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Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification
February 18, 2014
Aditya [email protected] 646.885.5472
Benjamin [email protected] 703.312.9763
Energy & Natural Resources Research: Advanced Transportation©FBR CAPITAL MARKETS & CO.
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© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking
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Important disclosures can be found at the end of this report.
Table of Contents
Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification ................................. 2
Summary & Recommendation................................................................................................................................................ 2
Key Points ............................................................................................................................................................................... 2
Our Investment Thesis Is Focused on Five Key Areas ............................................................................................................. 3
Brief Overview ........................................................................................................................................................................ 7
Key Models ............................................................................................................................................................................. 9
FBR Global Auto Model ......................................................................................................................................................... 10
Premium Vehicle Segment.................................................................................................................................................... 11
Market Analysis: Three Key Segments .................................................................................................................................. 13
An Overview of Global CAFE Standards ................................................................................................................................ 17
FBR Global Electrification Model .......................................................................................................................................... 19
Global Separator Model........................................................................................................................................................ 29
Material Handling: Market Overview and Cost of Ownership.............................................................................................. 43
Investment Risks ................................................................................................................................................................... 51
Power Solutions International, Inc. (PSIX) ................................................................................................................................ 52
Westport Innovations Inc. (WPRT) ........................................................................................................................................... 62
Tesla Motors, Inc. (TSLA) .......................................................................................................................................................... 70
Polypore International, Inc. (PPO) ............................................................................................................................................ 88
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© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking
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February 18, 2014 Coverage Initiated
Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification
Summary & Recommendation Transportation is a major source of petroleum consumption and carbon dioxide (CO2) emissions, and improvements to existing power trains and use of alternative fuels will drive a major change in the transportation landscape over the coming years. We define the advanced transportation landscape to include technologies that improve the efficiency of traditional internal combustion (IC) engine power trains, electric vehicles (EVs), natural gas vehicles and associated fueling infrastructure, fuel cells for mobile applications, and electric vehicle charging stations. We are launching coverage of four companies: We rate Power Solutions International, Inc. (PSIX), and Westport Innovations Inc. (WPRT) Outperform, and we rate Tesla Motors, Inc. (TSLA) and Polypore International, Inc. (PPO) Market Perform.
Key Points We expect natural gas to increase its share as a transportation fuel, especially in medium- and heavy-duty trucks,
and expect the nation’s trucking fleet to begin a sustained transition toward natural gas engines. We expect a third of new truck shipments to use natural gas as a fuel by the end of this decade, up from less than 5% today, and see the industry at an inflection point with increased engine availability and attractive pricing on new products. Increased competition within storage solutions, such as compressed natural gas (CNG) tanks, will meaningfully lower incremental costs and will only increase the attractiveness of using natural gas as a fuel. We also see a sizable buildout in fueling infrastructure for natural gas trucks through the end of this decade, and we see a 15%+ fuel displacement opportunity for distillate fuel oil used for “on-highway” applications. In sectors such as material handling, liquefied petroleum gas (LPG) and natural gas should continue to take share from diesel forklifts due to tightening emission standards and lower operating costs.
We also expect electrification to play an increasing role in automotive power trains, accessory electrification, and propulsion for applications such as material handling. It is important to note that, despite decades of improvements to IC engines, current engines can achieve only about 25%–40% overall efficiency due to friction, heat, and combustion losses. On the other hand, a fully electric power train can achieve efficiencies upward of 80%, and that coupled with the lower relative cost of electricity versus gasoline can lead to substantially lower operating costs.
Looking across our various subsectors, we believe that investors are underappreciating the wide-scale reach of natural gas as a transportation fuel, especially in trucking and material handling applications. While the passenger electric vehicle landscape will evolve rapidly, we believe that this near- to medium-term transition is fully priced in at current stock prices. Select opportunities, however, can be found in areas such as electrification of material handling. We also expect select technologies such as fuel cells, an extension of electrification, to make an impact in material handling.
We see Power Solutions as a key beneficiary of increased natural gas penetration in areas such as oil and gas, material handling, stationary power, and on-road trucking. We see earnings growth potential of at least 25% from the company’s rapidly increasing product portfolio. Westport is expected to remain a controversial name; however, we believe that recent management changes should transition Westport to a specialty fuel systems provider with sustained profitability and healthy margins. With low investor sentiment and interest, multiple new announcements in 2014 should also serve as a positive catalyst for the stock.
We are strong believers in Tesla’s ability to continue to produce cutting-edge electric vehicles but believe that the current stock is fully pricing in Tesla’s transition to a Porsche-type manufacturer by the end of this decade. This carries higher execution risk, and we do see the risk/reward to be compelling at current levels. Polypore is expected to retain its high market share within lithium separators, an important component in the electric vehicle supply chain. At current levels, however, the stock is pricing in a meaningful penetration scenario for electric vehicles over the next three to five years. We also see limited upside to our estimates until the next generation of electric vehicles is launched in 2016/2017.
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Our Investment Thesis Is Focused on Five Key Areas
Electric Vehicles We believe that all the leading original equipment manufacturers (OEMs) now have more detailed product development and launch schedules, including scalable platforms and common architectures. This should enable the OEMs to create varying models from mild hybrids to plug-in hybrid electric vehicles (PHEVs), using similar platforms and architectures, as well as varying sizes of battery and other power train components. We believe that full EV platform development and new models will be somewhat limited by range and battery cost limitations.
We expect OEMs like Nissan Motor Co. Ltd. (NSANY) (Infiniti) and BMW to focus on full EV development, while OEMs like Ford Motor Company (F), Volkswagen AG (“VW”), Toyota Motor Corporation (TM), and General Motors Company (GM) place a greater emphasis on hybrids and plug-in hybrids. Overall, we expect EV/PHEV penetration to be less than 1% of global light-vehicle (LV) sales by 2015 and 3% by 2020. China continues to remain a wildcard in these forecasts, and developments there will need to be monitored closely, especially given continued government incentives to promote electric vehicles. Also important is the number of joint ventures created to launch electric-only passenger brands in China.
Tesla will continue to stand out as one of the only viable full EV manufacturers, given its proprietary power train and battery technology, and we expect industry competition to Tesla to be limited. Tesla’s key challenge will remain the on-time and on-cost development of the Model X and the Gen 3, managing capital needs to introduce new variants to the Model S, and competing with traditional automakers for vehicle safety and connectivity content. Given its relatively smaller size, supply-chain management around power train components will remain critical for the company. While we remain positive on Tesla’s evolution into a successful premium auto manufacturer, we believe the shares are fairly valued at current levels. Tesla’s evolution into a Porsche-type automaker with industry-leading sustainable margins is fully captured at current prices, in our opinion. Further upside will be largely dependent on establishing a manufacturing presence in China and the Gen 3 vehicle achieving unit volumes closer to name plates such as the BMW 3 series within only a few years of launch. We do not see real clarity on this until at least 2017.
Natural Gas We expect the nation’s trucking fleet to begin a meaningful transition to natural gas, which we believe will only accelerate from the 2015 time frame. Product availability has increased meaningfully, and pricing is now what we term as “commercial pricing,” which has led to a multifold increase in orders from the larger fleets who were early adopters, as well as substantial interest from the smaller fleets. We see further cost-reduction potential due to increased competition in natural gas storage tanks, and we expect to see industry consolidation among tank suppliers. While new natural gas engines will dominate the market, we also see dual-fuel technologies to continue to make inroads, and given the fragmented landscape of dual-fuel providers, we would expect to see industry consolidation. Natural gas will also continue to increase its share within the material handling sector, at the expense of diesel engines, and we expect this trend to manifest itself further in the U.S. and also in China over the coming years.
Power Solutions is our Top Pick within this sector. Within transportation applications, we see the company being a major beneficiary from the penetration of natural gas engines in the medium- to heavy-duty truck markets. The company’s trucking engines have a meaningful weight and cost advantage over those of larger manufacturers, and we also see Power Solutions continuing to increase its market share globally within the material handling sector. The rapidly tightening emissions landscape, which necessitates the use of expensive emission-control equipment such
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as exhaust gas recirculation (EGR) and selective catalytic reduction (SCR) systems, will further increase the competitiveness of the company’s natural gas product offerings.
Technology providers such as Westport and engine manufacturers such as Cummins Inc. (CMI) will continue to maintain their high market shares on natural gas engine shipments. Westport is expected to remain a controversial name, and sentiment remains negative, but we believe that the market is underestimating the profit opportunity from the transition to a technology provider with selected manufacturing expertise, increasing R&D efficiency and benefits from further penetration into heavy-duty applications.
The light-duty truck market is large with approximately 2.7 million sold in 2013, and the top 10 brands sold about 2 million units. We estimate a near-term addressable market of about 600,000. However, this segment remains underpenetrated despite the launch of natural gas product offerings for a number of high-volume platforms through a network of third-party qualified vehicle modifiers (QVMs) for GM and Ford and factory-installed natural gas engines by Chrysler Group LLC. We will be monitoring this market closely as it moves beyond the early adopters in the telecom and utility segment.
The spread between natural gas and diesel fuel and the long-term stability of this spread remain key drivers for the ongoing shift toward natural gas engines. Natural gas prices have rebounded rapidly from their lows and are currently above $5.00/MMBtu due to higher weather-driven demand, and several factors such as liquefied natural gas (LNG) exports and coal plant retirements could affect long-term prices. Taking these factors into account, along with the contribution from unconventional plays, the FBR exploration & production team anticipates a tightening of the natural gas markets over the coming year and forecasts long-term natural gas prices of $5/MMBtu, in line with current prices and 35% above the 2013 average price of approximately $3.70/MMBtu. As we highlight later, natural gas prices would have to remain above $7/MMBtu for a sustained period of time before economics deteriorate and slow down the shift to natural gas vehicles. Natural gas–related transportation stocks have underperformed recently with the rapid rise in gas prices, and any further pullback on higher near-term gas prices would present a further buying opportunity.
Other Technologies In this category, we include technologies such as fuel cells for vehicles, ultracapacitors for start-stop and hybrid applications in passenger and medium-duty applications, and microturbine propulsion units in medium-duty applications. While it is too early to estimate potential market adoption, a number of auto manufacturers such as Toyota and Hyundai Motor Company (HYMTF) have announced plans to introduce fuel cell vehicles in the 2015/2016 time frame. We are also seeing increased investment dollars put to work by OEMs such as VW and GM to potentially introduce fuel cell products. Fuel cells can deliver a driving range at a more affordable cost than current-generation lithium batteries; however, infrastructure in the form of hydrogen fueling stations will remain a key barrier to overcome.
Ultracapacitors have a number of advantages over lithium batteries including speed of discharge and longer life; however, the need to manage ever-increasing “hotel loads” requires higher energy densities, which is a key drawback of ultracapacitors. We, however, see applications with stop-start characteristics, especially in the medium-duty applications, to be the key area of use for ultracapacitors.
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Infrastructure Both electric vehicles and natural gas vehicles require their independent charging and refueling infrastructure. Electric vehicles can charge both at home and in public, while commercial natural gas vehicles need to be refueled in “return-to-base locations” and public fueling stations.
The lack of standardization in EV charging has the potential to slow down overall adoption rates and is creating multiple charging networks in the U.S. For example, Tesla operates its own proprietary supercharger network, Nissan is selling chargers and fast chargers based on the Chademo protocol, while a group of U.S. and European companies are launching chargers based on the SAE protocol. We see the potential for utilities to enter this segment and facilitate industry consolidation.
Component Supply Chain Our attention here is focused on battery separators, which are one of the key components used in lithium-ion (“Li-ion”) batteries and play a major role in battery safety and longevity. We expect separator manufacturing to be dominated by a few large players (Asahi Group Holdings Ltd. and Polypore) and do not believe that newer entrants will be able to make major inroads in the market. We estimate the market to be currently oversupplied in terms of installed separator capacity. However, the pace of Tesla’s growth has the potential to change the industry supply/demand balance given the high separator content in its vehicles.
Polypore is expected to remain one of the leading players for lithium-ion separators used in consumer electronic and electric vehicle applications. We, however, expect the shares to remain range-bound in the near term, as PPO continues to price in meaningful industry adoption of electric vehicles over the next few years. Earnings will also continue to be affected by relatively low capacity utilization and the shift toward PHEVs. Further sustained stock upside will be dependent on wins on high-content/volume models, such as the upcoming Tesla Gen 3, and recapture of market share in consumer electronics.
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The
Deb
ate™
Debatable Point Our Thoughts Time Frame Impact
Will markets begin to appreciate the extent of natural gas penetration in light-, medium-, and heavy-duty power trains?
We expect to see meaningfully higher production levels from engine manufacturers such as the Cummins Westport joint venture, sizable orders from trucking fleets, a number of new engine launches in the medium-duty category, and a competitive pricing environment, which should result in industry volumes more than doubling over 2013 levels. Installed fueling infrastructure will also benefit the new sales process. Light-duty penetration will need to be monitored for signs of traction away from early-adopter customers.
3 to 6 Months
Will material handling in China and the U.S. surprise to the upside?
Increased product availability and operating cost savings could have a meaningful positive impact on material handling shipments in 2014 in China. Within the U.S., we see natural gas forklifts continuing to increase share, despite competition from electrics, given advantages in certain duty cycles.
6 to 12 Months
Will the large number of new electric vehicle launches affect the premium segment in 2014?
Several high-profile launches are expected in 2014, such as the Tesla Model X, Cadillac ELR, BMW I3, VW Golf E, and Mercedes-Benz B Class Electric. Among these vehicles, only the Tesla Model X could have a meaningful impact in its category, but this is more a 2015 story given the late-2014 launch. Within the mid-size segment, we await the launch of the new Chevy Volt in 2015/2016, which should come with increased range, a more powerful engine, and better pricing.
12 Months
Will increased natural gas price volatility negatively affect sentiment?
Recent weather-related spikes have seen prices go above $5/MMBtu. Although we see limited impact on actual economics unless gas rises above $7/MMBtu on a sustained basis, sentiment toward natural gas stocks could weaken on any further weather-related spike. Our FBR forecasts call for long-term prices of $5/MMBtu.
3 Months
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Brief Overview Below, we detail the key areas of the advanced transportation landscape and the main players within each segment.
IC Engine Power Train Improvement These mainly include engine technologies such as turbo charging, supercharging, and variable valve timing; transmission systems such as dual-clutch transmissions; and newer gear box designs such as 8- to 10-speed transmissions. Thermal management systems are also expected to play a key role in increasing overall engine efficiency, and we also include advancements such as electric all-wheel-drive systems (AWD) in this category. Today’s automobile is extremely complex, with the need to monitor a large number of power train and vehicle parameters also leading to increased sophistication in sensor systems.
Public companies. BorgWarner Inc. (BWA) has the best-in-class industry portfolio spanning IC engine and drive train products. Sensata Technologies Holding N.V. (ST) is the leader in sensors used to monitor various parameters for power train, emission, and vehicle safety.
Private companies. These companies have mostly focused on implementing more innovative solutions to existing IC engine designs, such as redesigning key IC engine components, including pistons, combustion chambers, or new engine designs such as opposed piston structures and better rotary Wankel designs. Lead times to bring new and radical designs to market have been very long given lengthy testing requirements. Some of the leading players here include Transonic Combustion, Pinnacle Engines, Inc., Liquid Piston, and EcoMotors International.
Electric Vehicles We classify vehicle electrification technologies into power train electrification, electrification of ancillary systems, and key components used in electrification sub-systems.
Power train electrification can be broadly classified into (a) mild hybrids without acceleration assist, (b) mild hybrids with acceleration assist, (c) full hybrids, (d) plug-in hybrids, and (e) full electric vehicles. Key ancillary electric vehicle systems include electric power steering (EPS) and electric HVAC systems (A/C compressor). Key electric vehicle components include batteries and their components (anode, cathode materials, electrolytes, and separators), power train components (motors), power train control systems (inverters and motor controllers), and transmission components (gear boxes).
Public companies (OEMs). Most of the leading auto OEMs have introduced some type of electric vehicles. Start-stop or mild hybrid systems have been introduced by Ford, BMW, GM, and Mercedes (a Daimler AG [DDAIF] brand) in the U.S. Buick (a GM brand) has introduced mild hybrid systems with accelerative assist or “e-Assist”; Toyota and Ford are leading manufacturers of full hybrid models. Tesla is the leading electric vehicle manufacturer, along with Nissan and BMW. GM has the popular Volt PHEV platform. Smaller players such as Kandi Technologies Group, Inc. (KNDI) manufacture low-speed electric vehicles in markets such as China and are looking to expand their U.S. presence.
Public companies (components). Within components, Johnson Controls, Inc. (JCI) remains the leading supplier of start-stop batteries followed by Exide Corporation (XIDE). Electric vehicle batteries are manufactured by LG Chem (LGLD), Samsung Electronics Co. Ltd. (SSNLF), Panasonic Corporation (PCRFY), GS Yuasa (6674-JP), and The Dow Chemical Company (DOW). Key components such as lithium battery separators are manufactured by Polypore, and glass mat separators used in start-stop batteries are manufactured by Owens Corning Inc. (OC). One of the key raw materials used in electric vehicle batteries is lithium and is mined by companies such as FMC Corporation (FMC), Rockwood Holdings, Inc. (ROC), Sociedad Quimica y Minera S.A. (SQM), Orocobre (OCE-AU), and Canada Lithium Corp. (CLQ-CA). A few vehicles have also begun to use ultracapacitor-based mild
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hybrid systems, and Maxwell Technologies, Inc. (MXWL) is the largest manufacturer of ultracapacitors.
Private companies. Several private companies are developing next-generation lithium-based batteries. Key among those include Envia Systems and Sakti 3. Similar to private companies pursuing advances in IC engine power trains, lead times to bring new designs to market are long due to rigorous testing requirements.
Grid Storage
Storage batteries used in electric vehicles have numerous applications when used in grid support applications, such as frequency regulation and peak shaving. Electric vehicles could also be used to provide vehicle-to-grid services and perform some of these functions on a micro level. While this remains an evolving market, we see numerous opportunities where electric vehicles and their storage systems, both new and used, find their way into providing grid support services.
Natural Gas Vehicles These include mainly medium- and heavy-duty trucks, which use either a dedicated or dual-fuel natural gas engine. Natural gas engines are also used in light-duty trucks, although most of these trucks use bi-fuel systems, which can run on both gasoline and natural gas. Passenger vehicles can also run on natural gas, although the market for these vehicles has mostly developed in emerging markets, with only limited impact in the U.S. Natural gas offerings with the Class 7/8 truck category are relatively more mature than electric vehicles, with all major truck OEMs now offering a natural gas product.
Public companies (OEMs). The key truck OEMs are PACCAR Inc. (PCAR), which includes the Kenworth and Peterbilt brand, and Volvo (VOLVY), which also includes Mack, Freightliner (Daimler), and Navistar (NAV) through its international brand. The leading natural gas engine manufacturers include Cummins, through its Cummins Westport joint venture, Power Solutions, and Weichai Power Co. Ltd. (2338-HK) in China. Weichai Power Co. Ltd. and China Yuchai International Limited (CYD) are the leading engine manufacturers in China. Dual-fuel systems for natural gas engines are manufactured by American Power Group (APGI), Ecodual, Clean Air Power (CAP-GB), and OmniTek Corp. (OMTK).
Public companies (components and fueling systems). Westport is one of the leading manufacturers of natural gas components used in natural gas engines globally. Fuel Systems Solutions, Inc. (FSYS) supplies natural gas engine components for light-duty truck engines, material handling, and industrial applications. Other component manufacturers include Quantum Fuel Systems Technologies Worldwide, Inc. (QTWW), a leading manufacturer of natural gas storage tanks.
Infrastructure Both electric and natural gas vehicles require a large refueling infrastructure. With electric vehicles expected to be used mainly for passenger applications, the charging infrastructure can be divided into residential (110, 240V) and commercial categories (Level 2 and DC fast charge). Leading manufacturers include Siemens AG (SIE-DE), Leviton Manufacturing Co., Inc. , and Schneider Electric (SU-FR), and parts are sold either through a partnership with the OEMs or through independent electrical contractors. OEMs such as Tesla have begun to install their proprietary supercharger network around the country, and Nissan is manufacturing Level 3 DC fast chargers based on the Japanese Chademo protocol.
Public companies (EV infrastructure). Tesla is soon expected to have the largest supercharger network in the nation and in select European countries. Involvement from utilities has been limited with NRG Energy, Inc. (NRG), through its wholly owned subsidiary NRG EV, operating a network of 70 sites in California, Washington, D.C., Dallas, and Houston. Car Charging Group, Inc. (CCGI) owns and operates public car charging equipment throughout the country, and following the purchase of
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Ecotality’s Blink Assets and Blink Network, CCGI now owns and operates more than 13,400 charging stations.
Private companies (EV infrastructure). ChargePoint, Inc., formerly Coulomb Tech, manages a network of more than 15,000 charging spots around the country. Greenlots provides similar services, such as charging stations installation, support, and network management to EV charging station owners. EV-Charge America and Clipper Creek, Inc. are manufacturers of EV charging stations for both commercial and residential use.
Natural Gas Fueling Stations
The availability of a public or dedicated fueling infrastructure is even more important for commercial natural gas vehicles. Several public and private players have begun to build fueling infrastructure, with the ability to dispense either compressed natural gas or liquid natural gas or both. Some of the constraints in this buildout are the large capital outlays to build infrastructure, securing LNG feedstock supply, and location constraints to open stations given low levels of current fleet penetration.
Public companies (natural gas). Clean Energy Fuels Corp. (CLNE) operates the largest network of natural gas refueling stations in the country. Trillium CNG, a subsidiary of Integrys Energy Group, Inc. (TEG), is a provider of CNG fueling services through an extensive network of both public and private fueling stations.
