTOR will someday produce what they claim. I am not willing to risk my money on this company at this time.

Algae as a biofuel seems more promising. Three airlines are joining the newly-formed Algal Biomass Organization (ABO), a non-profit organization which aims to promote the development of commercially viable transportation and power-generation fuels, as well as other non-energy applications, from algae biomass.

Air New Zealand, Continental Airlines and Virgin Atlantic, together with biofuel technology developer UOP LLC, a Honeywell company, are the first wave of aviation-related members to join the ABO. The organization is co-chaired by aircraft maker Boeing Co.
The airlines are advocating the identification and acceleration of new generations of fuel sources for the industry that have lower life-cycle carbon emissions, such as sustainable algae-based biofuels.

Vijay said...

1. In the US you can buy znn.v by putting an order for znnmf or znnmf.pk or calling your broker. Just depends on your trading company's software.

2. Recently, the sales guy at ZENN said that the independent permittivity test will be in a few (7?)weeks and so I bought a considerable position in ZENN.

3. I am betting that EESTOR is going for the independent, third party permittivity test based successful testing in house. So, IMHO there is a very good chance that it will succeed.

4. My personal opinion is that if it (EESTOR) is successful, then the analysis on this page (article/blog) may actually be realized.

5. KPCB, the company that invested in GOOGLE when it (Google) started has said that EESTOR is the biggest risk/reward of any investment that it has made.

6. At this point, Fuel Cells are too far away and IMHO, only electric cars have a chance of being commercialized even without EESTOR. You may get a car with a small cabin but lots of batteries.
A news item said that one guy has converted his Honda Accord to an EV using 21 lead acid batteries.
So, building a basic car for a 40 mile round trip commute is already here. So, you spend another $1000 every 3 yrs to replace the batteries. But no gas expenses, no oil changes etc.

SO, even if EESTOR is not successful, ZENN has a chance of doing well. Meaning ZENN stock will not crash to zero.

7. IF EESTOR is successful, then one of the big auto manufacturers will have to rapidly make a deal with ZENN. It may save GM or Ford from bankruptcy.

8. Politicians may get into the fray. If I were a Canadian politician in the know, I would set up a $1 Billion fund to develop electric cars and write the bill in such a way that ZENN would get most of it.

9. Of course, US politicians may say that EESU is critical to national security and prevent it being sold outside the US, in order to save the auto industry.
I feel that there may be some political games since the potential pot is so large.

Well, good luck if you are an investor in ZENN. If EESTOR delivers, they will certainly help the world to be a better place

Tom Villars said...

Investor said, "EESTOR was to release the technology mid to end of 2007. They did not."

In EEStor's original business plan two prices were quoted one for low volume production and one for mass production. I agree this is troubling but ZENN has said this was a clarification of the delivery schedule and hopefully they are just haggling over volume and price.

Investor also said, "But when they go completely silent this means something is substantially wrong."

Ian has been giving interviews this podcast being one of the best.

Tom Villars said...

vijay said, "Of course, US politicians may say that EESU is critical to national security and prevent it being sold outside the US, in order to save the auto industry."

I'd like to see a US politician get in between KPCB and many billions of dollars. You might see some grandstanding but I doubt any serious opposition would develop.

vijay said, "IF EESTOR is successful, then one of the big auto manufacturers will have to rapidly make a deal with ZENN. It may save GM or Ford from bankruptcy."

I hope it isn't GM. If there is one company that could screwed up the biggest advance in EV history, it is GM.

vijay said, "SO, even if EESTOR is not successful, ZENN has a chance of doing well. Meaning ZENN stock will not crash to zero."

I disagree. If EEStor isn't for real ZENN isn't worth anything. Nobody needs ZENN's enhanced golf cart technology which is all they have so far. ZENN is nothing more than a system integrator that negotiated a good deal and then got VERY lucky when gas prices went way up.

Investor said...

Tom,
I agree. ZENN will not do well if EESTOR fails to deliver. In a word the car is "ugly". I am pulling for EESTOR so we can substantially reduce our dependance on oil.
Thanks for the pod cast. I might pick up a few shares if the next mildstone is favorable.

John said...

Tom a well thought out article and I agree with most of your conclusions. However there is one very big omission that can not be left out – the OEM car market and from ZENN’s comments and I would bet a lot of money that ZENN is exploring this vigorously.

They said that their first “city car” will be for markets outside of North America. Secondly when you look at the world car market of some 50 million cars per year ZENN’s exclusive EEStor deal seems to cover at least 70+% of all cars made or something over 35+ million cars per year. My bet is that they will announce a deal with a major Chinese or Indian car maker to Joint Venture a production plant for something like 250,000 cars per year starting in late 2009 and ramping up as fast as EEStor can deliver.

