Wunderlich Securities Comments On A123 Systems, Battery Debut

A123 Systems

announced it had developed a 12V lithium-ion battery to be marketed into the start-stop technology drive train, which most major OEM makers are developing. Start-stop technology is a form of mild hybrid that uses an electric motor to start the car from a stop and in some cases to propel it forward. The reason the auto industry is embracing this technology is that it doesn't require car makers to do anything more than make modest modifications to the existing internal combustion engine drive train. It improves fuel efficiency by up to 15%. A123 needs to get volume production up so it can lower its manufacturing costs. Making 12V batteries for this market really moves the needle toward big volume. Indeed, Wunderlich expects the market for the A123 12V product to be small or nonexistent. Further, it's going to have to assemble all these by hand, and doing it that way means it will likely lose money on the sale of each one. If the overallotment is exercised on the recent deal, A123 will have added $257 million to its balance sheet, but this should only buy the company another 12 months. Wunderlich expects A123 will have to go back to the capital markets in mid-2012. In its model for 2012, Wunderlich assumes a $200mm raise, split between debt and equity. But that follow-on raise will likely need to be repeated again in 2013 and every year until the firm turns a profit. A123 will be net negative cash in 12 months according to its forecast. Wunderlich reiterates its Sell rating and $3.50 price target. AONE is trading lower at $5.94