Private companies (natural gas). Private companies such as Blue Energy Fuels (owned by ENN Group Co. Ltd. in China) are also working to build and maintain networks of LNG refueling stations.
Key Models We are introducing the following key models, which drive our market opportunity forecast across the key segment verticals. Our global auto model forms the basis for our penetration forecasts for EV/PHEV and hybrid vehicles, and the premium segment model highlights the expected inroads to be made by electric vehicles within this high-value segment. The global electrification model details our EV/PHEV and hybrid forecasts and forms the basis for the separator model, a key component within the EV supply chain. Complementing these models is the global acid battery model, which forms the basis for global start-stop penetration.
Within the natural gas segment, our natural gas trucking model details our forecasts for natural gas penetration within the heavy-duty trucking segment. The material handling model details the market opportunity by weight class and power train while highlighting the relative cost economics of each power train.
FBR global auto model—details our forecast for global passenger vehicles sold, along with penetration and forecasts of key product technologies.
Global premium vehicle model—details our forecast for premium passenger vehicles sold globally. Relevant to understanding market share gains by electric vehicles, given that most of the electric vehicles sold this decade will compete in this category.
Global lead acid battery model—details our forecast for traditional lead acid batteries sold worldwide, which then forms the basis for our start-stop advanced absorbed glass mat (AGM) forecast.
FBR global electrification model—details our forecast for EVs, PHEVs, and hybrids through the end of this decade.
Global separator model—details the market opportunity for lithium-ion separators, a key component of lithium-ion batteries.
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FBR natural gas trucking model—details our forecast for natural gas trucking penetration across Class 6–8 trucks.
Natural gas fueling station model—details our forecast for U.S. natural gas fueling stations.
FBR material handling model and cost calculator—details the market opportunity for the material handling market by power train.
Material handling cost calculator—highlights the relative cost advantages of electric and natural gas/LPG forklifts.
FBR Global Auto Model We forecast global auto production to increase 3.7% to close to 85 million units in 2014, up from about 82 million units in 2013. Driving this is continued growth in North America (+5%), China (+7%), other Asia (+4%), and South America (+3%). We expect a modest recovery in Europe with volumes up about 2%, although key questions remain about the right level of long-term structural demand. We are roughly in line with the consensus for 2014.
Through 2018, we expect global auto production to reach close to 96 million units. Passenger vehicles are expected to account for about 65% of global auto production, or about 65 million units.
Global Light-Vehicle Production
Source: FBR Research
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North America Europe China Rest of Asia Rest of World
2013-2020 CAGR by Region
China: 7.0%
North America: 2.0%
Europe: 0.8%
Rest of Asia: 3.8%
Rest of World: 3.9%
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Global Projected Vehicles Sales
Source: FBR Research
Premium Vehicle Segment We believe it is important to understand the market dynamics within the premium vehicle segment, as electric vehicles, plug-in hybrids, and high-performance hybrids are expected to have prices that overlap this segment. We acknowledge that our definition of premium vehicles might differ from some third-party forecasters, but we are including that segment of the market where we see the most potential for overlap. Tesla has the potential to make the highest impact in this segment, given its high-performance all-electric power trains and luxury features, while manufacturers such as BMW, through its i brand, offer a unique city mobility experience.
We also believe that the overlap between the premium segment and mid-segment EV/PHEVs will increase as manufacturers such as Mercedes gain traction with the CLA class, BMW launches the 2 series, and Audi AG launches the A3. These entry-level vehicles are designed to increase the overall market reach by targeting entry-level prices close to $30,000. This price tag will not be too far away from the price of a well-loaded Chevy Volt after accounting for the $7,500 tax credit.
We define the market to include luxury vehicles such as the BMW 5 series and Mercedes E class; entry-level luxury such as the BMW 3 series and Mercedes C class; and SUVs such as the BMW X3 and Mercedes M class, all the way to the Porsche Panamera and Range Rover.
While we expect some impact in 2014, it will become important to monitor the impact on sales within this category in 2015, especially as Tesla launches the Model X, BMW launches the i3, Mercedes the B class, and GM is expected to launch the new Chevy Volt in 2015/2016, with improved range, a more powerful range extender engine, and an attractive price.
We expect overall luxury vehicle sales to increase from 3.2 million to 4.2 million through the end of this decade, accounting for about 4% of global light-vehicle sales. Within this, we expect high-single-digit growth rates in the entry-level luxury category, especially in the Asian markets (China will be a key driver), along with an increasing proportion of SUVs, again from Asian markets. The luxury market is expected to be one of the fastest-growing segments of the automotive industry, and our estimates do not fully take into account the market potential in China. With many industry participants calling for low-double-digit growth in the premium category in China, this market has the potential to surprise to the upside.
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33.0
35.0
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
veh
icle
s (m
illio
ns)
China North America Europe Rest of the World
2013-2020 CAGR by Region
China: 6.49%
North America: 2.31%
Europe: 0.55%
Rest of Asia: 3.38%
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Global Luxury and Passenger Vehicle Sales
Source: FBR Research
Base-Case Luxury Auto Sales
Source: FBR Research and Automotive News
Upside-Case Luxury Auto Sales
Source: FBR Research and Automotive News
We believe that luxury car sales will be a key component of overall passenger vehicle sales growth over the remainder of the decade. Although luxury vehicles only make up a small portion of auto sales, luxury is a high-ticket part of the market given that these vehicles cost 3x–4x typical mass market passenger vehicles. We divide the luxury market into three main segments: entry-level or mid-size sedans, luxury sedans, and SUVs.
Currently, the key manufacturers in this category include industry leaders such as Mercedes, BMW, Audi, Porsche (PAH3-ETR), Cadillac, Lexus, Infiniti, and Jaguar Land Rover, a division of Tata Motors Limited (TTM).
3.2 3.7 4.2
72.4
85.2
98.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2012 2013 2014 2015 2016 2017 2018 2019 2020
Global Luxury Sales Global LV Sales
Global LV Sales CAGR2012-2015: 3.3%2012-2020: 3.4%2015-2020: 3.0%
Luxury Sales CAGR2012-2015: 2.7%2012-2020: 3.1%2015-2020: 2.8%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Entry Level 1,385,763 1,441,349 1,499,548 1,568,966 1,653,356 1,719,310 1,784,656 1,853,970 1,917,144
% chg 4.0% 4.0% 4.6% 5.4% 4.0% 3.8% 3.9% 3.4%
Luxury Sedan 1,274,863 1,335,937 1,375,748 1,419,865 1,464,780 1,495,979 1,539,450 1,582,864 1,631,196
% chg 4.8% 3.0% 3.2% 3.2% 2.1% 2.9% 2.8% 3.1%
SUV 539,840 566,091 619,362 617,084 620,266 623,328 627,103 631,067 634,397
% chg 4.9% 9.4% -0.4% 0.5% 0.5% 0.6% 0.6% 0.5%
Global Total Luxury Sales 3,200,465 3,343,377 3,494,658 3,605,916 3,738,402 3,838,617 3,951,209 4,067,901 4,182,737
% chg 4.5% 4.5% 3.2% 3.7% 2.7% 2.9% 3.0% 2.8%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Entry Level 1,385,763 1,441,349 1,508,076 1,594,663 1,695,389 1,780,634 1,872,731 1,988,002 2,065,544
% chg 4.0% 4.6% 5.7% 6.3% 5.0% 5.2% 6.2% 3.9%
Luxury Sedan 1,274,863 1,335,937 1,387,826 1,440,172 1,493,223 1,543,383 1,599,051 1,655,487 1,706,268
% chg 4.8% 3.9% 3.8% 3.7% 3.4% 3.6% 3.5% 3.1%
SUV 539,840 566,091 623,669 623,340 628,102 631,163 636,294 641,642 646,382
% chg 4.9% 10.2% -0.1% 0.8% 0.5% 0.8% 0.8% 0.7%
Global Total Luxury Sales 3,200,465 3,343,377 3,519,571 3,658,175 3,816,714 3,955,180 4,108,077 4,285,130 4,418,195
% chg 4.5% 5.3% 3.9% 4.3% 3.6% 3.9% 4.3% 3.1%
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Market Analysis: Three Key Segments
Premium Luxury This category consists of unit sales of 1.37 million annually in 2013, with about 233,000 vehicles sold in the U.S., about 690,000 sold in Europe, and 350,000 in the rest of the world (ROW).
Luxury Sedan 2013E
Source: FBR Research and Automotive News
Entry Level This category consists of about 1.4 million vehicles, with about 410,000 sold in the U.S. and about 640,000 in Europe and 390,000 in the rest of the world.
Mid-Size Car (Entry Level) 2013E
Source: FBR Research and Automotive News
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Luxury SUV This category consists of about 560,000 vehicles sold globally, with the U.S. accounting for 370,000 and the rest of the world for about 194,000.
Luxury SUV 2013E
Source: FBR Research and Automotive News
2012 Annual Sales Volumes: Luxury Sedan, Luxury SUV, Mid-Size Vehicle—Top Brands
Source: FBR Research and Automotive News
The exhibit above highlights sales by name plate for the most successful brands in this category, with average global name plate sales close to 300,000 vehicles. The success of the three leading brands in this category can be attributed to consistently delivering high-quality, differentiated automobiles and developing a strong global brand. As a result, these brands have been able to sustain premium category pricing while continuing to grow the segment.
The exhibit below highlights a potential scenario in the U.S. luxury and mid-size luxury market, the key point being that the success of companies like Tesla will lead to market share shifts within the luxury segment. The top three auto manufacturers are bound to respond with more vehicle content, both in terms of connectivity and safety features, and more competitive pricing given cheaper procurement and larger R&D resources. We will be monitoring this trend closely, especially in 2015 when Tesla starts large-scale production of the Model X.
284K 314K359K
1.3M
57K 67K142K
38K
539K
330K 307K 300K
1.4M
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
A6 E Class
BMW 5
Total M Class BMW X5
Lexus RX
Range Rover
Total A4 C Class
BMW 3
Total
Luxury Sedan Luxury SUV Mid-Size
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Luxury Sedan Demand Progression in North America
Source: FBR Research and Automotive News
Entry-Level Luxury Demand Progression in North America
Source: FBR Research and Automotive News
5 Series, 20% 5 Series, 24%5 Series, 18% 5 Series, 17%
E-Class, 19%
E-Class, 28%
E-Class, 23%E-Class, 21%
Lexus LS, 10%
Infiniti M, 9% Audi A6, 8%
Audi A6, 9%Audi A6, 8%
Cadillac, 15%Cadillac, 6%
Cadillac, 10%Cadillac, 9%
S-Class, 9%
Other, 26% Other, 25%
Other, 31%
Other, 29%
Tesla, 10%Tesla, 17%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2012 2020 - Base Case 2020 - Upside
5 Series E-Class Lexus LS Infiniti M Audi A6 Cadillac S-Class Other Tesla
260K 237K 252K 272K
3 Series, 25% 3 Series, 24%3 Series, 20% 3 Series, 18%
Infiniti G37, 16%Infiniti G37, 14%
Cadillac CTS, 14%Cadillac CTS, 11%
Cadillac CTS, 9% Cadillac CTS, 9%
C Class, 14%C Class, 21%
C Class, 19%C Class, 18%
Audi A4, 11% Audi A4, 8%
Audi A4, 9%Audi A4, 8%
Other, 20% Other, 21%
Other, 33%Other, 31%
Tesla, 10%Tesla, 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2012 2020 - Base Case 2020 - Upside
3 Series Infiniti G37 Cadillac CTS C Class Audi A4 Lincoln Other Tesla
434K 422K 502K 532K
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Page 16
We focus our attention on two key components that are affected by the shift in the markets toward electrified power trains: traditional lead acid batteries and lithium-ion separators.
Traditional lead acid batteries will be affected as a shift toward absorbent glass mat (AGM) batteries used for start-stop applications reduces demand for traditional lead acid batteries. Also affected will be the supply chain for lead acid batteries, and manufacturers of key components such as lead acid separators (Polypore) will see a negative impact to their overall shipments, while those that supply glass mat separators (Owens Corning) to AGM batteries should benefit.
As detailed in our lead acid model below, we see an annual impact of 100 bps to lead acid shipment growth globally, or about 50% of incremental growth.
Lithium-ion separators, on the other hand, should see a meaningful positive impact on total demand from the increased penetration of electrified power trains. The two major sources of demand for the separators will be from consumer electronics, which use between 0.05 M2 and 0.64 M2, and automobile batteries, for which hybrids use on average 85 M2, while EV/PHEV vehicles use on average 425 M2 of separator. As a result, as the market share of PHEV, EV, and hybrid vehicles increases, the demand for separators should increase proportionally.
Global Lead Acid Battery Shipment Model
Source: FBR Research
Global 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total Shipments (M Units) 2013-2015E 2013-2020E
Shipments - Total Batteries 390 400 410 420 430 440 450 460 470 481
OE - % chg 4.7% 4.6% 4.1% 3.8% 3.4% 3.3% 3.4% 3.3% 3.3%
Aft Mkt - % chg 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.4% 2.3%
Total growth 2.5% 2.5% 2.4% 2.4% 2.3% 2.3% 2.3% 2.3% 2.3%
Shipment Breakdown (M Units)
Shipments - Flooded 384 391 398 405 411 416 421 427 432 437 1.6% 1.4%
% chg 1.8% 1.8% 1.7% 1.4% 1.3% 1.3% 1.4% 1.2% 1.2%
Shipments - AGM 6 9 12 15 19 24 28 33 38 43
% chg 50.0% 32.7% 25.0% 27.3% 23.8% 20.2% 15.9% 15.5% 14.9% 26.1% 20.3%
Market Opportunity
Unit Pricing ($) $50 $51 $51 $52 $52 $53 $53 $54 $54 $55
% chg 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.8% 0.9%
Market Size - Flooded ($B) $19 $20 $20 $21 $21 $22 $22 $23 $23 $24
CAGR
AGM Shipments
Impact from AGM Growth
Flooded Shipments
Total Battery Shipments
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Page 17
An Overview of Global CAFE Standards Vehicle fuel efficiency standards are designed to reduce fuel consumption and CO2 emissions and lower dependence on foreign oil. The U.S., EU, Canada, China, and Japan have introduced fuel efficiency standards and have introduced or passed fuel improvement targets over the next 10–15 years.
Fuel consumption and CO2 targets are measured in MPG, Km/L, or grams of CO2 per km and are based mainly on the U.S. combined or European Union NEDC drive cycle. Currently, Japan and Europe lead the world in fuel efficiency standards, while the U.S. has among the lowest fuel efficiency standards. These standards are implemented on either a voluntary or mandatory basis, with most standards being implemented on a mandatory basis. Converted to the U.S. corporate average fuel economy (CAFE) basis, most standards globally call for a 3%–5% annual improvement in fuel economy over the next 10–15 years. The European Union is expected to remain the leader in fuel economy.
The exhibits below detail country/region-specific standards.
Historical Fuel Economy and Current/Proposed Standards
Source: FBR Research and The International Council on Clean Transportation (ICCT)
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Historical CO2 Emission and Current/Proposed Standards
Source: FBR Research and The International Council on Clean Transportation (ICCT)
The U.S. Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHSTA) introduced the final ruling in August 2012 that would extend CAFE standards to model years 2017–2025. The ruling covers passenger cars, light-duty trucks, and medium-duty passenger vehicles and would require fleet-wide CO2 targets of 163 gallons/mile, equivalent to 49.5 MPG to 54.5 MPG, or roughly a doubling from current levels in fuel economy. In terms of CO2, this would result in a decrease in CO2 emissions from 2016 levels of 250 gallons/mile to 163 gallons/mile.
These targets will be applied on the entire mix of a manufacturer’s fleet and can be achieved through improvements in fuel economy, as well as technological improvements such as increased air conditioning efficiency. These standards are based on vehicle footprint and should result in different standards for different sizes (compact, mid-size, full-size) of passenger vehicles; in other words, larger vehicles will have higher targets. In addition, credits will be given to improvements to air conditioner (AC) systems and the use of electrification technologies such as start-stop, EV/PHEVs, and fuel cell power trains.
In the real world, this is expected to translate into fuel economy targets (vehicle sticker) ranging from 40 MPG to 50 MPG for full-size to compact cars and 26 MPG to 38 MPG for large pickup trucks to small SUVs. Electric vehicles, plug-in electrics, and CNG vehicles would also have an added multiplier through 2021 (2.0x–1.5x), which would increase their weight in fleet-wide calculations. Hybridization of full-size pickup trucks will also be eligible for up to a 20 gallons/mile CO2 credit.
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FBR Global Electrification Model Global Electrification Model
Source: FBR Research and Automotive News
Our electrification model summarizes our key forecasts for light-vehicle electrification potential through the end of this decade. Our key forecasts are as follows:
Our electrification model includes electric vehicles (EVs), plug-in hybrids (PHEVs), hybrids (mild, dual-motor), start-stop, and lithium-ion start-stop.
EVs include full electric power trains (Tesla Model S, Nissan Leaf), plug-in hybrids (Chevy Volt, BMW i3, Toyota Prius), and start-stop (BMW 3–5 Series, Chevy Malibu, Ford Fusion).
Expect start-stop to use AGM; electric power trains will still only represent 6% of light-vehicle sales in key markets such as the U.S., Europe, and China.
Start-stop vehicles are expected to represent about 30% of total light vehicles sold in these markets by 2020. Geographical differences will see Europe having about 70% penetration, the U.S. close to 15%, and China less than 5%. The pace of adoption of start-stop in the U.S. and China remains somewhat uncertain, but these two markets could be a source of potential upside. Europe remains a very mature market for start-stop.
Lithium-ion-based mild hybrid systems will begin to be introduced around 2016/2017.
The U.S. will lead the way in EV/PHEV sales, with total sales approaching 330,000 by 2015 and 1 million units by the end of this decade. High-volume manufacturers should be able to benefit from the $7,500 tax credit at least until 2016/2017. The current time line for new model introductions should enable a smooth transition as new vehicles will come with improved driving and cost characteristics, more than offsetting the lack of the tax credit.
Our U.S. model is driven by our bottom-up analysis of various electric vehicle models, based on their expected launch dates and our projected volume estimates. We will look to add further detail to our Asian and European models as more information becomes available on model launches and timing.
China remains the wild card for EVs/PHEV. Despite very modest near-term sales, the policy environment continues to remain very supportive, and a number of foreign joint ventures should see the launch of EV-only brands.
Total battery supply opportunity remains large at $4.8 billion by 2015 and $17 billion by 2020.
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
EV/PHEV 0.0 0.0 0.1 0.1 0.3 0.5 0.7 0.9 1.3 1.6 1.8
Start-Stop AGM 3.1 3.6 5.5 7.1 8.4 10.1 12.1 13.9 15.4 17.1 18.9
Start-Stop AGM (Incl. Replacement) 8.9 11.9 14.9 19.0 23.5 28.3 32.8 37.8 43.5
Start-Stop Li-ion - - 0.0 0.0 0.0 0.1 0.6 0.9 1.5 1.7 1.8
Hybrid - other 0.9 0.7 1.1 1.4 1.5 1.6 1.7 1.8 2.0 2.1 2.3
Other Gasoline 44 45 44 44 46 46 45 44 43 43 42
Revenues ($M)
EV/PHEV $36 $490 $915 $1,304 $3,061 $4,806 $5,796 $7,356 $9,852 $11,052 $12,107
Start-Stop AGM $0 $686 $1,063 $1,429 $1,749 $2,174 $2,629 $3,091 $3,506 $3,957 $4,445
Start-Stop Li-ion $0 $0 $4 $41 $37 $101 $470 $594 $920 $1,008 $1,022
Average Penetration
EV/PHEV Penetration 0.0% 0.1% 0.2% 0.3% 0.6% 0.9% 1.2% 1.6% 2.2% 2.5% 2.8%
Start-Stop AGM Penetration 6.5% 7.4% 11.1% 13.9% 15.5% 17.8% 20.8% 23.5% 25.1% 27.0% 29.2%
Start-Stop Li-ion Penetration 0.0% 0.0% 0.0% 0.1% 0.1% 0.3% 1.1% 1.4% 2.4% 2.7% 2.8%
Hybrid Penetration (excl. Li-ion) 1.5% 2.2% 2.7% 2.7% 2.8% 2.9% 3.1% 3.2% 3.4% 3.5%
Global Battery Supply Opportunity
($M)$36 $1,175 $1,983 $2,774 $4,847 $7,081 $8,895 $11,041 $14,278 $16,016 $17,573
Vehicle Sales; US, Europe, China
(M Units)
Global Electrification Model
47.5 48.4 49.7 51.3 54.3 56.7 58.0 59.4 61.3 63.2 64.9
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Page 20
The exhibits below detail the global revenue opportunity by type of technology and electrification opportunity by geography.
