At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Goldman calls it: A123 blows it
I guess you have to hand it to Goldman Sachs. When the banker-everyone-loves-to-hate panned electric car-battery maker A123 Systems (NAS: AONE) as a stock in search of a catalyst last month, investors weren't exactly pleased with the downgrade. But now, two days after earnings came out, the stock has already dropped 6% from its pre-earnings price ... and is down a whopping 35% from its highs of just before the downgrade. And now that the bad news is out, everyone who's anyone (and several folks who aren't) on Wall Street is rushing down the trail that Goldman blazed.
Why? There were all sorts of reasons, actually, so take your pick: On Wednesday, A123 sold more batteries than anyone believed it could, yet managed to lose more money than anyone feared it would -- $0.51 per diluted share, versus a Wall Street consensus of $0.38. Although you might think it's a good thing that A123 is selling more batteries than expected, it actually appears that the more batteries A123 sells, the more money it loses. Last year, for example, the quarterly loss was nearly 20% less, at just $0.42 per share.
Bad news is good news?
Of course, if that's the case, then perhaps investors should be encouraged by this other bit of news: According to A123, key customer Fisker Automotive is slashing its orders for the company's batteries. Sure, A123 has the General Motors (NYS: GM) contract to look forward to, and the potential to participate in rising sales of electric trucks to Navistar (NYS: NAV) , which is building an electric delivery fleet for FedEx (NYS: FDX) and UPS (NYS: UPS) . But with Fisker hitting the brakes, it looks like A123's old projection of $210 million in sales is now toast. The company warns that it could book as little as $165 million in revenues this year.
Perversely, the Fisker announcement might turn out to be good news for A123's stock, if not its business. In downgrading the shares last month, Goldman Sachs warned specifically that a too-fast ramp-up in battery production was one factor behind the downgrade. Now that batteries are selling less quickly than previously thought, this probably means A123 can ease up on its capital spending, reduce its cash burn, and maybe coast for a while on the manufacturing capacity it already has in place.
Foolish final thought
Sometimes it seems to me that A123 is operating on a can't-win business model. Sales success breeds a need for manufacturing capacity -- requiring capital spending with cash A123 doesn't have. This opens the door to debt issuances, share dilution, and all the consequent troubles for A123's stock price.
On the flip side, a failure to launch at Fisker stymies A123's growth prospects, allowing rival battery manufacturers that already have scale production in place -- LG Chem in South Korea, Johnson Controls (NYS: JCI) here at home -- to widen their lead. Meanwhile, better-funded start-ups such as Tesla Motors (NAS: TSLA) in California continue to generate buzz with their longer-range e-cars and alternative battery-pack technology alike.
Put it all together, and I very much fear that A123 is destined to travel the same road that rival Ener1trod earlier this year.
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At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 307 out of more than 180,000 members.The Motley Fool owns shares of UPS and FedEx.Motley Fool newsletter serviceshave recommended buying shares of FedEx and General Motors. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.