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)
Specific energy (Wh/kg)
Price ($ USD/kWh)
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.
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.