Global Revenue Opportunity from Vehicle Electrification
Source: FBR Research
Global Vehicle Electrification Opportunity
Source: FBR Research
$1
$7
$2
$3
$5
$9
$11
$14
$16
$18
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
($B
)
Start-Stop AGM Start-Stop Li-ion EV/PHEV
47.5 48.4 49.7 51.3
54.3 56.7 58.0 59.4
61.3 63.2
64.9
7.4%
18%
29%
0%
5%
10%
15%
20%
25%
30%
35%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2010 2012 2014E 2016E 2018E 2020E
(M U
nit
s)
EV/PHEV & Hybrid Start-Stop AGM
Start-Stop Li-ion Other Gasoline
EV/PHEV & Hybrid Penetration Start-Stop AGM Penetration
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China Vehicle Electrification Opportunity
Source: FBR Research
Europe Vehicle Electrification Opportunity
Source: FBR Research
16.7 17.1 17.9
19.320.8
22.223.5 24.9
26.4
28.029.7
0.0%
1.0%
2.0%
3.0%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(M U
nit
s)
EV/PHEV Sales Start-Stop AGM Sales Start-Stop Li-Ion Sales
Other EV/PHEV Penetration % AGM Penetration %
Li-Ion Penetration %
51%
19.318.7
17.316.8 17.1
17.4 17.4 17.417.7 18.1 18.1
86%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.0
5.0
10.0
15.0
20.0
25.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(M U
nit
s)
EV/PHEV Sales Start-Stop AGM Sales Start-Stop Li-Ion Sales Other
EV/PHEV Penetration % AGM Penetration % Li-Ion Penetration %
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U.S. Vehicle Electrification Opportunity (Units)
Source: FBR Research
Global AGM Opportunity by Region
Source: FBR Research
7%
11.5
12.6
14.5 15.2
16.4 17.1 17.1 17.1 17.1 17.1 17.1
15%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
(M U
nit
s)
EV/PHEV Sales Start-Stop AGM Sales Start-Stop Li-Ion Sales
Other EV/PHEV Penetration % AGM Penetration %
Li-Ion Penetration %
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
($M
)
China Start-Stop Revenue (AGM) Europe Start-Stop Revenue (AGM)
U.S. Start-Stop AGM Revenue U.S. Penetration %
Europe Penetration % China Penetration %
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Page 23
Fuel Economy Improvement—Key Components Automakers can meet the improvements in fuel economy by targeting a number of areas within a vehicle, such as improvements in power train, transmission, body structure, tires, and use of electrical accessories.
Key areas of improvement within these categories include engine downsizing, turbo charging, gasoline direct injection, dual-clutch transmissions, 7- to 10-speed transmissions, aluminum body structure, low-resistance tires, electrical power steering, and switching to diesel engines. While diesel engines can offer substantial fuel economy savings, the uptake of diesel engines in markets such as the U.S. could be limited by consumer preferences and increased costs to comply with stringent emission mandates.
Vehicle electrification also remains a key component to improving the fuel economy of existing vehicles through start-stop hybrids, hybrids with energy storage batteries to full electric vehicles, or plug-in hybrids. We define “vehicle electrification” to include AGM batteries used in start-stop models, nickel metal hydride (NiMH)-based hybrids, dual-motor hybrids, Li-ion-based hybrid systems, disruptive start-stop technologies using ultra capacitors, and plug-in hybrids/pure electric vehicles. The key decision in implementing different fuel improvement technologies remains the trade-off between the incremental cost of the technology and the associated fuel economy improvement.
The exhibits below detail the cost/benefit trade-off of using different technologies for increasing fuel economy and the incremental cost of using each technology. In terms of improvement to the vehicle power train and transmission, we see components such as electrical power steering and low-resistance tires offering a 2%–6% improvement in fuel economy at an incremental cost of $200–$250. Improvements in transmission can improve fuel economy by 3%–7% at an incremental cost of $500–$600. Lightweight body structures can improve fuel economy by 6%–8% at an incremental cost of $900 per vehicle.
In terms of power train improvement, we see engine downsizing/turbo charging and gasoline direct injection as two key technologies to improving fuel consumption by 12%–15% at an incremental cost of $800–$1,400. Our analysis does not cover diesel engine power train improvements, such as homogeneous charge compression ignition (HCCI), which offer the potential to significantly improve the fuel economy of diesel engines. The exhibit below highlights the incremental costs for improvements to the IC engine.
Incremental Costs to Consumers with Improved Fuel Economy (Gasoline and Diesel)
Source: FBR Research
Diesel Engine$2,000
Turbocharging/Downsizing
$1,400
Aluminum Body Structure
$900
Gasoline Direct Injection
$800
Dual-Clutch $500
Low-Resistance Tires$200
Electrical Power Steering
$250
7/8 Speed Transmission$600
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
0% 5% 10% 15% 20% 25%
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Vehicle electrification technologies have the potential to significantly improve fuel economy, albeit at much higher incremental costs. However, technologies such as start-stop have the potential to offer 3%–8% improvement in fuel economy at an incremental cost of $500–$800. Lithium-ion-based hybrids and mild hybrids using NiMH can offer fuel economy improvement of 20%–30% at an incremental cost of $2,200–$2,700. Dual-mode hybrids can increase fuel economy by more than 50% at an incremental cost of $3,000–$3,500. The exhibit below highlights the incremental costs and improvements to fuel for start-stop technologies in hybrid vehicles.
Diesel engines offer another option to increase fuel economy by 25%–30% at an incremental cost of $2,000 per vehicle. Diesel vehicles have benefited from significant improvements in turbo charging and account for a sizable portion of the European market, as well as large emerging markets such as India. We, however, believe that diesel vehicles will remain a small part of the U.S. market, given historical customer aversion to diesel vehicles and the incremental cost of meeting emission regulations.
Incremental Costs to Consumers with Improved Fuel Economy (Hybrid and Diesel)
Source: FBR Research
Pure electric vehicles and plug-in hybrids offer a significant improvement in fuel economy, an estimated 100%–200%, but at a higher incremental cost of $13,000–$15,000, or around $5,500–$7,500 including subsidies.
NIMH-Hybrid (Dual-Mode)
$3,000NIMH-Mild Hybrid
$2,700
Li-ion Hybrid (Start-Stop)
$2,250
Diesel $2,000
Mild Hybrid (Start-Stop)
$500
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
0% 25% 50% 75%
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Incremental Costs to Consumers with Improved Fuel Economy (Hybrid, PHEV, and BEV)
Source: FBR Research
Based on our analysis, we estimate that the average payback for non-electrification technologies is 2.0–6.0 years, or an average of approximately 4.5 years. For vehicle electrification, we see the most attractive payback on start-stop with AGM of around 3.0 years, with an average of 5.0 years for hybrid-based improvements. Currently, electric vehicles/plug-in hybrids offer a payback of 3.5–4.5 years, if one were to include the $7,500 tax credit, excluding which payback would be 7.0–8.0 years. Given the cost-reduction potential of Li-ion batteries, we expect payback periods to improve substantially to 1.5–2.5 years, or 4.5–5.5 years excluding subsidies. The exhibits below highlight payback periods for IC engines, hybrids, and EV/PHEV, respectively.
Gasoline Incremental Cost to Consumer versus Payback Period
Source: FBR Research
Mild Hybrid
(Start-Stop)
Li-ion Hybrid (Start-Stop)
NIMH-Mild Hybrid
NIMH-Hybrid(Dual-Mode)
30-50 Mile PHEV$7,500
100 Mile BEV$5,500
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
0% 50% 100% 150% 200% 250%
Low-Resistance Tires2.2
Electrical Power Steering3.8
Dual-Clutch4.2
7/8 Transmission 4.6
Gasoline Direct Injection
3.6
Aluminum Body Structure6.0 Turbocharging/
Downsizing5.5
1.0
2.0
3.0
4.0
5.0
6.0
7.0
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600
Pay
bac
k (y
ear
s)
Incremental Cost to Consumer
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Hybrid Incremental Cost to Consumer versus Payback Period
Source: FBR Research
EV/PHEV Incremental Cost to Consumer versus Payback Period
Source: FBR Research
Mild Hybrid (Start-Stop)
2.9
Li-ion Hybrid (Start Stop)
4.1
NIMH-Mild Hybrid
5.7
NIMH-Hybrid(Dual-Mode)
4.9
Li-ion Hybrid(Start-Stop)
3.4
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500
Pay
bac
k (y
ear
s)
Incremental Cost to Consumer $2011 Scenario 2016 Scenario
100 Mile BEV1.7
30-50 Mile PHEV2.6
100 Mile BEV3.7
30-50 Mile PHEV 4.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
$2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000
Pay
bac
k (y
ear
s)
Incremental Cost to Consumer $2011 Scenario 2016 Scenario
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The exhibits below depict the road map to get from the current CAFE values for both a compact and a mid-size car using a standard four-cylinder engine. Since CAFE standards are footprint-based, we present the fuel economy improvement potential for a compact car, which would have to reach CAFE targets of 56–61 MPG, and for a mid-size car, which would have to reach CAFE targets of 51–56 MPG. While we see sizable potential for fuel economy improvements from power train, transmission, and chassis advancements, we do not see these improvements as sufficient to reach CAFE targets without the introduction of electrification into the drive train.
Improved Fuel Economy Road Map I (30 MPG Car)
Source: FBR Research
Technologies such as start-stop offer an easy solution to get to CAFE targets, as demonstrated in the exhibit above; however, we believe that AGM start-stop will not in itself be sufficient to meet CAFE, especially for mid-size and full-size vehicles. We believe automakers will have to increase penetration of lithium-ion start-stop and hybrid systems, which offer accelerative boost capabilities (given energy storage capabilities of lithium-ion), and increase their lineup of full electrics and plug-in electrics.
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Improved Fuel Economy Road Map (Mid-Sized Car)
Source: FBR Research
Improved Fuel Economy Road Map II (30 MPG Car)
Source: FBR Research
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Global Separator Model Our global separator model below details our assumptions for total lithium separator demand through 2015 in the three key segments of EV/PHEV, hybrids, and non-transportation applications, such as consumer electronics and grid storage.
Global Lithium-Ion Separator Model (Base-Case Scenario)
Source: FBR Research
We expect total separator demand to increase to 920 million square meters by 2015 and 1.7 billion square meters by 2020. Transportation will account for close to 60% of this incremental growth.
We expect the key drivers of demand to be EVs/PHEVs accounting for about 60% of incremental demand through 2020, consumer electronics and other accounting for 33% of incremental demand, and hybrids accounting for the remainder.
Within non-transportation, the key categories driving incremental demand are smartphones, tablets, power tools, and grid storage.
We estimate that the industry is currently oversupplied, but new capacity additions are necessary to meet demand post-2015.
The exhibits below highlight the expected mix between separators used in EV PHEVs, hybrids, and other non-transportation applications. Also below, we highlight the mix between the various non-transportation applications through 2015, key being consumer electronics and grid storage applications.
Separator Demand (Million Sq. M.)
EV/PHEV 62 72 142 234 307 412 561 628 695 38.3%
EV % of Total 10% 11% 18% 26% 29% 34% 39% 40% 40%
Hybrids 112 119 126 133 141 153 166 179 191 7.1%
Hybrids % of Total 19% 18% 16% 15% 13% 13% 12% 11% 11%
Consumer Electronics/Other 416 461 509 548 598 650 706 770 842 9.0%
CE /Other % of Total 71% 71% 66% 60% 57% 53% 49% 49% 49%
Total 590 652 776 916 1,046 1,214 1,434 1,578 1,729 15.0%
% Change 24% 11% 19% 18% 14% 16% 18% 10% 10%
Revenue Opportunity ($M)
EV / PHEV Industry $116 $128 $241 $365 $441 $544 $682 $702 $715 27.9%
Hybrids Industry $185 $186 $187 $190 $194 $204 $215 $226 $235 3.4%
Consumer Electronics Industry $728 $767 $803 $823 $852 $879 $909 $941 $978 3.5%
Total $1,029 $1,081 $1,231 $1,378 $1,487 $1,627 $1,805 $1,869 $1,928 8.6%% Change 15% 5% 14% 12% 8% 9% 11% 4% 3%
Global Li-ion Separator SalesCAGR
2013-20202017E 2018E 2019E 2020E2012 2013E 2014E 2015E 2016E
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Global Li-Ion Separator Demand (Million Square Meters)
Source: FBR Research
Global Li-Ion Separator Revenue Opportunity ($ in Millions)
Source: FBR Research
% Mix 2012 2015E 2020E
EV/PHEV 10% 26% 40%
Hybrids 19% 15% 11%
CE/Other 71% 60% 49%
Total 100% 100% 100%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2012 2015E 2020E
Million Sq. M.
Consumer Electronics/Other Hybrids EV/PHEV
590
916
1,729
Upside: 939
Upside: 1,976
$116
$365
$715
$728
$823
$978
$185
$190
$235
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
$2,000
$2,250
2012 2015E 2020E
$M
EV / PHEV Industry Consumer Electronics Industry Hybrids Industry
2015E Upside: $1.4B
2020E Upside: $2.2B
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Global Consumer Electronics/Other Separator Market
Source: FBR Research
FBR Natural Gas Trucking Model Natural gas as fuel can be used in light, medium-duty, and heavy-duty trucks. It can be used in two forms: CNG, or compressed natural gas, which is typically compressed to 3,600 psi, and LNG, or liquefied natural gas, which is typically stored at –200F to –280F and can be used both as cold or unsaturated LNG or warm, saturated LNG. LNG is delivered to vehicle tanks at low pressures ranging from 40 psi to 140 psi.
While natural gas engines offer meaningful operating fuel cost savings ranging from 30% to 40%, several other considerations, such as duty cycles, incremental maintenance expenses, miles driven per year, the need to install on-site fueling, and availability of public fueling stations, are taken into account by fleet operators before switching over to CNG/LNG trucks.
The difference between diesel and CNG/LNG prices at the pump is a key driver of annual operating cost savings, which in turn determines the payback to the operator after incurring the additional expense of buying a natural gas truck or a dual-fuel truck. We use our payback estimator to calculate typical paybacks for different levels of fuel price spread, after taking into account that most truck operators are targeting paybacks between two and three years. Our payback estimator takes into account the annual fuel savings by using CNG/LNG, as well as incremental operating expenses, loss of payload due to increased fuel storage system weight, cost impact from lower range, and the incremental cost of installing CNG/LNG engines on new trucks. We then determine the proportion of the existing trucking fleet that would meet their target paybacks, depending on annual miles driven.
% Mix 2012 2015E 2020E
Smart Phones 12.4% 17.9% 25.6%
Tablets 9.4% 17.0% 26.0%
Laptops 31.5% 24.4% 16.7%
Power Tools 15.0% 14.1% 10.8%
Grid Storage 0.6% 1.1% 2.4%
Other 31.1% 25.5% 18.6%
Total 100% 100% 100%
0
200
400
600
800
1000
2012 2015E 2020E
Million Sq. M.
Smartphone Tablet Laptop PC Power Tools Grid Energy Storage Other
2015 Upside: 572M Sq. M.
2015 Upside: 1,089 M Sq. M.
416
842
548
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We also compare the level of fuel price spread for different combinations of input natural gas prices and diesel prices. Our key takeaways are as follows:
Natural gas trucks currently meet economic return thresholds for a number of regional haul applications. A duty cycle of at least 60,000 annual miles is needed to meet return thresholds for short-haul applications. For long-distance trucking, the current lack of a 15L product in the market will limit wide-scale adoption in the near term. These thresholds should only increase over time as product costs decline, and introduction of larger engines such as the 13L HPDI from Volvo, 15L Cummins Spark, and new offerings from the Westport 2.0 HPDI series will enhance the attractiveness in long-distance applications.
Despite meaningful price declines, we continue to see above-normal mark-ups in the industry with fuel storage and delivery components. We believe increasing volumes and technological improvements (higher power output, emission system advancements) should lower installed product prices by 20%–30% over the next two to three years. Industry participants believe that economies of scale should deliver further cost savings, once penetration levels reach double digits in the industry. We see the potential for this to be achieved in 2015.
While fuel prices introduce a degree of volatility to this analysis, we would point out that the diesel to CNG/LNG spread would have to decline to below $1.00/diesel gallon equivalent (DGE) (currently $1.50–$2.00/DGE) on a sustained basis to make natural gas uneconomical as a fuel source. Similar to component pricing for long-haul truck engines, CNG/LNG pricing also incorporates above-normal pricing premiums, which should provide a cushion in the event of declining diesel prices.
We believe that a minimum fuel spread of $1.00/DGE should be maintained even in a scenario where natural gas rises to $7.00/MMBtu and oil prices decline to $65/barrel. Key drivers here are improving economics of LNG production at scale (similar analysis can be applied to CNG production).
CWI 11.9L Payback–2013
Source: FBR Research
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CWI 11.9L Payback–2015
Source: FBR Research
LNG Economics—DGE Spread >$1.00, Oil at $65, Natural Gas at $5.00 and $7.00
Source: FBR Research
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FBR Natural Gas Trucking Model The exhibits below detail the key assumptions supporting our natural gas trucking model.
We are using normalized trucking volumes as a base for our natural gas shipment assumptions. Trucking is a very cyclical industry, with peak-to-trough declines/increases of 30%–40%, driven by both macro factors and emission regulations. We rely on third-party industry experts such as ACT for our near-term assumptions, opting to base our forecasts on normalized North America industry volumes of 250,000 for Class 8 shipments. This translates into normalized U.S. shipment volumes of about 220,000.
Our model segments the natural gas trucking opportunity within the Class 8 sector by annual miles driven and engine displacements. We arrive at our total Class 8 penetration by summing the three key displacement buckets up to 12L, 12L–14L, and 14L–16L.
We expect total market penetration of 14% by 2015, 24% by 2017, and 35% by 2020.
While 2013 was an important year for new engine launches, we expect to see real traction only in 2014 and beyond. By 2015, the trucking industry will likely have wide-ranging availability of natural gas engines with about 53% of models offering some kind of natural gas option.
Natural gas engines are able to deliver power and torque curves very similar to diesels and, excluding the very high output applications, should be able to provide similar drivability as diesels.
Penetration in the long-haul heavy-duty market will be largely dependent on Cummins launching the 15 Spark Ignited in 2015/2016, Westport launching its HPDI 2.0 with captive engine divisions of large OEMs, and Volvo gaining traction in the long-haul market through its 13.0L HPDI offering in 2014.
For Class 5–7, we assume natural gas engine volumes of 15,000 annually, which gives only limited benefit to new launches such as the Cummins 6.7L, as well new launches from Power Solutions through its 8.8L engine.
The exhibits below detail our Class 8 penetration and opportunity forecast by 14L–16 L and up to 12L displacement.
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North American Truck Volumes Class 5–8
Source: FBR Research and ACT
Class 8 Truck Opportunity
Total Class 8 Natural Gas Shipment Forecast and Penetration
Source: FBR Research
6,722 11,684
20,844
32,339
45,645
55,013
68,313
78,594
3%5%
8%
13%
18%22%
27%31%
-10%
0%
10%
20%
30%
40%
50%
60%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2013 2014 2015 2016 2017 2018 2019 2020
Total Class 8 Units Market Penetration
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Truck Industry Launch Road Map
NGV Current Offering and Launches
Source: FBR Research
NGV Offerings of Current Truck Models
Source: FBR Research
Manufacturer Total Models NGV Offering % Penetration Launches (2013) Total % Penetration 2014 Launch 2015 Launch Total % Penetration
Peterbilt LH 5 1 20% 1 3 60% 3 60%
Peterbilt Other 4 4 100% 0 3 75% 3 75%
Kenworth LH 5 0 0% 2 3 60% 3 60%
Kenworth Other 3 2 67% 2 3 100% 3 100%
Paccar LH 10 1 10% 3 6 60% 6 60%
Paccar Other 7 6 86% 2 6 86% 6 86%
Total Paccar 17 7 41% 5 12 71% 12 71%
Navistar LH 3 0 0% 1 1 33% 1 33%
Navistar Other 5 1 20% 0 3 60% 3 60%
Total Navistar 8 1 13% 1 4 50% 4 50%
Freightliner LH 5 1 20% 1 1 20% 1 20%
Freightliner Other 4 2 50% 0 2 50% 2 50%
Total Freightliner 9 3 33% 1 3 33% 3 33%
Mack LH 4 0 0% 1 1 25% 1 25%
Mack Other 6 2 33% 1 3 50% 3 50%
Total Mack 10 2 20% 2 4 40% 4 40%
Volvo LH 5 0 0% 0 0 0% 2 1 3 60%
Volvo Other 4 1 25% 1 2 50% 2 50%
Total Volvo 9 1 11% 1 2 22% 2 1 5 56%
Other LH 3 2 5
Total LH 27 2 7% 6 9 33% 5 3 12 44%
Total Other 26 12 46% 4 16 62% 0 0 16 62%
TOTAL Models 53 14 26% 10 25 47% 5 3 28 53%
7%
33%
44%46%
62%62%
26%
47%
53%
0%
10%
20%
30%
40%
50%
60%
70%
2012 2013 2015
% PenetrationLong Haul Other Total Models
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2013 OEM NGV Truck Availability
Source: FBR Research and company Web sites
Ann. Units Sold Current LH Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
27,000 386 ISX 15, Paccar MX 12.9L 550 / 1850; 380-500 / 1450-1850 400-475 / 1750 Long Haul
389 ISX 15, Paccar MX 12.9L 550 / 1850; 380-500 / 1450-1850 Long Haul
587 ISX 15, Paccar MX 12.9L 550 / 1850; 380-500 / 1450-1850 Long Haul
579 ISX 15 / ISX 12, Paccar MX 12.9L 550 / 1850; 380-500 / 1450-1850 Long Haul
384 ISX 11.9, ISL 9 Paccar MX 12.9L 310-425 / 1150-1650; 380-500 / 1450-1850 ISL G 8.9L, ISX 12-G 320 / 1000; 400/1450 ISX 12 G Tanker, LTL
5 1 1
Current Other Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
320 ISX 11.9 310-425 / 1150-1650 ISL G 8.9L 320 / 1000 ISX 12 G Vocational Refuse
365 ISX 11.9, ISL 9, Paccar MX 12.9L 200-425 / 520-1650; 380-500 / 1450-1850 ISL G 8.9L, ISX 12-G 320 / 1000; 400/1450 ISX 12 G Vocational Mixer
367 ISX 12, ISX 15, Paccar MX 12.9L 310-425 / 1150-1650; 550 / 18500; 380-500 / 1450-1850 475 / 1750 Vocational / Dump Truck
382 ISL 9 200-360 / 520-800 ISL G 8.9L 320 / 1000 Short Haul
348 Paccar PX 9, Paccar PX 7 260-380hp; 280-360hp Vocational
567 Paccar MX 12.9L 380-500 / 1450-1850 400-475 / 1750 Vocational
4 4
Ann. Units Sold Current LH Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
45,000 T660 Paccar MX 12.9L 380-500 / 1450-1850 ISX 12 G Long / Regional Haul
T680 Paccar MX 12.9L 380-500 / 1450-1850 Long Haul
T700 Paccar MX 12.9L 380-500 / 1450-1850 Long Haul
W900 Paccar MX 12.9L 380-500 / 1450-1850 ISX 12 G Long / Regional Haul
T800 Paccar MX 12.9L 380-500 / 1450-1850 Long / Regional / other
5 0 2
Current Other Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
T440 PX-8, ISL 9 260 / 660; 260-380 / 720-1250 ISL G 8.9L 320 / 1000 ISX 12 G Vocational / LTL
T470 PX-8 260 / 660 ISL G 8.9L 320 / 1000 Vocational
T800 SH Paccar MX 12.9L 380-500 / 1450-1850 ISX 12 G
3 2 2
PACCAR TOTAL
72,000 17 7 5
Ann. Units Sold Current LH Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
LoneStar Cummins ISX 15 550/2050 Long Haul
Prostar Maxxforce 13 / ISX15 475 / 1700; 500 / 1850 400 / 1450 ISX 12 G Liquid / dry bulk, beverage, LH, Regional Haul
9900 Series Cummins ISX 15 600/2050 Long Haul
3 0 1
Current Other Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
TransStar MaxxForce 13 475 / 1700 ISL G 8.9L 320 / 1000 Beverage, liquid / dry bulk, regional haul
DuraStar Cummins ISB 6.7 300 / 660 Beverage, Const. Emerg, Gov., Landscaping
TerraStar 6.4L MaxxForce 7 300 / 660 Utility, Pickup / delivery, landscsaping, Gov.
