Tuesday, November 02, 2010

Movers, Not Shakers

From the most experienced scientists and engineers to wet-behind-the-ears high school kids, there are thousands trying to invent high powered, energy efficiency trucks and cars to replace the fossil fuel guzzling vehicles that make up our current fleet. Most think of the fuel first, but there is more to a vehicle than the fuel source. It takes all sorts of subsystems to make a car or truck move down the road.

That is why the “greenies” turn to companies like Enova Systems, Inc. (ENA: NYSE AMEX) for power train systems. Unlike Delphi (private) and Oshkosh Corp. (OSK: NYSE), which manufacture powertrain systems for conventional vehicles, Enova is a small upstart that is focused exclusively on the very unconventional hybrid and electric car market.

Specializing has its advantages. Using a conventional powertrain system is likely to produce more shaking in a hybrid or all-electric vehicle than moving. For example, the hybrid powertrain is essentially two powertrains — a gas engine powertrain and an electric motor powertrain. It takes a specialized computer controller to coordinate the two.

Enova is an upstart. Sales in the last twelve months were $7.3 million on which the company reported a net loss of $6.7 million or $0.26 per share. Operations are using about $1.4 million in cash each quarter. At the end of June 2010, the company had $10.4 million on its balance sheet. We estimate that without a major change in circumstances, Enova could use up that cash by early 2012.

Early customer Smith Electric Vehicles (private) recently ordered another 100 electric drive systems for Smith’s all-electric Smith Newton truck. Enova had already shipped 220 units out of contract for a total of 500 drive systems that is supported by a $32 million grant from the Department of Energy. Smith claims the number one spot in the manufacture of all-electric commercial trucks with a fleet of vans and utility vehicles.

Enova also have two strong customers in Navistar International Group, Inc. (NAV: NYSE) and China’s FAW (First Auto Works) Group, which accounted for most of Enova’s sales in 2009. The FAW Group is expected to deliver the first all-electric fire trucks to the China market after in the first quarter 2011. FAW has partnerships with Toyota, Volkswagon and Mazda and delivered 1.8 million vehicles in the first nine months of 2010. In a recent statement regarding new US EPA regulation of fuel efficiency and greenhouse gases, Navistar management pointed out that it was the first Original Equipment Manufacturer (OEM) to release the smokeless diesel engine and the first OEM to enter assembly line production of diesel-hybrid commercial trucks and school buses in North America.

Enova has some competition from some heavy hitters in the automotive market. Toyota Motor Group (TM: NYSE) agreed to license its in-house hybrid power train to Mazda earlier this year, demonstrating that even a big name automotive manufacturer is prepared to get involved at the early stages of automotive design. First tier supplier The Bosch Group GmbH has introduced a hybrid vehicle power train and is developing an all-electric powertrain.

The worries about cash resource, a skimpy roster of customers, and the threat of competition aside, investors with little tolerance for risk might find unpalatable the 2.80 beta measure of risk in Enova’s stock. We acknowledge that the initial sales of Enova’s powertrain only prove marketability. The verdict on profitability is still out.

Enova is confident that its powertrains are can make the long haul because it products are set apart by quick and easy installation and integration through a bolt-on post-transmission drive system technology. That means costly recertification for emissions, which in the end may be what moves and not shakes Enova and its stock.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Enova Systems, Inc. (ENA: NYSE AMEX) is included in the Efficiency Group in Crystal Equity Research’s The Mothers of Invention Index.

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