The logic, why would ZENN just sell drive systems when they can have 50% of the margin on selling a car – say $300 to $500 per car for smaller vehicles. Thus by the end of this year it seems to me to be very likely that ZENN will have announced that they have a deal to earn say $400 times 250,000 or $100 million per year. With 33 million shares out this means profits of $3.00 per share on the first tiny (in world terms) deal. At 30 times earnings that means $100 per share in real value never mind their ownership in EEStor and what deals can be done on the other 34,750,000 cars per year.

One other issue is that to build a car from scratch as 100% electric vs 100% gas there will almost no difference in selling price inclusive of an EEStor battery. So again why would ZENN go the electric drive route only?

If my crystal ball told me that the ZENN stock could be $500 or $1,000 12 to 18 months from now it wouldn’t surprise me at all. Is there risks – you bet there is! But my money is where my mouth is, I have a load of stock.

One final note is that every electric power grid in the world cycles to a peak during the day and valley at night and very few cars ever use more than a fraction of a tank per day. So we have a situation where virtually every EEStor car becomes a battery for the grid – charging at night with cheaper power and reselling some power the next day at higher prices – the car could become a marginal cash generator for the owner instead of a big expense.

Tom Villars said...

john said, "The logic, why would ZENN just sell drive systems when they can have 50% of the margin on selling a car – say $300 to $500 per car for smaller vehicles."

I disagree. If ZENN tries to emulate an OEM like GM, Ford, or Toyota they'll be hopeless bogged down in details like logistics, safety certifications, advertising and host of other distractions that goes into developing a brand name and the infrastructure to support the sales and maintenance of thousands and eventually millions of cars. It would be much better to concentrate on the one differential advantage ZENN has and this is the exclusive agreement with EEStor for cars under 3100 lbs.

Also your assumption of a gross profit of only $300 to $500 per car sounds very low to me. I'm thinking ZENN can show a gross profit closer to $2000 for the ZENNergy drive train alone. Ian has said there will be a $5000 premium for ZENNergy equipped vehicles. By the time you subtract out the cost of the old ICE and all the supporting components (electric starter, alternator, muffler, gas tank, radiator) $2000 gross profit per car doesn't sound unreasonable to me.

Finally a share price of 30 times earnings might be common among high tech software firms, but I don't think it's realistic for a company that has to delivery a physical product even if the technology is a major breakthrough.

Of course this is all speculation so it will be very interesting to see what happens when permittivity testing results are announced.


Good luck with your investment.

Mark J said...

Why is Ian Clifford selling his stock in Zenn?? On three separate occasions this year Clifford has sold stock. I could not find any insiders buying. This is a serious red flag for me. I was going to open a small position in Zenn until I saw that. See details here
http://www.canadianinsider.com/
coReport/allTransactions.php?ticker=ZNN

Tom Villars said...

Mark,

ZENN's insiders own about 16% so the 48,600 shares sold by Ian an other insiders between March and August of 2008 is only 0.17% of the outstanding insider shares. Why do you feel this is a red flag?

Also Ian only pays himself a little over 100K per year which isn't much for a CEO of a multimillion dollar business. I wish more of the companies I'm invested in had your definition of a "red flag" when it comes to compensation.

Mark J said...

If he is only paid 100K that seems reasonable to me. This is a tiny company with no profits. It will become a penny stock if the eestor technology does not pan out. If I remember correctly Clifford doesn't have any executive experience until Zenn. Don't quote me on that I don't remember where I read it. I think he was a salesman?

While the stock he sold may only represent a small fraction of what he owns, the fact remains there have only been sales this year no purchases. As for 16% insider ownership, I'd love to see some more details. Please post them if you have any. Like how many shares does Clifford have personally. Also I'd like to know if the insiders purchased any shares or if its all been given to them as compensation.

I'd love to be wrong but these sales still bother me.

Tom Villars said...

From the annual report, dated 1/21/08:
"As the date of this report, the directors and senior officers of the Company beneficially owned, directly or indirectly, or exercised control or direction over approximately 16% of the number of outstanding common shares of the Company."


see page 20

If you are looking for experience start by going through the board members.

k. said...

Hi there.

Is there a way (web site?) through which we can follow any updates on EEstor capacitor tests ?

Does anyone have any news or can provide the latest news link you've come across ?

I am thinking in opening a small position on Zenn and was wondering where to find the latest news on the company and on EEstor's capacitor tests.

Thanks a bunch,
Frank

James said...

On 14 Aug09 I Saw a Marine in Afghanistan on Fox News with a box strapped to the front of his chest. Suspect it was a Battery/EESU. Suspect EESUs Lockheed Martin is making for DoD are probably putting ZENN on the back burner for a while. Comments?
(I am retired LOCKMART engineer.)