PayStar Navistar 13L SCR, Cummins ISX 15 365-475 / 1250-1700; 455-602 / 1650-2050 Construction, mixer, waste, government
WorkStar MaxxForce DT diesel 7.6L 300 / 860 Construction, Emerg., Mixer, Waste, Utilty, Gov.
5 1 0
Navistar Total 8 1 1
Ann. Units Sold Current LH Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
Cascadia Evolution 14.8 Detroit DD15, Detroit DD13 455-505 / 1550-1750; 350-470 / 1250-1650 Long Haul
Cascadia Detroit DD15 / Cummins ISX15 505 / 1750; 550 / 1850 Long / Regional Haul
Coronado DD13, DD15, DD16, Cummins ISX 15 470/1650; 505/1750; 550/1850, 600/2050 Long / Regional Haul
122SD DD13, DD15, DD16, Cummins ISX 15 470/1650; 505/1750; 550/1850, 600/2050 Long / Regional Haul
Cascadia 113 ISX12 G 400/1450 ISX12 G Long / Regional Haul
5 1 1
Current Other Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
M2 106 Cummins ISB 6.7, ISL 9 200-325 / 520-750; 260-380 / 720-1250 Dump, fire & emerg, food & beverage, refuse
M2 112 Detroit DD13 350-470 / 1250-1650 ISL G 8.9L 320 / 1000 Regional haul, tanker, food & bev, refuse
108SD Cummins ISB 6.7, ISL 9 200-325 / 520-750; 260-380 / 720-1250 Sewer vac, dump, refuse, utility
114SD Cummins ISC 8.3, ISL 9 260-350 / 660-1000; 260-380 / 720-1250 ISL G 8.9L 320 / 1000 Mixer, crane, dump, fire & emerg, plow, refuse
4 2 0
Freightliner Total 9 3 1
Ann. Units Sold Current LH Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
Pinnacle Sleeper Axle Back 11L MP7 / 13L MP8 325-405 / 1260-1560; 415-505 / 1460-1760 400 / 1450 LD / regional hauling, bulk hauling
Pinnacle Daycab 11L MP7 / 13L MP8 325-405 / 1260-1560; 415-505 / 1460-1760 400 / 1450 ISX 12 G Long haul / regional / bulk
Pinnacle Special Edition Rawhide 11L MP7 / 13L MP8 325-405 / 1260-1560; 415-505 / 1460-1760 400 / 1450 Long haul / regional / bulk
Pinnacle Special Edition Smartway 11L MP7 / 13L MP8 325-405 / 1260-1560; 415-505 / 1460-1760 400 / 1450 Long haul / regional / bulk
4 0 1
Current Other Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
Mack Granite 11L MP7 / 13L MP8 325-405 / 1260-1560; 415-505 / 1460-1760 400 / 1450 ISX 12 G Dump, mixer, tandem steer mixer, roll off
Mack Rawhide 11L MP7 / 13L MP8 325-405 / 1260-1560; 415-505 / 1460-1760 400 / 1450 Dump, mixer, tandem steer mixer, roll off
Mack Granite MHD 9L Cummins ISL 345 / 1150 400 / 1450 Shorter runs / light duty cycles
TerraPro Cabover MP7 and MP8 325-405 / 1260-1560; 410-505 / 1460-1760 ISL G 8.9L 320 / 1000 Refuse / Concerte pumper
TerraPro Low Entry MP7 325-405 / 1260-1560 ISL G 8.9L 320 / 1000 Rear loader/ front loader/ side loader
Mack Titan Mack MP10 16L 515-605 / 1860-2060 Logging/oil field/coal/heavy equip/ heavy haul
6 2 1
Mack Total 10 2 2
Ann. Units Sold Current LH Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
Volvo VN 670 Volvo D13, D16, Cummins ISX 15 375-500 / 1450-1750; 550 / 1850; 550 / 1850 Long haul
Volvo VN 730 Volvo D13, D16, Cummins ISX 15 375-500 / 1450-1750; 550 / 1850; 550 / 1850 Heavy duty / Long haul
Volvo VN 780 Volvo D13, D16, Cummins ISX 15 375-500 / 1450-1750; 550 / 1850; 550 / 1850 Long haul
Volvo VN 630 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850
Volvo VN 430 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 regional hauling
5 0 0
Current Other Models Diesel Engine HP / Torque NG Engine HP / Torque New Launches Applications
Volvo VHD Volvo D11, Volvo D13 325-405 / 1250-1450; 375-500 / 1450-1750 Vocational
Volvo VHD 430 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 Vocational
Volvo VNL 300 Daycab Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 Volvo D13-LNG, ISX 12-G455 / 1750; 400/1450 ISX 12 G Regional / Specialty hauling
Volvo VNM 200 Daycab Volvo D11, Volvo D13 325-405 / 1250-1450; 375-500 / 1450-1750 ISL G 8.9L 300 / 1000 regional, bulk and specialty hauling
4 1 1
Volvo Total 9 1 1
Volvo
Peterbilt
Kenworth
Navistar
Freightliner
Mack
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14L–16L Model Penetration and Total Opportunity of Long-Haul Trucks
Source: FBR Research
Total 14L–16L Shipment Forecast and Penetration
Source: FBR Research
16
34
1%0% 0%
5%
10%
14%
18%
23%
0%
5%
10%
15%
20%
25%
30%
0
2
4
6
8
10
12
14
16
18
2013 2014 2015 2016 2017 2018 2019 2020
Long Haul Models NGV Models
NGV Model % Penetration Customer % Penetration
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Up to 12L Model Penetration and Total Opportunity of Long-Haul Trucks
Source: FBR Research
Total Up to 12L Shipment Forecast and Penetration
Source: FBR Research
32
12
15
20
38% 38%
47% 47%
53% 53%
63% 63%
3% 9%
19%23%
29%32%
41%44%
-5%
5%
15%
25%
35%
45%
55%
65%
75%
0
5
10
15
20
25
30
35
2013 2014 2015 2016 2017 2018 2019 2020
LH Models NGV Models NGV Model % Penetration Customer % Penetration
16,406 20,508
25,566 27,891
35,547
38,281
5,672
10,453
18,656
22,758
27,816 30,141
37,797
40,531
3%
9%
19%
23%
29%32%
41%44%
0%
10%
20%
30%
40%
50%
60%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2013 2014 2015 2016 2017 2018 2019 2020
CWI up to 12L Units Total up to 12L Units Total Market Penetration
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Class 8 Segment Mix
2012 Class 8 Volumes by Market Mix
Source: FBR Research
Class 8 Volume and Market Opportunity Forecast Detail
Class 8 NGV Forecast by Displacement
Source: FBR Research
50,410
30,806
58,811
81,216
22,404
28,005 8,402
0
50,000
100,000
150,000
200,000
250,000
300,000
Market by Manufacturer
Other
Volvo
Mack
Freightliner
International
Peterbilt
Kenworth11%
11%
280,054
246,384 250,000
-
50,000
100,000
150,000
200,000
250,000
300,000
2012 2013 FBR Normalized Volumes
154,030
47,609
78,415
0
50,000
100,000
150,000
200,000
250,000
300,000
Market by Miles Driven
up to 80K
70K-100K
>100K 55%
17%
28%
156,830
98,019
14,003 11,202
0
50,000
100,000
150,000
200,000
250,000
300,000
Market by Engine
<11L
11L-12L
12L-14L
14L-16L
35%
5%
4%
56%
18%
21%
29%
8%
10%
3%
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Opportunity for Class 5–7
Total Shipment Forecast and Penetration for Class 5–7
Source: FBR Research
Fuel Displacement Opportunity Based on our natural gas trucking model, we have estimated the total fuel consumption and potential diesel displacement opportunity by shifting to natural gas. We base our estimate on about 12% of the combined fleet running on natural gas by 2020.
The impact on diesel consumption from the shift to natural gas is more pronounced than the impact to natural gas.
We estimate incremental gas consumption of 2 Bcf/d to 2.5 Bcf/d by 2020, or about 3%–4% of total demand by 2020, per the estimate by FBR’s E&P team.
We estimate a reduction in diesel fuel of 6.5 billion gallons by 2020, or about 15% of total diesel consumed in the on-road segment. For 2012, the U.S. consumed 57 billion gallons of distillate fuel oil.
Natural Gas Class 5–8 Fleet Penetration
Source: FBR Research
0.4%
1.6%
4.4%
11.9%
0%
2%
4%
6%
8%
10%
12%
14%
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Diesel Trucks Natural Gas Trucks % Fleet Penetration
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On-Highway Diesel Fuel Consumption Replacement
Source: FBR Research and the U.S. Energy Information Administration
Natural Gas Required for Transportation As a Portion of Total U.S. Production
Source: FBR Research
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Material Handling: Market Overview and Cost of Ownership
A Large Global Sector, High Cyclicality in Developed Markets, Steady Growth in Emerging Markets We estimate that total global forklift sales in 2012 were approximately 944,000 for all classes of forklifts. The single-largest market for forklifts was Europe, with approximately 355,000 forklifts sold in 2012. Europe was followed closely by China, with 290,000 forklifts sold and North America with 180,000. We estimate that 48,000 forklifts were sold in South America and 70,000 in Japan and the rest of Asia. We estimate total 2012 annual forklift sales to be in the range of $30 billion to $35 billion.
Global Forklift Market Sales
Source: FBR Research and the Industrial Truck Association
While the emerging market economies have seen generally steady growth in forklift sales over the past decade or so, the developed markets, particularly the U.S. and Europe, have exhibited high levels of economic cyclicality. Different classes of forklifts are also exposed to different sectors of the economy, such as the heavier forklift classes, which are more dependent on nonresidential construction. During the last downturn, between the 2006 peak and 2009 trough, U.S. forklift sales dropped by 104,000, or 54%. The majority of that drop was experienced in the market for the typically larger and internal combustion engine Class IV and V forklifts, which experienced a 66% drop in sales over the same period. Despite this cyclicality, several trends are evident in the market:
Continued shift toward electric forklifts in Classes I–III. This is driven by both tightening emission standards and economic attractiveness of electric forklifts in certain duty cycles.
LPG, or propane forklifts, have increased their market share at the expense of diesel, again driven by tightening emission standards and a low overall cost of ownership.
0
200000
400000
600000
800000
1000000
1200000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
Fork
lift
Sal
es
Europe North America South & Central America A/P, China and Japan
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Historical U.S. Forklift Market Sales
Source: FBR Research and Industrial Truck Association
Historical U.S. Forklift Market Sales by Class
Source: FBR Research and Industrial Truck Association
0
50000
100000
150000
200000
250000
U.S
. Fo
rklif
t Sa
les
Aggregate Forklift Deliveries
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Fork
lift
Sale
s
Class I & II Class III Class IV & V
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Historical U.S. Market Share by Forklift Class
Source: FBR Research and Industrial Truck Association
The global market is dominated by a few very large manufacturers, the largest being Toyota and Kion Group AG (KGX), with a combined 44% global market share. In the U.S. market, some of the larger players include Toyota, Hyster-Yale Materials Handling, Inc. (HY), Crown Equipment Corporation, and Kimberly-Clark Corporation (KMB). In China, the market is dominated by local manufacturers; Anhui Forklift Truck Group and Hangcha Group combined control approximately 47% of the Chinese market. The remaining market in China is divided largely between smaller Chinese manufacturers with only a small presence from foreign competitors such as Toyota Motor Corporation, The Linde Group (LN:GR), Jungheinrich Group (JUN3:GR), Hyster-Yale Materials Handling, Inc., and Mitsubishi Motors Corp.
Top Manufacturers by Global Market Share
Source: FBR Research and Modern Materials Handling
0%
10%
20%
30%
40%
50%
60%
Class I & II Class III Class IV & V
23%
21%
9%8%
7%
6%
5%
4%
17%
Toyota Motor Corp.
Kion Group
Jungheinrich Group
Hyster-Yale Materials HandlingCrown Equipment Corp.
UniCarriers Americas Corp.
Komatsu Utility Co.
Mitsubishi Caterpillar Forklift
Other
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The range of products and their prevalence in certain geographic markets vary widely. The U.S. Occupational Safety and Health Administration (OSHA) classifies forklifts based upon engine type and function and identifies six classes of forklift. Class I and Class II lift trucks are defined as electrically powered “rider” trucks with either cushion or pneumatic tires. The difference between I and II is that Class II lift trucks are used in narrow-aisle or reach applications, which means they are generally smaller and have a wider range of designs. Class III lift trucks are electrically powered hand/rider trucks and are generally used for moving heavy objects across distances. Class IV and Class V are similar in form and function to Class I trucks, the difference being that they are powered by IC engines, and, as a result, these lift trucks are usually larger and have higher weight capacities than their electric counterparts. The principal difference between the Class IV and V lift trucks is that Class IV trucks have cushion or solid tires while Class V trucks have pneumatic tires. Class VI trucks are tractors, powered either by electric motor or IC engine, which are used for pulling trailers or objects between locations. Lastly, Class VII, which consists of rough terrain forklift trucks, refers to any forklifts typically intended for use on unimproved natural terrain or construction sites.
Transition to Electric, Natural Gas Well Underway There are three major sources of forklift power trains: electric, LPG, and diesel. For each fuel type, there are certain scenarios in which one is far more suitable than the other. For instance, large lift trucks with weight classifications above 12,000 lbs are powered almost exclusively by diesel and occasionally LPG. On the other end of the spectrum, Class III trucks, or hand trucks, exclusively use electric power.
Different geographic markets differ by which type of power source they use. For instance, in most developed markets, the percentage of electric-powered versus IC forklifts is much higher. In Western Europe, electric lift trucks comprised 81% of the Western European lift truck market. That figure is slightly skewed given that warehouse trucks, which are similar to Class III in definition, make up 62% of the entire European lift truck market. Developing countries, on the other hand, tend to favor IC-powered trucks instead. We estimate that more than 70% of all the lift trucks sold in China are powered by IC engines. When that figure is compared with North America or Eastern Europe, which had only 40% and 37% of their lift trucks powered by IC engines, it is clear that geography, as well as weight classification, can have a large effect on the distribution of forklift fuel type.
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Forklift Market Characteristic by Geographic Region
Source: FBR Research and company reports and presentations
While load-carrying requirements and duty cycles determine the type of forklifts used, there is an area of overlap in the largest portion of the market, which we identify as medium-duty lift trucks. These lift trucks would typically be used in warehouses and can be exclusively indoor, indoor/outdoor, or outdoor-only trucks, which have a weight capacity range of 3,000 lbs to 12,000 lbs and would all be generally classified as Class I, II, IV, or V under the OSHA classification system. We then further classified this market into light-medium-duty, medium-duty, and heavy-medium-duty ranges to gain a better sense of where and why a particular type of fuel would be chosen.
Forklift Market Segment Descriptions and Examples
Source: FBR Research and Hyster Company
Segment Weight Range Diesel/Gasoline LPG Electric Approximate HP Required Approximate Engine Size
Light-Medium-Duty 3,000lbs-5,000lbs $29,000 $28,000 $46,000 15-40hp 2L
Medium-Duty 5,000lbs-7,000lbs $35,000 $33,000 $53,000 50-70hp 2-3L
Heavy-Medium-Duty 7,000lbs-12,000lbs $53,000 $51,000 $85,000 90-100hp 3-4L
Segment Fuel Type Model Class Weight Rating' Engine Manufacturer Engine Size, HP
Electric J30-40XN Class I 3,000lbs-4,000lbs N/A 16.1 HP Hoist Motor, 6.4-6.7 HP Traction Motor
Propane/Natural Gas S30-45FT, S40FTS Class IV 3,000lbs-4,000lbs Mazda 2.0L, 40HP
Diesel H30-35FT, H40FTS Class V 3,000lbs-4,000lbs Yanmar 2.6L 39HP
Electric J45-70XN Class I 4,500lbs-7,000lbs N/A 21.5-32.2HP Hoist Motor, 13.4HP Traction Motor
Propane/Natural Gas S40-70FT Class IV 4,000lbs-7,000lbs Mazda, GM 2.2L, 2.4L, 51HP ,66HP
Diesel H40-70FT Class V 4,000lbs-7,000lbs Yanmar 2.6L, 3.3L , 46HP, 58HP
Electric E80XN Class I 8,000lbs-12,000lbs N/A 35.5-48.3 Hoist Motor, 28.2-28.8HP Traction Motor
Propane/Natural Gas S80-120FT Class IV 8,000lbs-12,000lbs GM 4.3L, 98HP
Diesel H80-120FT Class V 8,000lbs-12,000lbs Kubota (Tier IV certified) 3.8L, 74HP
Segment DescriptionsApproximate Cost per Lift Truck
Heavy-Medium-Duty
Typical Hyster Forklift per Segment
Light-Medium-Duty
Medium-Duty
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Within the medium-duty segment, each fuel type has both its advantages and disadvantages.
Advantages and Disadvantages by Type
Electric Liquefied Propane Gas Diesel
Advantages Low operating costs given a low cost of electricity
No direct emissions, completely safe to operate indoors
Lower annual maintenance costs than an IC engine
Lower fuel costs than diesel
Relatively low emissions, mostly safe to operate indoors
Lower up-front costs, very low infrastructure costs, as propane is a low pressure system
Limitations of propane, such as lower octane rating, and lower energy density, have limited impact on performance of forklift engines versus on-road vehicles.
Lower upfront costs for the lift truck
Easily accessible fuel
Low infrastructure costs
Especially suitable in heavy-duty applications
Disadvantages Higher up-front costs for batteries and charging station
Need to maintain multiple batteries per forklift to account for charging times and battery cool down times
Higher cost of the forklift
Battery costs and electricity usage increase significantly with weight rating
Fuel is still much more expensive than electricity
Higher annual maintenance costs than electric
Fueling infrastructure and associated safety needs
Highest fuel costs and lower fuel efficiency than propane
Relatively high emissions, cannot operate indoors unless in a well-ventilated area
Higher maintenance costs than electric lift trucks
Source: FBR Research
Hydrogen Fuel Cell Forklifts The alternative to a battery-powered electric lift truck is to use hydrogen fuel cells instead of a battery pack. This technology, although new, has been tried at scale in a number of facilities, including a Walmart distribution center in Calgary, Canada, and a large BMW plant in South Carolina where BMW expects to save about 4 million kwh per year over the lead acid alternative. Using hydrogen fuel cells in place of lead acid batteries does come with some additional costs, but ones that can be mitigated with scale. For instance, to use hydrogen fuel cells, the facility will require either to have pure hydrogen shipped in or to have a hydrogen production facility located on site, both of which can be prohibitively expensive unless the fleet of lift trucks is large. The additional cost is mitigated by reduced electricity consumption and by tax credits, which cover 30% of the cost of the fuel cell up to $3,000 per kWh. These benefits and the added benefits of reducing the net environmental effect to near zero make hydrogen power a plausible alternative to the lead acid battery in certain scenarios.
Cost Analysis
Below is our analysis of the total cost of ownership per truck for a 40-truck fleet. It shows that for each class of truck, the lowest cost of ownership can yield different results. It is important to remember that for each application, the required duty cycle can still result in a power train choice that is not the lowest cost option.
