Nobody likes the high operating costs associated with gas-guzzling SUVs or the horrid smell that results from commercial trucks and buses spewing diesel exhaust. But internal combustion engines, along with their high costs and heavy pollutants, have been both a necessity and part of our reality for decades.
But times are changing.
And thanks to a multi-year decline in the cost of lithium-ion batteries, aggressive policy support from governments around the world, and increased commitment from leading automakers, we finally see momentum building behind the transition from internal combustion engines to electric vehicles (EV).
According to Bloomberg’s NEF Electric Vehicle Outlook for 2018, sales of EVs will increase from a record 1.1 million units worldwide in 2017, to 11 million in 2025, and then exploding to 30 million in 2030 as the costs to manufacture EVs fall to beneath that of internal combustion engine vehicles.
Bloomberg’s EV report went to say that by 2040, 55% of all new car sales and 33% of commercial vehicles will be electric.
Simply put, we’re in the first inning of a likely extended innings ball game when it comes to the transition and migration from internal combustion engines to EVs.
A diversified approach
Longmont, Colorado-based UQM Technologies Inc (NYSE: UQM) is a $65 million company that “develops, manufactures, and sells power dense, high-efficiency electric motors, generators, electronic power controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, and industrial markets.”
In simpler terms, UQM makes motors and propulsion systems for electric vehicles.
UQM isn’t a one product company, and they’re not locked into selling only within their backyard. In fact, when UQM hosted investors and analysts on its third quarter 2018 conference call, CEO Joe Mitchell made a point of highlighting the strong growth across the company’s propulsion systems, auxiliary products, and engineering services divisions, and underscoring several essential developments that relate to the company’s work in China and India.
Mitchell highlighted UQM’s continued shipment of explosion-proof E-drive systems to the Chinese commercial vehicle manufacturer KESHI, as well as his company’s initial deliveries of fuel cell compressor systems to several new customers.
Away from China, Mitchell discussed UQM’s continued delivery of PowerPhase DT electric drivetrains to the Indian automotive giant, Ashok Leyland Ltd, as well as his company’s ongoing worth with Meritor Inc (NYSE:MTOR), Lightning Systems, and Proterra.
Under the leadership of CEO Joe Mitchell, UQM is actively executing its growth plan, nurturing customer relationship in strategic areas around the globe, and laying the foundation to take advantage of what is likely to be years of growth as cities, states, and countries transition away from internal combustion engines and toward cleaner and more efficient electric vehicles.
Tripped up by Trump’s tariffs
Long before President Trump went to war with Chinese President Xi over his country’s trade practices, UQM signed a joint venture (JV) agreement with China National Heavy Duty Truck Group Co. (CNHTC) and Sinotruk Global Village Investment Ltd, a Hong Kong-based LLC owned by CNHTC.
Now, UQM’s strategic partnership and joint venture with CNHTC was a multifaceted arrangement.
Part one involved CNHTC giving UQM more than $5 million in cash for a 9.9% stake in the company.
Part two, which required approval by the committee on foreign investment in the United States (CFIUS), would transfer 34% of UQM’s outstanding shares to CNHTC in exchange for a $28.3 million investment.
And part three revolved around the formation of a mutually beneficial joint venture between UQM and CNHTC.
Under the JV agreement, UQM was to be a 25% partner with an option to increase its ownership to 33% after the first year of operation.
UQM would contribute $6 million of the venture’s $24 million cost. A seemingly steep sum for such a tiny company. But according to UQM’s management, the joint venture would have a production capacity of 50,000 E-drives and E-axles. And production of that magnitude would be HUGE for a company the size of UQM.
When the joint venture was signed here’s what UQM’s CEO Joe Mitchell said about the transaction:
“Our strategy for many years has been to align ourselves with a Chinese partner that would enable us to have a local manufacturing presence in China. This JV agreement gives us the opportunity to manufacture and sell our electric propulsion systems to the largest market in the world for electric vehicles.”
Unfortunately, on March 5, 2018, UQM and CNHTC were forced to withdraw and abandon their application to CFIUS for investment approval when the government committee informed UQM that: “The second stage investment [the $28.3 million cash for stock swap] would likely not be approved in its current form.”
Now, abandoning this JV was a blow to UQM’s business. The tiny company needed the cash and, likely, may need to sell stock (or issue debt) to raise some money over the next 12 months to further their growth initiatives. That said, the CFIUS setback isn’t a death blow, and the company appears to be taking it in stride as they work with their Chinese partners to further their business relationship.
On the road to profitability
When UQM Technologies reported third-quarter financial results Wednesday, October 31, what stood out was its impressive top-line revenue growth.
Thanks to a surge in product sales and the addition of contract services (which didn’t exist in the year-ago period) UQM reported a 59% surge, from $2.8 million to $4.4 million, in year-over-year revenue.
And while growth in the top line failed to produce a positive bottom line figure, the company appears to be on the right path.
Here’s what David Rosenthal, UQM’s CFO, had to say about his company’s performance during the November 1 conference call:
“Top-line results were at record levels, and we’ve achieved sales of nearly $9 million year-to-date which tops 2017’s revenue in total. The third quarter was another excellent one for UQM with record sales, including a strong service component and a positive outlook on order trends heading in 2019. We will continue to manage cash appropriately while investing in the business and ramping up production which should lead to higher margins on our path to profitability.”
The biggest hurdle UQM most overcome on its path to profitability is managing its costs and margins while the business transitions from prototype work to long-term, high-volume production. Provided UQM can meet the future demand of a rocky and unpredictable EV market, it’s the jump from single unit sales to more significant, high volume orders, that should light a fire under UQM’s top and bottom line growth.
An improving chart
After a spectacular 250% advance from May through November in 2017, UQM has been trapped in a trading range between $1 and $1.50. But I believe the stock is building energy to break above its October 2018 $1.50 swing high and push up toward its March 2014 $3.45 swing high.
Now, the most critical part of UQM’s technical development will be a close above $1.50. But I’m not interested in a single daily close above the October swing high. I want to see a weekly close above $1.50 at a bare minimum.
As the stock gains acceptance above $1.50 we’ll see a near 10-year downtrend line broken, a new bull trend in shares of UQM take hold, and an upside target of $3.45 become a logical and realistic possibility.
The bottom line is Joe Mitchell is making all the right moves to position UQM for long-term success in the electric vehicle revolution.
At the time of publication, Bob Byrne had no positions in the stocks mentioned.