Thursday, July 5, 2012

Some Questions About A123 Systems ($AONE)

The company began selling product commercially in 2006, I believe, yet still has consistently negative gross profit. At what point will it be able to sell goods at a positive gross margin?

If it were even possible, how long would it take to establish credibility after the damaging incident with defective batteries that were supplied to customers? How will this impact the company’s ability to attract investors and win future contracts?

How can the company compete with battery developers in China which generally have lower manufacturing, labor, and raw material costs?

It seems clear that the company needs significant further capital for R&D and to sustain operating or gross margin losses. Given that its unsecured notes trade between 25-30 cents, how will this be possible? Wouldn't it help significantly if the company redeemed the entire outstanding 2016 notes for equity?

How can the $144 million of 2016 notes only be worth $40 million according to the bond market - yet the company has a market cap of close to $200 million? Aren't both the notes worth significantly more and the stock worth significantly less?

Wouldn't they have a better chance of surviving if they (a) completely equitized the existing debt, via debt-for-equity exchanges, then (b) raised new capital through additional equity sales and bond issuances, and (c) took a hard look at the universe of investment opportunities and considered whether the best IRRs exist in the battery business?

With their cash and cleaned-up balance sheet, assuming they followed the steps above, might it be better to (a) sell the existing battery business to a strategic buyer and (b) buy other energy assets, like the credits of distressed natural gas or coal or PV solar companies that are low enough cost that they will survive?


Josh said...

Let me ask a dumb question. What do you want to happen to AONE stock or bonds?

Is the message more to AONE stockholders that are still long, public service announcement, sell your stock for the little value that is still left?

You have convinced me that the stock is worthless / or near worthless but there isn't a way for me to make money on it.

When I look at the AONE borrow rate, it is 100%+. So no money to be made there. I have never shorted a bond before.

CP said...

It would probably pay to buy in the money puts and/or sell calls... especially if you owned the bonds.

The liquidation value on the bonds today should be higher than the current price.

Anyway, I think the stock and bond values should converge.