In the light-medium-duty segment, electric-powered forklifts are the most cost-effective investment, but as forklifts become larger in the medium-duty segment, the total cost of LPG and electric forklifts is comparable, and in the heavy-medium-duty segment, LPG becomes the cheapest choice by far. Diesel forklifts are the best solution in heavy-duty applications in remote locations and outdoor scenarios. Fuel cells, while not the cheapest solution, have a major advantage in terms of fueling time. Furthermore, the total cost of ownership of fuel cell forklifts is highly dependent on fleet size and cost of fueling infrastructure, and the cost of each fueling station can vary significantly. Our cost calculator does not take into account any labor savings from decreased charging times, which in some cases can make fuel cell forklifts competitive with electrics.
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Five-Year Cumulative Cost per Lift Truck (40-Truck Fleet)
Source: FBR Research
Cumulative Cost and Payback Period Analysis for Light-Medium-Duty Lift Trucks
Source: FBR Research
Cumulative Cost and Payback Period Analysis for Medium-Duty Lift Trucks
Source: FBR Research
0
20000
40000
60000
80000
100000
120000
140000
160000
Electric LPG Diesel Fuel Cell
Tota
l Co
st in
$
Light-Medium-Duty Medium-Duty Heavy-Medium-Duty
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Cumulative Cost and Payback Period Analysis for Heavy-Medium-Duty Lift Trucks
Source: FBR Research
Given the cost characteristics of the industry, we see a shift toward more electric forklifts in virtually all geographic markets with the exception of Western Europe, where the shift has largely already occurred. In developed countries such as the U.S. and Japan, there is still a significant amount of cost savings that can be realized from a further shift toward electric power. In still developing regions, where fleets are largely, or in China’s case, almost entirely comprised of IC engine lift trucks, there will be a gradual shift toward more electric forklifts. As time goes on, we believe that the case for a shift toward electric drive will become even more compelling as emissions standards become more stringent in developing countries, and as battery technology continues to evolve, which may eventually make electrically powered forklifts competitive in the more rigorous applications.
Forklift IC Engines
Although we anticipate a continued shift toward more electric-powered forklifts, the IC engines will play an important role due to limitations posed by weight requirements, duty cycles, and relatively high cost of batteries. Within the IC market, we do see a continued shift from diesel engines toward LPG and CNG. As emissions standards continue to become more stringent and Tier IV EPA standards go into effect in 2015, the diesel option will become increasingly more expensive, leaving room for the lower-emission natural gas engines to acquire more market share.
The engine options are generally stratified by size, with a large number of smaller manufacturers providing diesel engines for less demanding applications, while the largest engines are provided by larger industrial engine manufacturers such as Cummins and Volvo. The Propane engines, however, are almost exclusively provided by larger manufacturers, such as GM, Toyota, and Mazda Motor Corp. (MZDAF). LPG and natural gas–powered forklift engines are typically converted to natural gas by third-party manufacturers like Power Solutions.
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Major Manufacturers of Forklift IC Engines
Source: FBR Research and company Web sites
Investment Risks Volatility in natural gas fuel prices. The adoption of natural gas as a fuel source is highly dependent on the spread between diesel fuel and natural gas fuel (DGE equivalent), and we estimate that a minimum spread of $1.00/DGE is needed to incentivize customers to make the switch. While we believe that lower processing costs and economies of scale will keep the spread above $1.00/DGE even if natural gas reaches $7.00/MMBtu and oil declines to $65/barrel, such an increase could have a negative impact on the pace of adoption of natural gas.
Volatility in LPG/propane prices. LPG is widely used as a fuel in applications such as material handling, and a rapid increase in the cost of propane could have a negative impact on operating cost savings. Such an increase could increase the competitiveness of other fuel sources such as forklifts powered by batteries and fuel cells.
Slower-than-expected adoption of natural gas trucks. The pace of adoption of natural gas trucks depends on multiple factors, such as incremental capital costs, fuel cost savings, availability of infrastructure, applicability to the current duty cycle, and ongoing operating and maintenance costs. Trucking fleets typically undergo lengthy trials to ensure that natural gas trucks fit their duty cycle, and any delay in converting early trials to large-scale orders could have a negative impact on overall industry sales.
Slower-than-expected consumer adoption of electric vehicles. The pace of adoption of electric vehicles depends on consumer willingness to pay the incremental capital costs, offset by fuel cost savings. Electric vehicles generally have 30% of the range of a typical IC engine vehicle, and this remains a key drawback of electric vehicles. We see a path for these impediments to be overcome, but slower-than-expected adoption of electric vehicles could have a negative impact on our industry forecasts.
Increased competition from advancements in IC engines. Internal combustion engines continue to improve rapidly in terms of fuel efficiency, and the recent launch of multiple new diesel models in the U.S. could increase competition for electric vehicles, especially hybrids. A faster-than-expected improvement in fuel economy for traditional IC engines could have a negative impact on electric vehicle sales.
LPG Engine Size Range Horsepower Range Diesel Engine Size Range Horsepower Range
GM 3.0-4.3L 67-100HP Kubuta 3.8L 74HP
Mazda 2.0-2.2L 40-48HP Yanmar 2.6-3.3L 46-61HP
Toyota 2.2-3.7L 48-84HP Cummins 4.5-11.0L 155-370HP
Hyundai 2.4L 70HP Toyota 2.5-7.7L 53-168HP
Crown/John Deere 2.4L 59HP Iveco 4.5L 99HP
Volvo N/A N/A
Wuxi N/A N/A
Duetz 3.6L 74HP
Engine Manufacturer List
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Energy & Natural Resources: Advanced Transportation Important disclosures can be found at the end of this report.
© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking
Pricing as of February 14, 2014.
Aditya Satghare [email protected] . 646.885.5472 Benjamin Tainter [email protected] . 703.312.9763
52-Week Range
Three-Month ADTV
Dividend Yield
Market Cap (mil)
Beta
Enterprise Value (mil)
Fiscal Year-End
EPS 2013E 2014E 2015E
1Q $0.21A $0.31 $0.63
2Q $0.23A $0.36 $0.66
3Q $0.24A $0.43 $0.68
4Q $0.23 $0.48 $0.71
FY $0.92 $1.58 $2.69
2013E 2014E 2015E
FY Revenues 238 324 414
FY EBITDA 18 32 52
FY EBIT 15 27 46
EV/EBITDA 39.2x 22.0x 13.6x
P/E 74.2x 43.2x 25.4x
3Q13
Cash & Equivalents $8
Total Debt $12
Stockholders' Equity $51
$ in millions
BALANCE SHEET DATA
EARNINGS DATA
Excludes nonrecurring charges. Includes stock-based
comp.
FINANCIAL DATA
STOCK DATA
$701
$705
48,641
Shares Outstanding (mil) 10
$19.5 - $78.96
0.0%
1.05
December
Power Solutions International, Inc. (PSIX – $68.29) Coverage Initiated Wood Dale, IL Outperform February 18, 2014 Price Target: $80.00
Solid Natural Gas Engine Portfolio; Expanding Rapidly into Underpenetrated Markets
Summary and Recommendation We are initiating coverage of Power Solutions International, Inc. (PSIX) with an Outperform rating and a 12-month price target of $80 per share. Power Solutions is a leading manufacturer of a wide range of natural gas engines used in oil and gas, material handling, and on-road applications, areas where natural gas penetration is expected to increase materially over the next three to five years. The company’s capital-light business model, expanding product portfolio, and supply-chain optimization, along with market share gains in key target markets, should result in 25%–30% earnings growth over the next three to five years, with meaningful upside potential in an accelerated natural gas market adoption scenario. We would not be surprised to see some profit taking, especially around quarterly earnings, given the stock runup in the last 12 months, and would view any potential pullback as a further buying opportunity.
Key Points Expanding product line to meet the needs of untapped markets. We
believe that Power Solutions’ expanding portfolio of natural gas engines should be a major beneficiary of the expanding use of natural gas in large markets, such as oil and gas production and transportation, global material handling, and on-road trucking in the U.S. Power Solutions is entering markets with very low penetration rates, such as oil and gas (less than 10%) and on-road trucking (less than 3%), and more mature markets, such as material handling. Therefore, we see the potential for meaningful market share gain.
Capital-light model enhances earnings leverage. The company’s capital-light business model, short product development times in stationary and off-road applications, and internal efforts to lower component procurement costs should lead to meaningful earnings growth over the next few years. We see the potential for earnings to grow to $4.00 per share in a more modest industry penetration scenario to $7.00 per share in our upside scenario, which could result in meaningful stock upside from current levels.
Volatility could be a further buying opportunity. While PSIX has appreciated meaningfully over the last 12 months, we expect further upside as multiple new product and partnership announcements in 2014 increase inventor confidence in the company’s long-term growth trajectory. As the company’s product mix shifts toward higher customized packages, quarterly earnings variability could increase, and any potential pullback on this should be a further buying opportunity.
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The
Deb
ate™
Debatable Point Our Thoughts Time Frame Impact
When will investors have further evidence of the company’s rapidly expanding product portfolio?
We expect 2014 to be a year of multiple new product and partnership announcements, especially in oil and gas and on-road trucking.
12 Months
When will the capital-light business model deliver meaningful earnings leverage?
We expect increased investments in manufacturing capacity of higher-horsepower engines and on-road trucking engines, along with increased product volumes in material handling, to deliver more than 30% earnings leverage in 2014.
12 Months
Could a changing business mix increase stock volatility?
A shift toward more customized and higher-unit-pricing engine packages could lead to increased quarterly volatility. Any potential pullback should be a further buying opportunity.
12 Months
Investment Thesis We are initiating coverage of Power Solutions International, Inc. with an Outperform rating. We see meaningful upside potential over the next three to five years as Power Solutions expands its natural gas engine portfolio, enters new markets such as oil and gas and on-road trucking, and increases its market share in material handling. The company’s capital-light business model should deliver 25%–30% earnings growth over the next few years, with upside potential if industry adoption of natural gas engines accelerates further. We would view any near-term stock volatility as a further buying opportunity, especially given the meaningful stock runup over the last 12 months.
Valuation We base our $80 price target on about a 20x multiple of our 2017 EPS estimate of $4.20. We use 2017 as our valuation year, as we believe the company will reach product maturity in its oil and gas offering and on-road trucking business, setting the stage for sustained further growth off relatively low penetration levels. Our 20x multiple also results in a PEG of less than 1.0x, given our EPS growth estimate of 30% through 2017. We also believe that upside potential, in a faster industry adoption scenario, could result in materially higher earnings than our 2017 EPS estimate, due to Power Solutions’ broad product portfolio, increased market share, and capital-light business model. In our blue sky scenario, a stock price of $80 would imply about a 10x multiple on our estimated blue sky 2017 EPS.
Catalysts/Milestones New product launches in the oil and gas segment and expanding partnerships with
engine OEMs.
New orders in the medium-duty on-road trucking segment, with the newly developed internal engine platform and other base engines.
Increased traction in the material handling market in China.
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Power Solutions International Product Offerings
Source: Company presentation
Material handling—Engines mainly range in size from 1.0L to 4.3L, and higher-output models offer 5.0L to 8.8L. Typical power outputs range from 20 HP to 100 HP.
Heavy duty—Engines range in size from 8.1L to 22L, with typical power outputs ranging from 150 HP to 550 HP.
Portfolio expansion should enable greater penetration into the oil and gas markets and on-road trucking. Power Solutions is launching a new 61L engine, which will expand its range in the 1,000 KW+ category. The on-road expansion consists mainly of 4.8L to 8.8L engines, with power outputs of 150 HP to 300 HP.
Oil and Gas, Trucking, and Material Handling Are Large Markets with Low Natural Gas Penetration Rates
We estimate the oil and gas supply HP needs in the U.S. oil and gas plays to increase from 5.3 million HP in 2013 to 6.8 million HP by 2017. Our penetration scenarios lead to a natural gas penetration forecast of between 0.8 million HP and 2.6 million HP by 2017. See our “Oil and Gas” section from our power generation report.
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Oilfield Horsepower Natural Gas Engine Opportunity
Source: FBR Research
PSIX Oilfield Revenue Scenarios
Source: FBR Research
Material handling in the U.S., Europe, and China accounts for 796,000 units sold globally. The U.S. market sells about 57,000 IC engine–powered forklifts and about 25,000 heavy-duty forklifts, where Power Solutions has the potential to increase its market share.
72 82 93 9891
143184
234
114
213
339
479
0
100
200
300
400
500
600
2014 2015 2016 2017
Re
ven
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Op
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M)
Bear Case Base Case Bull Case
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Material Handling Market Overview
Source: FBR Research
In developed markets such as the U.S. and Europe, forklift demand has shifted away from internal combustion engine–powered forklifts to electrically powered versions. The economics for the light- to medium-duty forklifts generally favor the use of electric motors; however, for heavier-duty forklifts, or forklifts used outdoors and in construction, IC engines are generally more practical. Given the economic benefits to using electric forklift trucks, we expect to see a continued shift away from IC forklifts in most warehouse and lighter-duty applications. We also expect LPG and natural gas–powered forklifts to continue to grab share away from diesel given the tightening emissions climate and increased availability of natural gas engines.
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Market Size and Power Solutions’ Expected Market Share of Combined U.S. and China
Source: FBR Research and the Industrial Truck Association
Material Handling Revenue Opportunity Potential for Power Solutions
Source: FBR Research
The on-road trucking markets account for about 240,000 Class 8 trucks sold and 430,000 Class 5 and 7 trucks sold. Penetration rates remain very low, at less than 3%, and we see a meaningful growth opportunity for natural gas–powered trucks over the coming decade.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
50000
100000
150000
200000
250000
300000
350000
2013 2014 2015 2016 2017
Pe
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nta
ge M
arke
t Sh
are
Tota
l Fo
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t Sa
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U.S. Class IV & V U.S. Class VII China Expected PSIX Blended Market Share
59 60 60 6170
7787
97
82
105
125
152
0
20
40
60
80
100
120
140
160
2014 2015 2016 2017
Re
ven
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Op
po
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nit
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M)
Material Handling Revenue Scenarios
Bear Case Base Case Bull Case
7% 7% 7% 8%8%11%
15%
19%
15%
24%
28%
33%
0%
5%
10%
15%
20%
25%
30%
35%
2014 2015 2016 2017
Re
ven
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Op
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nit
y ($
M)
Percentage of Material Handling Revenue Coming From China
Bear Case Base Case Bull Case
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Class 8 Trucks—Natural Gas Penetration Estimates
Source: FBR Research
Class 5–7 Trucks—Natural Gas Penetration
Source: FBR Research
Engine Sourcing and Value Add by Power Solutions
Power Solutions typically sources its engine base blocks from large and established engine OEMs. The base blocks can be either diesel or gasoline and come in either turbo-charged or non-turbo-charged form.
The company then modifies the engines to run on a variety of natural gas fuel. Power Solutions also becomes the manufacturer of record, or MOR, for these newly modified engines and is responsible for warranty and replacement parts for these engines.
Typical modifications include adding new turbo chargers, engine control module (ECM) calibrations, natural gas fuel injectors, cooling packages, and three-way catalyst emission systems. Most of the converted engines meet new emission standards with little engine modifications and the use of standard three-way catalysts, unlike the use of more expensive systems such as SCR systems on new diesel engines.
Power Solutions provides in-house engineering, component sourcing, assembly, integration, and testing services to create a new natural gas product.
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Solid Earnings Growth under Multiple Scenarios and Market Penetration Forecasts
Power Solutions’ product portfolio spans multiple end markets with very low natural gas penetration rates, and the company has the potential to further increase its market share in select target markets.
Our scenario analysis captures the company’s expected growth under various scenarios, and we see the potential for at least 20%–25% over the next two to five years. We also see the potential for meaningfully higher earnings growth, in the range of 30%–35% if the oil and gas industry transitions to natural gas at an accelerated pace and if Power Solutions is successful in increasing its market share in U.S. material handling and is successful with material handling product launches in China.
2017 EPS Scenarios
Source: FBR Research
Working Capital Needs Should Increase Meaningfully As Power Solutions Transitions into Larger and Customized Engine Packages and Expands Internationally
We see working capital needs increasing by $42 million from 2013 to 2016, which can be met through a combination of internal cash flow generation and potentially external financing.
Our model assumes that Power Solutions raises some growth capital through 2016 to fund its rapidly expanding product portfolio.
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Risks Warranty issues on natural gas engine products. Power Solutions sells natural gas engines to a number of customers in multiple industries ranging from oil and gas to material handling to on-road trucking. The company is the manufacturer of record, or MOR, for most of the engines it sells and provides warranties on the engines. Any adverse warranty development could have a negative impact on earnings, as well as new business potential.
Increased working capital requirements from changing product mix toward larger and more customized engine packages. Power Solutions will typically source base engine blocks from a number of engine OEMs and convert the engines to natural gas with their own components, thereby tying up working capital until the engines are sold to customers and payment received. A mix shift toward larger, more customized engine packages will increase working capital requirements, which will have to be managed efficiently.
Increased competition from large-engine OEMs. Power Solutions is looking to enter markets that are currently served by large-engine OEMs selling either a traditional diesel engine or a natural gas product. Some of these OEMs have meaningfully greater resources, and increased competition through new product launches or pricing competition could have a negative impact on profitability.
Pricing spread between natural gas and diesel. The demand for natural gas engines is dependent on the pricing spread between natural gas and diesel. Any meaningful decline in this spread could negatively affect the demand for natural gas engines.
Company Profile Power Solutions International, Inc., based in Wood Dale, Illinois, was originally established as a global distributor of GM Industrial Engines and was originally a part of Power Great Lakes, until Power Solutions became the parent company. The original company, Power Great Lakes Inc., was founded by William Winemaster and his son, Gary Winemaster, as a distributor of Perkins engines. Power Solutions is leading manufacturer and supplier of industrial and on-road natural gas–powered engines, with products ranging from 0.97L to 21.9L. The company operates under three other brands in addition to the Power Solutions name. These are Power Great Lakes, Inc., which is the largest distributor of Perkins Engines in North America; MasterTrak, Inc., which provides advanced telematics solutions for engine monitoring; and Auto Manufacturing, Inc., which manufactures Auto Clutch, a power take-off (PTO) clutch built for use in heavy-duty side load applications. Through its brands, Power Solutions provides turnkey solutions to original equipment manufacturers in the industrial, construction, agricultural, and on-road markets and, after the introduction of the 61L engine coming soon, the oilfield services market.
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Income Statement—Power Solutions International, Inc. (PSIX) $ in Millions
Proprietary to FBR Capital Markets & Co. February 18, 2014 Aditya Satghare . 646.885.5472 . [email protected]
Source: Company documents and FBR Research
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Energy & Natural Resources: Advanced Transportation Important disclosures can be found at the end of this report.
© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking
Pricing as of February 14, 2014.
Aditya Satghare [email protected] . 646.885.5472 Benjamin Tainter [email protected] . 703.312.9763
52-Week Range
Three-Month ADTV
Dividend Yield
Market Cap (mil)
Beta
Enterprise Value (mil)
Fiscal Year-End
EPS 2013E 2014E 2015E
1Q ($0.57)A ($0.56) ($0.50)
2Q ($0.61)A ($0.61) ($0.52)
3Q ($0.48)A ($0.49) ($0.38)
4Q ($0.53) ($0.56) ($0.41)
FY ($2.20) ($2.22) ($1.82)
2013E 2014E 2015E
FY Revenues 164 209 340
FY EBITDA -95 -107 -64
FY EBIT -137 -152 -127
EV/EBITDA -10.1x -9.0x -15.0x
P/E -7.9x -7.8x -9.5x
3Q13
Cash & Equivalents $237
Total Debt $69
Stockholders' Equity $421
$ in millions
BALANCE SHEET DATA
EARNINGS DATA
Excludes nonrecurring charges. Includes stock-based
comp.
FINANCIAL DATA
STOCK DATA
$1,129
$961
1,106,706
Shares Outstanding (mil) 65
$16.03 - $35.4
0.0%
1.78
December
Westport Innovations Inc. (WPRT – $17.30) Coverage Initiated Vancouver, BC, Canada Outperform February 18, 2014 Price Target: $25.00
Business Model Transformation, Commercial Focus Should Significantly Improve Profitability Summary and Recommendation We are initiating coverage of Westport Innovations Inc. (WPRT) with an Outperform rating and a 12-month price target of $25 per share; we see an attractive risk/reward profile at current levels. We expect Westport to undergo a business model transformation over the next three to five years and to evolve into a specialized natural gas fuel systems provider with technological expertise and select manufacturing partnerships. Investor sentiment on WPRT remains low, primarily due to concerns surrounding the company’s path to profitability. We, however, believe that increasing R&D efficiency, management’s focus on cost control, and new partnerships for the HPDI 2.0 product and high-horsepower applications should increase investor comfort in Westport’s ability to profitably participate in the increasing use of natural gas in the on-road trucking, high-horsepower, and light-duty segments.
Key Points Business model transformation should lead to meaningfully higher
profitability. We believe that Westport’s transition into an advanced fuel systems provider with high-technology expertise and select manufacturing partnerships should enable it to capture the rapidly growing market opportunity that is arising from the use of natural gas engines in on-road trucking, high-horsepower, and off-road applications. We also expect a meaningful increase in Westport’s R&D efficiency as new development contracts become more customer funded, and selling, marketing, and overhead cost controls should provide long-awaited operating leverage to the business model.
Investor sentiment remains low, but 2014 should see multiple industry and company-specific announcements. We acknowledge that investor sentiment on the stock remains low, but we expect limited negative news flow in the near to medium term. This, coupled with an improving industry environment for natural gas–powered vehicles and stationary engines in 2014, should set the stock up for outperformance on the back of new product expansions and industry partnerships.
Attractive risk/reward profile and broad product portfolio could result in meaningful stock upside in a faster industry adoption scenario. In a business-as-usual scenario, we see the downside for the stock at $15; we believe that management’s actions on cost control and improved pricing realization could add up to $8 per share in value, and our upside scenario of faster industry adoption could add up to $17 per share. Our $25 price target assumes that management executes on its cost-control and targeted commercialization road map, while only giving a modest benefit for faster industry adoption in a few target areas. We also see sufficient cash on the balance sheet to fund the business plans through at least 2017.
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The
Deb
ate™
Debatable Point Our Thoughts Time Frame Impact
Will we see increased volatility during the business model’s transition?
Stock volatility could increase as investors digest the implications of the change in Westport’s business model and management’s increased focus on cost control. Low investor expectations and negative stock sentiment could limit near- to medium-term upside until we see positive evidence from management actions or company-specific customer wins.
3 to 6 Months
Will investors begin to appreciate the breadth of Westport’s technology portfolio?
We expect 2014 to be characterized by meaningfully higher volumes for the Cummins Westport 12L engine, the launch of the Volvo 13L, new contract announcements for the HPDI 2.0 product, and further signs of penetration into the high-horsepower segment.
12 Months
When will investors see evidence of Westport’s ability to break even and achieve meaningful profitability?
We expect greater market penetration to be complemented by signs of increasing R&D efficiency through new contract wins and tight SG&A control, which should provide increased visibility into future profit potential.
12 Months
Investment Thesis We are initiating coverage of Westport Innovations Inc. with an Outperform rating. We believe that Westport’s business model transformation into a specialized natural gas fuel systems provider, coupled with increasing R&D efficiency and cost controls, should enable the company to profitably participate in multiple new market segments. Low investor sentiment, as well as the potential for multiple upside catalysts in 2014, could lead to meaningful outperformance as we move through the year. In addition, management’s focus on R&D efficiency and cost control should enhance earnings leverage as Westport participates in the growth of multiple natural gas–driven end markets.
Valuation We base our $25 price target on a 17x multiple on our 2020 EPS estimate (excluding Cummins Westport Inc. [CWI]) of $2.80 and on $4.30 per share in proceeds from the CWI sale, discounted back at a 10% cost of equity. We believe that this valuation methodology captures the value potential to Westport from monetizing the CWI joint venture, along with a more mature product penetration scenario, which we expect Westport to achieve by the latter part of this decade.
Catalysts/Milestones Increasing volumes of the 12L Cummins Westport natural gas engine in multiple sectors
of the trucking model.
New contract announcements and partnerships for the new HPDI 2.0 product and further signs of penetration into the high-horsepower market.
New tank orders for Westport’s proprietary LNG/CNG tank system.
Further evidence of the successful launch of Volvo’s 13L engine.
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Broad Portfolio Offering Should Enable Westport to Target a Number of High-Potential Areas Westport has the broadest product portfolio in the advanced transportation industry; it is focused on natural gas fueling and storage systems. The company’s existing portfolio includes components and kits for light-duty applications; light-duty industrial natural gas engines; and fueling and storage for light-, medium- and heavy-duty trucks.
For the trucking market, the core of Westport’s technology is the HPDI, or high-pressure direct Injection system, which combines a diesel pilot injection system with natural gas fuel injection to achieve superior power and torque curves. The HPDI technology maintains the power and torque characteristics of traditional diesel systems, which become increasingly important in high-horsepower applications.
Westport also has a proprietary natural gas storage system specifically designed for LNG-driven trucks. The fueling system can be used for the recently launched 11.9L ISX G Cummins Westport natural gas engine and is designed to operate with cold (unsaturated) LNG, which enhances the operating range, unlike most of the systems in the market, which operate on warm (saturated) LNG. Different configurations are available for in-tank pumps, which can either be driven hydraulically or through an electric system. Although competition in CNG tanks is expected to increase meaningfully, we see limited competition within LNG tanks, with adoption rates driven primarily by the adoption of LNG in the market.
Product Expansion into Higher Revenue and Profit Opportunities Could Add Meaningfully to Profitability We see recent product expansions with the launch of HPDI 2.0 enabling Westport to potentially tie up captive engine divisions of large truck OEMs. HPDI 2.0 is a meaningful improvement from the first-generation of HPDI and should result, according to our estimates, in approximately a 30%–40% cost reduction over the initial system while providing all the benefits of high power and torque. This system can be further complemented by the company’s in-house storage solution to form a complete natural gas solution. While development and testing times can take several years, we expect to see products in the field from this new architecture over the next two to three years.
We expect to see increasing natural gas engine penetration in high-horsepower applications such as oil and gas, mining, marine, and locomotives. Westport is actively involved with industry leader Caterpillar to develop solutions for the mining and locomotive markets.
The exhibit below details our market forecast for new horsepower added in the U.S. oil and gas fields. We see the potential for Westport to target the fracking pump segment with its HPDI solutions, given the 30,000 HP units involved in a fracking fleet and the varying power and torque needs of operating a fracking pump. Similar opportunities also exist in drilling applications. Opportunities for operating and producing wells remain somewhat limited for Westport and could be met by a more traditional spark-ignited natural gas solution.
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Forecasted Oilfield Horsepower Requirements
Source: FBR Research
Multiple Levers to Create Share Value through Internal Management Actions and Faster Industry Adoption We see multiple levers to create shareholder value, including a targeted focus on commercializing key products, increasing R&D efficiency, improved cost control, and potentially faster industry adoption.
We broadly bucket Westport’s portfolio into three categories: high market potential, medium market potential, and low market potential.
High Potential
HPDI 2.0
LNG tanks
High-horsepower—oil and gas, mining, locomotive, and marine
Light-duty—Westport Wing
Medium Potential
China HPDI—upsell opportunity through the Weichai joint venture or by selling directly to Weichai.
Low Potential
Components and kits—we see limited potential for natural gas in passenger vehicles and believe that electrification will play a more important role here.
Light-duty industrial applications—a broad product portfolio with a strong base block engine is required.
China—commodity natural gas systems through the Weichai joint venture.
We believe that recent management changes will lead to increased product commercialization, but we expect Westport to see the most success in its “high-potential” category.
2013-2015 720,000
2015-2017 760,000
Incremental Additional HP
Drilling HP, 0.7M Drilling HP, 0.7M Drilling HP, 0.9M
Hydraulic Fracturing HP, 1.7M
Hydraulic Fracturing
HP, 1.9M
Hydraulic Fracturing
HP, 2.4M
New Production HP, 2.9M
New Production HP, 3.4M
New Production HP, 3.5M
0
1
2
3
4
5
6
7
8
2013E 2015E 2017E
An
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epo
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Ava
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Increasing R&D Efficiency The early-stage and technology-focused nature of Westport makes it difficult to compare the company’s R&D efficiency to that of more established players. While current R&D efficiency is low, we expect the management team to take multiple steps to correct this, such as customer funding of development contracts, while optimizing the focus areas to high-volume opportunities. We do not expect Westport to maintain its current R&D run-rates, and if maintained, we expect them to be offset by an increasing proportion of customer-funded contracts and/or service revenue. We have used various metrics to arrive at an estimated 30% R&D to new revenue (post 2016) ratio, which is a substantial improvement over prior levels, and we expect overall R&D to trend down to about 7% of sales by 2020.
Risk/Reward Profile Attractive at Current Levels In all of our scenarios for WPRT, we assume that Cummins exercises the option to buy out the Cummins Westport joint venture in 2020 at a 1.3x EBIT multiple.
In a business-as-usual scenario, we arrive at a downside price target of $15 and estimate that management actions on cost and product pricing can add about $8 per share in value, and faster industry penetration can add another $17 per share in value (the exhibit below highlights our scenarios and assumptions behind each key target market).
Price Target Scenario: Low Increased Penetration
Source: FBR Research
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Price Target Scenario: High Increased Penetration
Source: FBR Research
Risks Warranty issues and potential recalls on new products sold. Westport sells a number of natural gas engine components and storage solutions to a wide range of customers globally and provides warranties on these components. Its Cummins Westport joint venture sells the 8.9L and 11.9L natural gas engine. Any adverse warranty development could have a negative impact on earnings, as well as new business potential.
Slower-than-expected customer uptake of HPDI 2.0. Westport is looking to enter into strategic partnerships with engine OEMs or captive engine divisions of large OEMs to launch natural gas engines based on the HPDI 2.0 architecture. Any delay in securing new partnerships could have a negative impact on future earnings.
Inability to secure attractive R&D cost-sharing agreements with customers. Westport’s ability to generate healthy profitability is highly dependent on improving its R&D efficiency, which in turn depends on securing customer cost-sharing agreements. The inability to secure these agreements could limit future margin expansion potential and cash flow.
Limited pickup in light-duty natural gas penetration, which could result in a continued drag on earnings. Westport has committed sizable resources to growing its light-duty natural gas “WING” system, especially with the recent acquisition of BAF Technologies, Inc. The light-duty market has shown only limited customer interest, and a lack of meaningful sales pickup could continue to be a drag on earnings.
Pricing spread between natural gas and diesel. The demand for natural gas engines is dependent on the pricing spread between natural gas and diesel. Any meaningful decline in this spread could negatively affect the demand for natural gas engines.
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Company Profile Westport Innovations Inc. was founded by David Robert Demers in 1995 and is headquartered in Vancouver, Canada. Westport is a developer of natural gas and liquefied natural gas technologies. The company offers a range of engines, fueling systems, conversion kits, and other natural gas technologies for both on-road highway applications and heavy-duty off-road applications. The company operates four business segments: (1) Westport Heavy Duty, which engages in the engineering, design, and marketing of heavy-duty natural gas engine products; (2) Westport Light Duty, which provides natural gas engines and fuel systems for the OEM and light-duty automotive markets; (3) Cummins Westport, which designs, manufactures, and distributes spark-ignited natural gas engines and generation systems; and (4) Weichai Westport, which develops, manufactures, and sells engines for the on-road, marine, and power generation markets.
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Income Statement—Westport Innovations Inc. (WPRT) $ in Millions
Proprietary to FBR Capital Markets & Co. February 18, 2014 Aditya Satghare . 646.885.5472 . [email protected]
Source: Company documents and FBR Research
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Energy & Natural Resources: Advanced Transportation Important disclosures can be found at the end of this report.
© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking
Pricing as of February 14, 2014.
Aditya Satghare [email protected] . 646.885.5472 Benjamin Tainter [email protected] . 703.312.9763
52-Week Range
Three-Month ADTV
Dividend Yield
Market Cap (mil)
Beta
Enterprise Value (mil)
Fiscal Year-End
EPS 2013E 2014E 2015E
1Q $0.10A $0.22 $0.48
2Q $0.08A $0.19 $0.61
3Q ($0.07)A $0.48 $0.71
4Q $0.14 $0.60 $0.79
FY $0.25 $1.50 $2.60
2013E 2014E 2015E
FY Revenues 1,936 2,825 3,279
FY EBITDA 135 338 537
FY EBIT 41 218 373
EV/EBITDA 178.7x 71.1x 44.8x
P/E 792.9x 132.2x 76.2x
3Q13
Cash & Equivalents $796
Total Debt $660
Stockholders' Equity $564
$ in millions
BALANCE SHEET DATA
EARNINGS DATA
Excludes nonrecurring charges. Includes stock-based
comp.
FINANCIAL DATA
STOCK DATA
$24,173
$24,037
10,529,964
Shares Outstanding (mil) 122
$33.8 - $202.72
0.0%
1.13
December
Tesla Motors, Inc. (TSLA – $198.23) Coverage Initiated Palo Alto, CA Market Perform February 18, 2014 Price Target: $150.00
More Revolutionary Vehicles Ahead, but Stock Pricing in Best-in-Class Industry Profitability
Summary and Recommendation We are initiating coverage of Tesla Motors, Inc. (TSLA) with a Market Perform rating and a 12-month price target of $150 per share. Although we are strong believers in management’s ability to execute and launch differentiated products in today’s competitive auto landscape, we believe that the current stock price fully reflects Tesla’s evolution into what we believe will be one of the most profitable premium auto manufacturers by the end of this decade. Execution risk going forward is meaningfully higher as Tesla manages multiple product launches and expands into new geographies, and the risk/reward profile at current levels does not appear very attractive. We believe that sustained upside in the stock from current levels will be dependent on rapid success of the Gen 3 model and sizable expansion in China, and we expect limited clarity on these items until at least 2016.
Key Points Evolution into a premium manufacturer, with solid margins already
priced into the stock. We believe that the current stock price fully captures Tesla’s evolution into a premium auto manufacturer with sustainable industry-leading margins similar to those of Porsche. We acknowledge management’s strong execution to date and believe the company is capable of achieving such margins over the coming decade, compared with the multi-decade history and time line for companies such as Porsche in reaching this goal. Further stock upside from current levels will be largely dependent on rapid success of the Gen 3 model and on establishing a manufacturing presence in China, and we do not expect additional clarity on these metrics until 2016 at the earliest.
Potential headwinds and increased execution risk. Tesla’s ability to launch a revolutionary electric vehicle with the Model S is now proven. However, we see increased execution risk as the company moves into multiple new geographies, managing the expansion of the supercharging network and the allocation of internal resources between continued improvements to the Model S and launches of the Model X and the Gen 3. We do believe that the Gen 3 will be able to stand out in an increasingly competitive entry- to mid-level luxury segment, given new launches of the C/CLA classes from Mercedes, an expanded lineup from BMW, and upcoming new models from Audi and Jaguar.
Expect continued stock volatility. We expect the stock to remain volatile in the near to medium term, and our upside and downside scenarios lead to a fair value of $100 and $200, respectively, which leads to our price target of $150, indicating limited sustained upside potential over the next 12 months.
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The
Deb
ate™
Debatable Point Our Thoughts Time Frame Impact
When will investors gain additional clarity on the sales potential of the Model X and especially the Gen 3?
In 2014, Tesla plans to expand international sales of the Model S, and it will focus on launching the Model X in 2H14. We expect only limited clarity on the potential for Model X sales in 2014, and Gen 3 visibility should become clearer in 2016 or 2017.
12 Months
Will the Model X be the next Porsche Cayenne?
The Model X will go head to head with the likes of the Porsche Cayenne and the Range Rover. We acknowledge that the Model X will be revolutionary, but the Cayenne should prove to be a tough competitor with its solid on- and off-road pedigree. We do not expect Porsche Cayenne–type volumes for the Model X in the near to medium term.
12 Months
Will increasing overall capital intensity surprise investors?
We see the potential for investors to be negatively surprised by the increasing capital intensity of ongoing Model S upgrades, the buildout of the power train supply chain, the launch of new variants of the Model S, and the initial launches of the Model X and Gen 3. We are strong believers in Tesla’s engineering and design capabilities, but the auto industry is very capital intensive.
12 Months
Investment Thesis We are initiating coverage of Tesla Motors, Inc. with a Market Perform rating, as we believe the current stock price fully accounts for Tesla’s evolution into one of the most profitable premium auto manufacturers by the end of this decade, with sustainable margins similar to those of Porsche. Furthermore, we acknowledge management’s strong execution track record to date but see meaningfully higher execution risk ahead and, therefore, do not find the risk/reward profile attractive at current levels. Finally, sustained upside from current levels will be dependent on rapid success of the Gen 3 and on the establishment of a manufacturing presence in China, and we expect only limited clarity on these items until at least 2016.
Valuation We believe the right normalized multiple for TSLA is between 8x and 11x, compared with luxury auto manufacturers at 6x–8x. This is a 10%–50% premium to valuations of luxury automakers, reflecting the expected continued growth of Tesla’s global market share. We arrive at our price target by taking the midpoint of our upside and downside scenarios. We see a downside of $100 per share or 9x base-case 2017E EBITDA, and we see an upside of $200, or 13x our upside 2017E EBITDA, resulting in a price target of $150.
Catalysts/Milestones Preview of Model X preproduction prototype and further clarity on power train
characteristics and in-vehicle content.
Teaser shots of the Gen 3 and further clarity on vehicle features.
Signs of Model S success in international markets, especially in large markets such as China and Germany, as well as early signs of a demand build for Model X.
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Revolutionary Models Ahead—Core Expertise Lies in Power Train, Chassis Design, and Integration Tesla’s core expertise lies in developing and manufacturing fully electric power trains, as well as in its chassis design and integration capabilities. Tesla has maintained a commanding advantage over the competition in terms of both battery cost and overall battery performance. We estimate a current cost advantage in battery pack manufacturing of about 30%, when compared with large-scale prismatic battery packs, such as those assembled in Nissan’s plant in Tennessee. Tesla’s battery packs have an energy density advantage of about 30%, which is then coupled with the company’s state-of-the-art battery management systems.
We expect Tesla to maintain a cost/performance advantage of about 20%–30% in the near to medium term, and we expect the company to be at the forefront in advances in battery capacity, performance, and cost. We expect the next generation of battery systems for Tesla, based on similar battery chemistries, to debut in 2016 or 2017 (should coincide with the launch of Gen 3). Long term, we see Tesla as being agnostic to battery chemistry and expect the company to be a user/collaborator in multiple new battery chemistries that we expect to be introduced to the market in the latter part of this decade.
We see Tesla’s electric power train capabilities as similar to leading internal combustion (IC) engine technology from manufacturers such as Audi, which pioneered the use of turbo-charged engines in vehicles; BMW with its high-output in-line six cylinders and now the turbo-charged versions of these engines; and Mercedes with its highly reliable four- and six-cylinder gasoline and diesel engines. It is important to note that electric power trains can be modified to deliver varying power/torque configurations by using different cell configurations and inverter/software combinations. IC engines, on the other hand, need different core assemblies, such as cylinder blocks/heads, turbos, and cooling systems, which increase development and manufacturing costs. Part commonality within IC engine families can be between 40% and 60%, and electric power trains can also achieve substantial part commonality. Therefore, we believe that Tesla, with its similar battery chemistries, has a more cost-efficient method of, and rapid turnaround time for, delivering multiple power train configurations versus its competitors.
Tesla’s portfolio should develop into 10-plus models by the end of this decade.
Model S: planned refresh in 2016, new model in 2018. Introduction of all-wheel drive (AWD) and right-hand drive models. Coupe versions and grand touring–type version possible.
Model X: expected launch in 2014, mid-cycle refresh in 2017.
Gen 3: should launch in 2016/2017, mid-cycle refresh in 2020.
We expect each model to be launched in two to three configurations, each with a 60 kWh and 85 kWh power train, except the Gen 3, which we expect to start with a 40 KWh battery pack. We also expect Tesla to replicate the performance line across its product lineup similar to the “AMG” from Mercedes, “M” from BMW, and “S” line from Audi. We also expect to see industry-leading AWD systems, in terms of both performance and weight, from Tesla.
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Evolution of Tesla’s Portfolio
Source: FBR Research
Potential to Evolve into One of the Most Profitable Automobile Manufacturers over the Coming Decade We believe that Tesla has the potential to achieve industry-leading profit margins, similar to leaders such as Porsche and recently Jaguar, by transforming itself into one of the top five luxury auto manufacturers globally. We see two possible scenarios for Tesla. In both scenarios, the Gen 3 or the mid-size vehicle should play a critical role in achieving meaningful global volumes and further expanding the reach and awareness of Tesla’s brand.
Base case. In our base case, we estimate annual volumes of 150,000 units by 2020, relatively low volumes but respectable margins in the mid-teens. Tesla would continue to exclusively manufacture vehicles at its plant in Freemont and export to markets such as Europe and Asia.
Upside. In our upside case, we estimate annual volumes of 300,000 units by 2020, but Tesla will need to build overseas manufacturing facilities to sell into the fast-growing Asian market. In this scenario, Tesla would become a very profitable manufacturer with margins exceeding 20%.
In both of these scenarios, 2016/2017 will be important for the company as it launches the Gen 3 vehicle. In all key markets, we typically expect sales to progress from early adopters, hybrid buyers, and the green conscious who can afford luxury vehicles but have had limited choices so far and from premium vehicle buyers and then premium luxury or entry-level luxury buyers. We expect Tesla to remain a premium brand, even within its category, similar to a BMW today. The increasing availability of the supercharger network should continue to widen customer participation from each segment.
Base-Case Scenario
Source: FBR Research
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total Units 2,653 22,450 36,400 56,000 75,000 106,000 141,000 151,000 151,000
Revenues $413 $1,936 $2,825 $3,279 $5,389 $7,564 $9,614 $10,179 $10,179
EBITDA Margin 4.6% 5.8% 13.6% 15.7% 16.3% 16.4% 15.5%
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Upside Scenario
Source: FBR Research
We expect Tesla’s margins to be closer to those of Porsche and Jaguar than to those of Mercedes, BMW, and Audi.
Industry EBITDA Margins versus Our Tesla Projections
Source: Mercedes Benz, Audi, BMW, Porsche, and Jaguar annual reports
We see two demand scenarios for Tesla. In either scenario, Tesla should evolve into a highly profitable auto manufacturer.
Entry-Level Scenario—Base Case
Source: FBR Research and company reports
FY 2012 FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E
Total Units 3,002 20,650 39,500 55,000 79,000 126,000 181,000 271,000 301,000
Total Revenues (M) 413 1,868 2,911 3,127 5,736 9,100 12,897 17,945 19,454
EBITDA Margin 4.1% 4.5% 15.7% 18.6% 20.0% 21.5% 21.4%
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total U.S. 394,399 408,355 431,037 440,707 460,662 459,239 464,580 472,315 474,570
% chg 6.0% 3.5% 5.6% 2.2% 4.5% -0.3% 1.2% 1.7% 0.5%
Total Europe 644,387 642,059 640,016 658,479 677,533 695,024 711,056 725,169 734,851
% chg -6.0% -0.4% -0.3% 2.9% 2.9% 2.6% 2.3% 2.0% 1.3%
Total Other 346,977 390,935 428,495 469,780 515,161 565,047 609,020 656,486 707,723
% chg 18.0% 12.7% 9.6% 9.6% 9.7% 9.7% 7.8% 7.8% 7.8%
Global Entry-Level Total 1,385,763 1,441,349 1,499,548 1,568,966 1,653,356 1,719,310 1,784,656 1,853,970 1,917,144
U.S. 2.2% 5.2% 8.6% 10.6% 10.5%
EU 0.7% 1.4% 1.4% 1.4%
Other 0.2% 1.6% 1.5% 1.4%
Total 0.6% 1.7% 3.4% 3.8% 3.7%
U.S. 10,000 24,000 40,000 50,000 50,000
EU 5,000 10,000 10,000 10,000
Other 1,000 10,000 10,000 10,000
Total 10,000 30,000 60,000 70,000 70,000
Tesla Market Share
Tesla Entry-Level Volume
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Luxury Sedan Scenario—Base Case
Source: FBR Research and company reports
SUV Scenario—Base Case
Source: FBR Research and company reports
Longer term, Tesla’s volume potential will likely be determined by the success of models such as the Gen 3 and by success with multiple versions of the Model S and the Model X.
Entry-Level Scenario—Upside Case
Source: FBR Research and company reports
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total U.S. 233,780 254,980 267,645 275,529 276,998 263,008 259,036 254,242 251,996
% chg 16.0% 9.1% 5.0% 2.9% 0.5% -5.1% -1.5% -1.9% -0.9%
Total Europe 686,722 695,954 697,316 705,642 719,479 732,971 746,741 760,574 774,462
% chg 1.3% 0.2% 1.2% 2.0% 1.9% 1.9% 1.9% 1.8%
Total Other 354,360 385,003 410,788 438,695 468,302 500,000 533,673 568,048 604,737
% chg 8.6% 6.7% 6.8% 6.7% 6.8% 6.7% 6.4% 6.5%
Global Luxury Sedan Total 1,274,863 1,335,937 1,375,748 1,419,865 1,464,780 1,495,979 1,539,450 1,582,864 1,631,196
U.S. 1.1% 7.1% 7.6% 9.7% 10.6% 10.3% 9.6% 8.8% 8.9%
EU 0.6% 1.5% 1.2% 1.3% 1.2% 1.2% 1.2% 1.2%
Other 0.8% 1.4% 1.4% 1.8% 2.1% 2.4% 2.2%
Total 0.2% 1.7% 2.5% 2.9% 3.1% 3.0% 2.9% 2.8% 2.8%
U.S. 2,653 18,110 20,400 26,650 29,250 27,000 24,750 22,500 22,500
EU 4,340 10,200 8,200 9,000 9,000 9,000 9,000 9,000
Other 3,400 6,150 6,750 9,000 11,250 13,500 13,500
Total 2,653 22,450 34,000 41,000 45,000 45,000 45,000 45,000 45,000
Tesla Market Share
Tesla Luxury Sedan Volume
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total U.S. 359,893 372,428 371,617 370,251 372,160 373,997 376,262 378,640 380,638
% chg 12.0% 3.5% -0.2% -0.4% 0.5% 0.5% 0.6% 0.6% 0.5%
Total Europe/Other 179,947 193,663 247,745 246,834 248,106 249,331 250,841 252,427 253,759
% chg 12.0% 7.6% 27.9% -0.4% 0.5% 0.5% 0.6% 0.6% 0.5%
Global SUV Total 539,840 566,091 619,362 617,084 620,266 623,328 627,103 631,067 634,397
U.S. 0.1% 2.2% 3.2% 4.0% 4.0% 4.0% 3.9%
EU/Other 0.0% 0.8% 3.2% 6.0% 8.0% 7.9% 7.9%
Total 0.1% 1.6% 3.2% 4.8% 5.6% 5.5% 5.5%
U.S. 500 8,000 12,000 15,000 15,000 15,000 15,000
EU 2,000 5,000 10,000 10,000 10,000 10,000
Other 3,000 5,000 10,000 10,000 10,000
Total 500 10,000 20,000 30,000 35,000 35,000 35,000
Tesla Market Share
Tesla SUV Volume
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total U.S. 394,339 408,355 434,765 448,536 468,725 470,358 482,866 517,844 527,386
% chg 6.0% 3.6% 6.5% 3.2% 4.5% 0.3% 2.7% 7.2% 1.8%
Total Europe 644,387 642,059 640,016 648,479 677,533 695,024 711,056 725,169 734,851
% chg -6.0% -0.4% -0.3% 1.3% 4.5% 2.6% 2.3% 2.0% 1.3%
Total Other 346,977 390,935 433,295 487,648 549,131 615,252 678,808 744,990 803,307
% chg 18.0% 12.7% 10.8% 12.5% 12.6% 12.0% 10.3% 9.7% 7.8%
Global Entry-Level Total 1,385,703 1,441,349 1,508,076 1,584,663 1,695,389 1,780,634 1,872,731 1,988,002 2,065,543
U.S. 2.1% 5.1% 8.3% 14.5% 15.2%
EU 0.7% 1.4% 2.8% 4.1%
Other 0.2% 1.5% 4.7% 5.6%
Total 0.6% 1.7% 3.2% 6.5% 7.5%
U.S. 10,000 24,000 40,000 75,000 80,000
EU 5,000 10,000 20,000 30,000
Other 1,000 10,000 35,000 45,000
Total 10,000 30,000 60,000 130,000 155,000
Tesla Market Share
Tesla Entry-Level Volume
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Luxury Sedan Scenario—Upside Case
Source: FBR Research and company reports
SUV Scenario—Upside Case
Source: FBR Research and company reports
Management Will Need to Execute Flawlessly in Several Areas
International Expansion
Expanding manufacturing capacity. Tesla will need a local manufacturing base to expand meaningfully into Asia, especially the Chinese market. Tie-ups can be challenging given limited safeguards regarding technology protection and transfer agreements.
European expansion into high-volume markets can be challenging. Although a number of countries offer subsidies for electric vehicles, sales volumes have remained modest so far. Europe has also lagged behind the U.S. in developing an electric vehicle charging infrastructure in large markets, although Tesla is addressing this issue by building a supercharger network. Certain smaller markets such as Norway offer a sizable near- to medium-term opportunity for Tesla, where electric vehicles benefit meaningfully from lower fees and taxes, such as the lower new registration fees, public parking fees, exemption from toll payments, and access to bus lanes. These incentives are in place until 2018 or until the country reaches 50,000 electric vehicles. These incentives can make electric vehicles very attractive, with Tesla’s Model S being cheaper to own than both a Volkswagen Passat and a Mercedes E class. On the other hand, markets such as Germany, the home market to the top three luxury brands, could prove more challenging.
Asian expansion. A China strategy is critical for any luxury vehicle manufacturer. Competition is intense, from both German and domestic companies. German brands such as Audi lead the market,
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total U.S. 233,780 254,980 273,842 283,077 284,563 280,132 286,188 292,087 289,794
% chg 16.0% 9.1% 7.4% 3.4% 0.5% -1.6% 2.2% 2.1% -0.8%
Total Europe 686,722 695,954 697,316 705,642 719,479 732,971 746,741 760,574 774,462
% chg 1.3% 0.2% 1.2% 2.0% 1.9% 1.9% 1.9% 1.8%
Total Other 354,360 385,003 416,669 451,453 489,180 530,281 566,123 602,825 642,012
% chg 8.6% 8.2% 8.3% 8.4% 8.4% 6.8% 6.5% 6.5%
Global Luxury Sedan Total 1,274,863 1,335,937 1,387,826 1,440,172 1,493,223 1,543,383 1,599,051 1,655,487 1,706,268
U.S. 1.1% 5.9% 7.3% 8.8% 8.8% 12.5% 14.0% 15.4% 15.5%
EU 0.9% 1.7% 2.1% 2.1% 2.0% 2.0% 2.6% 2.6%
Other 1.2% 1.1% 1.2% 1.9% 2.6% 2.5% 3.1%
Total 0.2% 1.6% 2.7% 3.1% 3.1% 3.9% 4.4% 4.8% 5.0%
U.S. 2,653 15,000 20,000 25,000 25,000 35,000 40,000 45,000 45,000
EU 6,000 12,000 15,000 15,000 15,000 15,000 20,000 20,000
Other 5,000 5,000 6,000 10,000 15,000 15,000 20,000
Total 2,653 21,550 37,000 45,000 46,000 60,000 70,000 80,000 85,000
Tesla Market Share
Tesla Luxury Sedan Volume
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Total U.S. 359,893 372,428 374,201 374,004 376,861 378,698 381,777 384,985 387,829
% chg 12.0% 3.5% 0.5% -0.1% 0.8% 0.5% 0.8% 0.8% 0.7%
Total Europe/Other 179,947 193,663 249,467 249,336 251,241 252,465 254,518 256,657 258,553
% chg 12.0% 7.6% 28.8% -0.1% 0.8% 0.5% 0.8% 0.8% 0.7%
Global SUV Total 539,840 566,091 623,669 623,340 628,102 631,163 636,294 641,642 646,382
U.S. 0.7% 2.1% 4.0% 5.3% 6.5% 6.5% 6.4%
EU/Other 0.0% 0.8% 2.8% 5.9% 9.8% 13.6% 13.5%
Total 0.4% 1.6% 3.5% 5.5% 7.9% 9.4% 9.3%
U.S. 2,500 8,000 15,000 20,000 25,000 25,000 25,000
EU 2,000 5,000 10,000 10,000 15,000 15,000
Other 2000 5,000 15,000 20,000 20,000
Total 2500 10000 22,000 35,000 50,000 60,000 60,000
Tesla SUV Volume
Tesla Market Share
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with BMW and Mercedes also delivering strong annual sales in the region. We do not doubt the appeal of Tesla to the ultra-rich in China, but Tesla will have to forge local relationships to make a meaningful impact on the market. Porsche, for example, sells about 31,000 vehicles annually in China, though at a higher price point than BMW, Audi, Mercedes, Porsche, and Jaguar. These five brands, through their local tie-ups, sell more than 1 million vehicles annually and account for 85% of the premium luxury vehicle market in China. Of these brands, BMW, Audi, and Mercedes have local manufacturing tie-ups, while Porsche relies on its plants in Germany and Jaguar is in the process of building a China plant. While joint ventures in China have been successful, many of them have taken multiple years to reach profitability.
Tesla will also have to appeal to buyers who place a greater significance on “brand” and “backseat comfort” while combining vehicle performance and operating cost. Pricing premiums in China can be meaningful even after adjusting for import duties on vehicles and the value-added tax (VAT) in China. Import duties are 25%+ on finished cars, and the VAT is about 10% higher than state sales tax in the U.S. Tesla’s recent strategy of introducing the Model S in China at a price of about $125,000, is a first for the Chinese market, and we will look to closely monitor the traction Tesla receives with this strategy.
The four exhibits below highlight the average price premium in China.
BMW Product Mix in China
Source: FBR Research and BMW presentations
BMW Pricing Mix in China
Source: BMW
1 Series4%
3 Series19%
5 Series 36%
6 Series1%
7 Series7%
X19%
X38%
X57%
X63%
Z40%
BMW China Avg Price US Avg Price Premium
1 Series 48,429$ 40,450$ 7,978.80$
3 Series 76,976$ 43,743$ 33,232.75$
5 Series 111,009$ 59,815$ 51,194.02$
6 Series 214,258$ 85,283$ 128,974.44$
7 Series 239,001$ 94,960$ 144,041.78$
X1 52,550$ 33,967$ 18,583.73$
X3 89,350$ 42,150$ 47,200.40$
X5 190,281$ 58,200$ 132,080.53$
X6 239,237$ 65,100$ 174,136.80$
Z4 109,002$ 56,233$ 52,768.27$
Average 137,009$ 57,990$ 79,019$
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Porsche Product Mix in China
Source: FBR Research and Porsche annual report
Porsche Pricing Mix in China
Source: Porsche
Engineering and Product Development Capabilities
Engineering and product development capabilities will need to be further strengthened. As Tesla evolves into a multiproduct company from the Model S to the Model X to the Gen 3, there will be increasing demand on the product development team to manage multiple platform builds, undertake product refreshes, and build versions for multiple countries. We agree that the software-rich nature of power train controls should make it easier to handle multiple power train builds, versus some competitors, but Tesla will need to shore up its resources in platform design, chassis development, and integration. We also expect Tesla to place a greater emphasis on developing similar architectures, across Model S, Model X, and Gen 3, such as the “MQB” architecture by Volkswagen and BMW’s common architecture in its expanding 2, 4, and 6 Series line-ups.
Gen 3: achievable but a challenging target in a highly competitive segment. The mid-size or entry-level luxury segment remains very competitive, and buyers are a lot more price conscious than in the premium luxury segment. The segment is dominated by the BMW 3 series, the most successful mid-size luxury vehicle in recent history, followed by the Mercedes C Class and Audi A4. Cadillac has recently shown that BMW is not untouchable with the launch of the ATS, and the updated Lexus IS 350 and Infiniti Q50 are formidable competitors. Tesla’s Gen 3 will have to offer certain class-leading features while also competing with performance-oriented offerings such as the 335i, S4, C350, and the IS 350 Sport. We also expect the base versions of the Gen 3 to face competition from newer entry-level luxury models such as the Mercedes CLA, BMW 2 Series, and the Audi A3. For the Gen 3 in the U.S., we see a path toward a base price of about $40,000, or potentially about $32,500 with various tax credits and the potential to generate at least 20% gross margins. We expect technological improvements on the Model S to serve as the starting point for further cost reductions and platform modifications on the Gen 3. The exhibit below details our view of features of the Gen 3, which incorporate meaningful improvements in battery energy density, cost, and weight reduction of the vehicle.
9113%
Boxster/Cayman4%
Cayenne64%
Panamera29%
Porsche China Avg Price US Avg Price Premium
911 315,947$ 115,935$ 200,012$
Boxster/Cayman 142,680$ 57,225$ 85,455$
Cayenne 278,720$ 83,371$ 195,349$
Panamera 278,080$ 110,311$ 167,769$
Average 253,857$ 91,711$ 162,146$
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Model S versus Gen 3: Estimate of Key Parameters
Source: FBR Research and company Web site
Model S Gross Margins Could Approach 35% at Scale Production
Source: FBR Research
We expect cost reductions in Model S to form the basis for further reductions in the Gen 3 vehicle. We see a $40,000 base price excluding tax credits as achievable if Tesla executes on its cost-reduction plans.
Model S Diff Gen 3
Length (Inches) 196.0 (10) 186.0
Width (Inches) 77.3 (4) 73.3
Wheelbase (Inches) 116.5 (5) 111.5
BHP 302 (67) 235
Torque (ft-lbs.) 317 (17) 300
Battery Pack (kWh) 60 (20) 40
Curb Weight (lbs) 4300.0 420 3,880
Accl 0-60 (Seconds) 5.9 0.3 6.2
Range (Miles) 210 (30) 180
$83,700
$65,700
$51,700
$8,000 $2,000
$8,000
$14,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
1Q13 COGS Lower Component Cost
Lower Labor Lower Hours 4Q13E COGS Lower Component Cost
2016E COGS
Estimated Cost-Reduction Road Map
Price
Price
Price
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Model S to Gen 3 Pricing Estimates
Source: FBR Research
Estimated Model S to Gen 3—COGS
Source: FBR Research
Model S Price $77,000
Model S COGS $50,700
Battery Cost Reduction
Size 25
$/kWh 350
Total $8,750
Other Components $5,100
BIW $600
Interior / Electronics $2,500
Chassis, Suspension $2,000
Gen 3 COGS $36,850
Gen 3 Selling Price $46,000
Options $6,000
Base Price $40,000
% GP 20%
Model S to Gen 3
$50,700
$36,850
$8,750
$5,100
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Model S COGS Battery Cost Reduction Other Cost Gen 3 COGS
Model S to Gen 3
Base Price
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Current Competition and Attributes
Source: FBR Research and company web sites
Model X. The Model X will be entering a very competitive landscape with the likes of the Porsche Cayenne, Range Rover, and the higher-end models of the BMW X5 and Mercedes M and G classes. The Porsche Cayenne was one of the most successful launches in recent history, and if the Model X delivers Cayenne-type performance and handling with its unique power train, we could see the Model X reach annual volumes of 50,000. The Porsche Cayenne was very well received in the market, whose only choice for a high-end SUV was the Range Rover. The Cayenne accounts for approximately half of Porsche’s global sales, 65% of Chinese sales, and 45% of U.S. sales. It is unlikely that there is room for two Cayenne-type vehicles in the market, which is mostly dominated by U.S. and Chinese sales. Therefore, success of the Model X could cause some significant market share shifts in this segment. Some limitations remain to developing the SUV category due to its narrower geographical focus (mainly U.S. focused) and the need to meet a wide range of demands for a single vehicle—space, off-road capability, and utility/value. For the more traditional premium SUVs, successful brands sell about 35,000 to 45,000 units annually, with only one vehicle (Lexus RX) achieving sales of more than 80,000. Our sales estimate of 35,000–60,000 falls in between these ranges, and the upper end is close to the volumes of the Porsche Cayenne.
Distribution Channel and Retail Stores
Distribution channel and retail store strategy would need to be adjusted at scale. To deliver 150,000–300,000 in annual volumes, Tesla would have to operate an extensive retail store network. Assuming each store sells 40 to 50 vehicles per month, Tesla would need 300 to 600 stores to reach the target. Tesla could eventually consider a dual-retail strategy through a mix of owned retail and third-party stores.
Competitive Environment
Competition will take notice; cannot be a win-all situation. We expect Tesla’s competition to come mainly from large established manufacturers such as BMW, Audi, Mercedes Benz, Porsche, and Jaguar. Although Tesla is currently taking market share from multiple brands, including some hybrid brands, we see the real competition as being the premium brands in the market. We see BMW as a formidable competitor, and it is very likely that Tesla could grab share from the derivative architectures of its popular brands (6 Series, 4 Series). In terms of electric vehicles, we do not expect any real impact on Tesla sales from the BMW i3 or the Cadillac ELR. Yet, competition from BMW and Cadillac will have to be monitored closely, given the scalability of those platforms. While Tesla offers a unique driving experience and vehicle electronics, other luxury brands continue to offer a higher level of in-cabin comfort options and active safety features, and Tesla will have to keep investing in new technology to compete with some of the larger OEMs. We would also not be surprised to see increased competition from the finance subsidiaries of BMW, Mercedes, and Audi, especially in markets such as the U.S. We expect the luxury category to add about 800,000 annual vehicles between 2012 and 2020, and we estimate that Tesla will account for about 150,000 to 300,000, or approximately 20%–40% of annual incremental volumes.
Gen 3 BMW 335i Cadillac ATS Lexus IS 350 Average
Length (Inches) 186.0 182.5 182.8 183.7 183.0
Width (Inches) 73.3 71.3 71.1 71.3 71.2
Wheelbase (Inches) 111.5 110.6 109.3 110.2 110.0
BHP 235 300 320 305 308.3
Torque (ft-lbs) 300 300 275 277 284.0
Curb Weight (lbs) 3,880 3605 3560 3705 3623
Accl 0-60 (Seconds) 6.5 4.8 5.6 5.6 5.3
Braking 70 - 0 (Seconds) 180 164 163 177 168.0
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Capital Intensity
High capital intensity of multiple new launches, new model variants, power train supply chain, geographic expansion, and charging networks. We estimate a total capex commitment of about $5 billion through 2020 to meet facility expansion goals and to be used toward tooling for new models and maintenance capex.
Tesla’s Estimates 2020 Footprint
Source: FBR Research
Luxury Sedan Demand Progression in North America
Source: FBR Research and Automotive News
45K 85K
1.2M
1.6M
35K 60K
361K
634K
70K155K
1.8M 1.9M
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Model S - Base Case
Model S - Upside
Top 4 Total Model X - Base Case
Model X - Upside
Top 4 Total Gen 3 -Base Case
Gen 3 -Upside
Top 4 Total
Luxury Sedan2.8 %-5.2% LT Mkt
Share
Luxury SUV5.5%-9.5% LT Mkt
Share
Entry-Level3.7%-8.1% LT Mkt
Share
5 Series, 20% 5 Series, 24%5 Series, 18% 5 Series, 17%
E-Class, 19%
E-Class, 28%
E-Class, 23%E-Class, 21%
Lexus LS, 10%
Infiniti M, 9% Audi A6, 8%
Audi A6, 9%Audi A6, 8%
Cadillac, 15%Cadillac, 6%
Cadillac, 10%Cadillac, 9%
S-Class, 9%
Other, 26% Other, 25%
Other, 31%
Other, 29%
Tesla, 10%Tesla, 17%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2012 2020 - Base Case 2020 - Upside
5 Series E-Class Lexus LS Infiniti M Audi A6 Cadillac S-Class Other Tesla
260K 237K 252K 272K
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Entry-Level Luxury Demand Progression in North America
Source: FBR Research and Automotive News
Projected Tesla Capital Expenditures
Source: FBR Research
Financials The exhibits below highlight our base case and upside scenario. In both cases, we estimate that Tesla generates EBITDA margins greater than 15%, among the highest in the industry. While we have attempted to capture the impact of new product launches and development costs, margins could differ from our forecasts in any given year, depending on the pace of new product development. We focus primarily on EBITDA as the basis for our valuation.
Our capex assumptions through 2020 in both scenarios range from $4.0 billion to $6.0 billion. We view Tesla’s model as self-funding and do not see the need for additional capital in the foreseeable future.
3 Series, 25% 3 Series, 24%3 Series, 20% 3 Series, 18%
Infiniti G37, 16%Infiniti G37, 14%
Cadillac CTS, 14%Cadillac CTS, 11%
Cadillac CTS, 9% Cadillac CTS, 9%
C Class, 14%C Class, 21%
C Class, 19%C Class, 18%
Audi A4, 11% Audi A4, 8%
Audi A4, 9%Audi A4, 8%
Other, 20% Other, 21%
Other, 33%Other, 31%
Tesla, 10%Tesla, 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2012 2020 - Base Case 2020 - Upside
3 Series Infiniti G37 Cadillac CTS C Class Audi A4 Lincoln Other Tesla
434K 422K 502K 532K
Maintenance Capex $800
Model X Tooling/Assembly $350
Gen 3 Tooling/Assembly $500
Expansion-Model S $350
Expansion-Model X $250
Expansion-Gen 3 $1,500
Roadster II $250
Testing Facilities $350
Model S II Tooling $350
Total $4,700
Capex Detail ($ millions)
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Base-Case Scenario
Source: FBR Research
Upside Scenario
Source: FBR Research
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Valuation Tesla is an automobile company in the early stages of growth, trying to build revolutionary automobiles in a nascent product category and to compete with large, established auto manufacturers. The company, therefore, has no direct comps in the market. We believe that the right methodology to value TSLA is based on a luxury peer group, adjusting for differences in the long-term growth potential of the company. We believe Tesla will reach somewhat of a mature phase in 2017, following the launch of the Gen 3 in 2016 or 2017, reaching a more steady state of maturity in 2020, after launching the next-generation Model S, Model X, and Roadster.
We believe the right normalized multiple for TSLA is between 8x and 11x, compared with luxury auto manufacturers at 6x–8x. This is a 10%–50% premium to valuations of luxury automakers, reflecting the expected continued growth of Tesla and the potential increase in market share from relatively low levels. At current levels, we believe that the stock is pricing in success of the Model S, with sales of about 45,000–50,000 units in three to four years; the successful launch of the Model X, with about 35,000 units sold approximately three years from launch; and the successful launch of the Gen 3 at an attractive price point, with sales of about 70,000 units three years after the launch. We believe that margins north of 20% EBITDA are currently being priced into the stock. We also believe that upside for the stock in this scenario is limited to $165 per share, which reflects about 15x our 2017 EBITDA estimate of approximately $1.6 billion.
While execution in the auto industry is challenging even for the best of management teams, in the event of any potential execution issues, we see downside in the stock to $100 per share, or about 9.7x our 2017 EBITDA estimate.
We acknowledge that TSLA’s high-growth aspect and the stock’s momentum could continue to take shares higher, but for the stock to see meaningful upside from current levels, we believe that Tesla would have to manufacture in China and sell about two times the volume of our base-case scenario. This implies that Tesla would need to sell approximately 150,000 Gen 3 vehicles about three years from launch and that the Model S and Model X would need to achieve combined volumes of 150,000 units. We do not expect to gain any real clarity on this scenario until the company launches the Gen 3 in 2016 or 2017.
Base-Case Price Target Range
Source: FBR Research
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Upside Price Target Range
Source: FBR Research
Risks Warranty issues and potential recalls on new vehicles sold. Tesla provides a four-year, 50,000-mile new vehicle warranty, an eight-year or 125,000-mile warranty on the 65 KWh battery pack, and an eight-year, unlimited warranty on the 85 KWh model. While the company accrues a warranty reserve each quarter, an adverse warranty development or potential product recall could have a negative impact on profitability and operating cash flow.
Supply chain difficulties, especially related to the power train supply chain and components. Similar to most other auto manufacturers, Tesla is dependent on third-party suppliers for key components used in the Model S. Any disruption in supply or inability to meet Tesla’s growing production volumes could have a negative impact on the company.
Increased competition from large, premium luxury OEMs. Tesla competes in the premium vehicle segment with competitors who have greater resources, supplier leverage, and product distribution. Increased competition from these companies in terms of new product launches or pricing competition could negatively affect Tesla’s product volumes.
Demand creation in overseas markets, which have relatively lower consumer appetites for electric vehicles than the U.S. market. Tesla is looking to expand in markets such as Europe and China, which have thus far shown only limited appetite for electric vehicles. Slower-than-expected sales in these markets could have a negative impact on Tesla’s profitability.
Company Profile Tesla Motors, Inc. was founded by Jeffrey B. Straubel, Elon R. Musk, and Marc Tarpenning in 2003 and is headquartered in Palo Alto, California. Tesla designs, develops, manufactures, and sells fully electric vehicles and advanced electric vehicle power train components. It also provides services for the development of electric power train components and sells those components to other auto manufacturers, such as Toyota. The company began selling its first electric vehicle, the Tesla Roadster, in 2008, and the more recent Tesla Model S was first delivered in 2012. The company also announced the Tesla Model X in February 2012, with production expected to begin by late 2014.
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Income Statement—Tesla Motors, Inc. (TSLA) $ in Millions
Proprietary to FBR Capital Markets & Co. February 18, 2014 Aditya Satghare . 646.885.5472 . [email protected]
Source: Company documents and FBR Research
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Energy & Natural Resources: Advanced Transportation Important disclosures can be found at the end of this report.
© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking
Pricing as of February 14, 2014.
Aditya Satghare [email protected] . 646.885.5472 Benjamin Tainter [email protected] . 703.312.9763
52-Week Range
Three-Month ADTV
Dividend Yield
Market Cap (mil)
Beta
Enterprise Value (mil)
Fiscal Year-End
EPS 2013E 2014E 2015E
1Q $0.27A $0.22 $0.34
2Q $0.40A $0.38 $0.50
3Q $0.24A $0.40 $0.53
4Q $0.27 $0.41 $0.58
FY $1.18 $1.40 $1.95
2013E 2014E 2015E
FY Revenues 641 711 788
FY EBITDA 158 183 210
FY EBIT 103 128 155
EV/EBITDA 13.5x 11.7x 10.2x
P/E 28.2x 23.8x 17.1x
3Q13
Cash & Equivalents $27
Total Debt $646
Stockholders' Equity $555
$ in millions
BALANCE SHEET DATA
EARNINGS DATA
Excludes nonrecurring charges. Includes stock-based
comp.
FINANCIAL DATA
STOCK DATA
$1,518
$2,137
538,728
Shares Outstanding (mil) 46
$31.19 - $48.41
0.0%
0.90
December
Polypore International, Inc. (PPO – $33.30) Coverage Initiated Charlotte, NC Market Perform February 18, 2014 Price Target: $37.00
Strong Market Position, but Limited Upside until Second-Generation Vehicles Are Launched
Summary and Recommendation We are initiating coverage of Polypore International, Inc. (PPO) with a Market Perform rating and a 12-month price target of $37 per share. We believe that PPO is currently pricing in meaningful penetration of electric vehicles and plug-in hybrids, and we do not see the potential for industry shipments or earnings upside until second-generation vehicle models are launched in 2015/2016. Although several high-profile electric vehicle launches in 2014 could positively affect stock sentiment, we believe that Polypore will have to demonstrate increased market share in both the electric vehicle and consumer electronic segment for the stock to see meaningful upside from current levels. In the near to medium term, we expect PPO to remain range-bound between the low $30s and mid $40s until drivers for earning acceleration become more evident.
Key Points Current stock price incorporates meaningful electric vehicle penetration
over the next five years. We believe that the current stock price accounts for meaningful industry penetration of electric vehicles over the next three to five years, with about 500,000 EVs and PHEVs sold globally by 2015. As about 90,000 EVs and PHEVs were sold globally in 2013, we see limited upside to our industry shipment estimates through 2015. We believe that electrification will play a major role in the automotive landscape over the coming decade; however, the second-generation models of vehicles including Chevy Volt, Nissan Leaf, and Ford Energi are needed to achieve wider penetration levels such as seen by hybrids. We do not expect this until 2015/2016 at the earliest and, hence, see limited potential for upside to our individual name plate forecasts through 2016.
Expect continued competition in consumer electronics. While we expect increasing competition in the automotive separator segment, we believe that Polypore’s competitive advantage through its dry separator manufacturing process will enable it to maintain industry-leading market share (greater than 35%) in the automotive segment. The consumer electronics segment, however, could continue to see only limited growth due to strong industry pricing competition and the use of predominantly wet separator technology in consumer electronic applications.
Limited potential for multiple expansion in the absence of market share gains. We believe that the current valuation of low-double-digit EBITDA and a 25x+ earnings multiple should limit further multiple expansion in an environment of limited upside surprises for industry shipments. Giving Polypore the benefit of market share gains, we arrive at an upside stock price range in the mid $40s. Further upside from here will be more dependent on multiple expansion due to increased market share and greater visibility on upside to industry EV/PHEV shipments.
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The
Deb
ate™
Debatable Point Our Thoughts Time Frame Impact
Will new launches in 2014 have a short-term positive impact on the stock?
New launches in 2014 such as the BMW i3 and Golf E and continued success with the Tesla Model S could create positive industry sentiment, benefiting Polypore’s stock in the near to medium term.
3 to 6 Months
Will Polypore recapture some of the lost consumer electronics market share?
Industry competition remains high, and Polypore’s dry manufacturing process is at a disadvantage in certain consumer electronic applications. We expect some recapture of lost market share but expect consumer electronics to somewhat limit earnings growth.
12 Months
Will we see increased disclosure from the management team?
We urge the management team to provide incremental segment disclosure, which could have an overall positive impact on investors appreciating Polypore’s long-term competitive advantage in this business.
12 Months
Investment Thesis We are initiating coverage of Polypore International, Inc. with a Market Perform rating and a $37 price target. The current stock is pricing in meaningful adoption of EVs/PHEVs over the next three to five years, and we see limited upside to our industry shipment forecast until second-generation models are launched in 2015/2016. A number of high-profile launches could positively affect stock sentiment, but Polypore will have to demonstrate increased market share in both electric vehicles and consumer electronics for the stock to see sustained upside. We expect PPO to remain range-bound in the low $30s to mid $40s until drivers for earnings acceleration become more evident.
Valuation We base our $37 price target on a low-double-digit multiple of our 2017 EBITDA estimate. We believe that this EBITDA multiple is appropriate given Polypore’s attractive margin profile (greater than 30% EBITDA margins) and ability to grow earnings by mid-teens annually through 2017. This translates into a P/E multiple of 13x our 2017 EPS estimate. Our downside scenario of a low-$30 stock is based on an 11x EBITDA multiple of our 2017 estimate, which translates into a stock price of $31.70. Our upside scenario of a mid-$40 stock is based on a 15x EBITDA multiple of our 2017 upside estimate, capturing increased market share by Polypore in both electric vehicles and consumer electronics.
Catalysts/Milestones New supply wins on EV/PHEV vehicle platforms.
New supply wins on new consumer electronic devices.
Continued success in the lead acid market in China.
Continued manufacturing execution leading to increasing product margins.
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Broad Product Portfolio Serving Multiple End Markets Polypore manufactures separators used in the following key industries:
Lead acid separators. Polypore primarily manufactures polyethylene (PE) separators, which are used for starting, lighting, and ignition (SLI) applications in passenger and commercial vehicles. The recent sale of the Microporous business has resulted in Polypore exiting from separators used in industrial deep-cycle applications.
Lithium-ion separators. Polypore manufactures the “dry type” lithium-ion separators, which are used in large-format electric vehicles, plug-in hybrids, and dual-motor hybrid applications. These separators are also used in consumer electronics, such as mobile phones, audio/video players, laptops, tablets, and cameras. The major types of lithium separators offered are polypropylene (PP) and PE monolayers or coated, multilayer PP and PE separators.
Polypore has 14 operating facilities on a global basis. The company’s top three facilities are located in Owensboro, Kentucky; Charlotte, North Carolina; and Prachinburi, Thailand. Among the 14 manufacturing plants, Polypore produces lithium separators in three facilities: Charlotte, North Carolina; Shanghai, China; and Ochang, South Korea, with additional lithium separator capacity from the company’s newest facility in Concord, North Carolina. The remaining facilities produce lead acid separators.
Healthcare separators. Polypore produces filtration membranes and modules that are used in healthcare filtration equipment and specialty applications, such as equipment used for hemodialysis and blood oxygenation.
Separators used in industrial applications. Polypore produces filtration membranes for micro-, ultra- and nanofiltration and gasification/degasification of liquids. The end markets for filtration membranes include water treatment, food and beverage processing, pharmaceuticals, semiconductors, and flat-panel display manufacturing.
Our Earnings Forecasts Are Driven by Our Industry Models
Global auto model. We expect light-vehicle sales to increase at a 3.4% CAGR through 2020, with markets such as China growing at a 6.4% CAGR.
Global Auto Model
Source: FBR Research and Automotive News
2012-2015: 3.3%
2012-2020: 3.4%
2015-2020: 3.0%
Global LV Sales CAGR
72.4
85.2
98.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Ve
hic
les
Sold
(m
illio
ns)
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Global electrification model. We expect EVs/PHEVs to reach annual sales of 0.6 million globally by 2015 and 1.6 million by 2020, which translates into a penetration rate of 2.5%. Hybrid vehicles including dual-motor and other mild hybrids are expected to reach annual sales of 1.3 million by 2015 and 2.0 million by 2020 and achieve penetration rates of 2.5% and 3.1%.
Global Electrification Model
Source: FBR Research
Start-stop and lithium-ion start-stop will have a meaningful impact on growth rates for traditional lead acid batteries. We expect annual start-stop shipments of 18.5 million by 2015 globally and 34.6 million by 2020, resulting in a 1.0% impact on annual sales of lead acid batteries.
Global Start-Stop Opportunity
Source: FBR Research and Automotive News
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
EV/PHEV 0.0 0.0 0.1 0.1 0.3 0.5 0.7 0.9 1.3 1.6 1.8
Start-Stop AGM 3.1 3.6 5.5 7.1 8.4 10.1 12.1 13.9 15.4 17.1 18.9
Start-Stop AGM (Incl. Replacement) 8.9 11.9 14.9 19.0 23.5 28.3 32.8 37.8 43.5
Start-Stop Li-ion - - 0.0 0.0 0.0 0.1 0.6 0.9 1.5 1.7 1.8
Hybrid - other 0.9 0.7 1.1 1.4 1.5 1.6 1.7 1.8 2.0 2.1 2.3
Other Gasoline 44 45 44 44 46 46 45 44 43 43 42
Revenues ($M)
EV/PHEV $36 $490 $915 $1,304 $3,061 $4,806 $5,796 $7,356 $9,852 $11,052 $12,107
Start-Stop AGM $0 $686 $1,063 $1,429 $1,749 $2,174 $2,629 $3,091 $3,506 $3,957 $4,445
Start-Stop Li-ion $0 $0 $4 $41 $37 $101 $470 $594 $920 $1,008 $1,022
Average Penetration
EV/PHEV Penetration 0.0% 0.1% 0.2% 0.3% 0.6% 0.9% 1.2% 1.6% 2.2% 2.5% 2.8%
Start-Stop AGM Penetration 6.5% 7.4% 11.1% 13.9% 15.5% 17.8% 20.8% 23.5% 25.1% 27.0% 29.2%
Start-Stop Li-ion Penetration 0.0% 0.0% 0.0% 0.1% 0.1% 0.3% 1.1% 1.4% 2.4% 2.7% 2.8%
Hybrid Penetration (excl. Li-ion) 1.5% 2.2% 2.7% 2.7% 2.8% 2.9% 3.1% 3.2% 3.4% 3.5%
Global Battery Supply Opportunity
($M)$36 $1,175 $1,983 $2,774 $4,847 $7,081 $8,895 $11,041 $14,278 $16,016 $17,573
Vehicle Sales; US, Europe, China
(M Units)47.5 48.4 49.7 51.3 54.3 56.7 58.0 59.4 61.3 63.2 64.9
47.5 48.4 49.7 51.354.3
56.7 58.0 59.4 61.363.2 64.9
7.4%
18%
29%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
(M U
nit
s)
EV/PHEV Start-Stop AGM Start-Stop Li-ionOther Gasoline EV/PHEV Penetration Start-Stop AGM PenetrationStart-Stop Li-ion Penetration
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Global Lead Acid Shipments
Source: FBR Research
Our separator model captures our vehicle shipment forecasts and expectations for consumer electronic demand. We arrive at global separator demand of 916 million square meters to 939 million square meters by 2015 and 1,729 million square meters to 1,976 million square meters by 2020.
We estimate that current industry capacity is about 1 billion square meters and excess capacity in the industry could be as high as 40%.
Based on our expectation for vehicle and consumer shipment growth through the end of this decade, we expect current industry capacity to meet demand expectations through 2016.
The rise of manufacturers such as Tesla should increase the amount of separator content in batteries, although we are using our Tesla shipment forecasts to calculate a blended mix for industry separators.
Global Separator Model—Base Case
Source: FBR Research
Global 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Total Shipments (M Units) 2012-2015 2012-2020Shipments - Total 390 409 423 438 452 464 475 485 496 507
OE - % chg 4.7% 5.3% 4.9% 4.3% 3.5% 3.5% 3.0% 3.0% 3.0%
Aft Mkt - % chg 5.0% 3.0% 3.0% 3.0% 2.5% 2.0% 2.0% 2.0% 2.0% 3.4% 2.7%
Total growth 4.9% 3.5% 3.4% 3.3% 2.7% 2.3% 2.2% 2.2% 2.2%
Shipment Breakdown (M Units)
Shipments -Flooded 386 404 412 423 431 437 443 447 451 455 2.1% 1.5%
% chg 4.7% 1.9% 2.6% 1.9% 1.4% 1.3% 1.0% 0.8% 0.9%
Shipments - AGM 4 5 11 15 21 27 32 38 45 52
% chg 33.3% 133.3% 31.3% 42.9% 28.6% 18.5% 18.8% 18.4% 15.6% 63.6% 34.7%
Market OpportunityUnit Pricing ($) $50 $51 $51 $52 $52 $53 $53 $54 $54 $55
% chg 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.2% 1.2%
Mkt Size - Flooded ($B) $19 $20 $21 $22 $22 $23 $24 $24 $24 $25
CAGR
AGM Shipments
Impact from AGM Growth
Flooded Shipments
Total Battery Shipments
Separator Demand (Million Sq. M.)
EV/PHEV 62 72 142 234 307 412 561 628 695 38.3%
EV % of Total 10% 11% 18% 26% 29% 34% 39% 40% 40%
Hybrids 112 119 126 133 141 153 166 179 191 7.1%
Hybrids % of Total 19% 18% 16% 15% 13% 13% 12% 11% 11%
Consumer Electronics/Other 416 461 509 548 598 650 706 770 842 9.0%
CE/Other % of Total 71% 71% 66% 60% 57% 53% 49% 49% 49%
Total 590 652 776 916 1,046 1,214 1,434 1,578 1,729 15.0%
% Change 24% 11% 19% 18% 14% 16% 18% 10% 10%
Revenue Opportunity ($M)
EV/PHEV Industry $116 $128 $241 $365 $441 $544 $682 $702 $715 27.9%
Hybrids Industry $185 $186 $187 $190 $194 $204 $215 $226 $235 3.4%
Consumer Electronics Industry $728 $767 $803 $823 $852 $879 $909 $941 $978 3.5%
Total $1,029 $1,081 $1,231 $1,378 $1,487 $1,627 $1,805 $1,869 $1,928 8.6%% Change 15% 5% 14% 12% 8% 9% 11% 4% 3%
2017E 2018E 2019E 2020E2012 2013E 2014E 2015E 2016ECAGR
2013E-2020EGlobal Li-ion Separator Sales
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Global Separator Model—Upside Case
Source: FBR Research
We arrive at two earnings scenarios for Polypore:
In our base case, we expect revenues of $239 million by 2015 and $312 million by 2017.
In our upside case, we expect revenues of $276 million by 2015 and $391 million by 2017.
Global Polypore Lithium-Ion Revenue Opportunity—Base Case
Source: FBR Research and company documents
Separator Demand (Million Sq. M.)
EV/PHEV 62 72 142 234 307 412 561 628 695 38.3%
EV % of total 10% 11% 18% 25% 28% 32% 36% 36% 35%
Hybrids 112 119 126 133 141 153 166 179 191 7.1%
Hybrids % of total 19% 18% 16% 14% 13% 12% 11% 10% 10%
Consumer Electronics / Other 416 461 510 572 652 738 840 954 1089 13.1%
CE/Other % of total 71% 71% 66% 61% 59% 57% 54% 54% 55%
Total 590 651 778 939 1,100 1,303 1,567 1,761 1,976 17.2%
% chg 24% 10% 19% 21% 17% 18% 20% 12% 12%
Revenue Opportunity ($M)
EV/PHEV Industry $116 $128 $241 $365 $441 $544 $682 $702 $715 27.9%
Hybrids Industry $185 $186 $187 $190 $194 $204 $215 $226 $235 3.4%
Consumer Electronics Industry $728 $765 $805 $857 $929 $999 $1,080 $1,166 $1,264 7.4%
Total $1,029 $1,080 $1,233 $1,413 $1,563 $1,747 $1,977 $2,094 $2,215 10.8%% chg 15% 5% 14% 15% 11% 12% 13% 6% 6%
CAGR
2013E-2020EGlobal Li-Ion Separator Sales 2017E 2018E 2019E 2020E2012 2013E 2014E 2015E 2016E
Polypore 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECAGR 2013E-
2020E
EV/PHEV Market Share 40% 38% 35% 34% 32% 32% 32% 32% 32%
Hybrid Market Share 17% 16% 16% 16% 16% 16% 16% 16% 16%
Consumer Electronics Market Share 9% 8% 9% 10% 12% 12% 12% 12% 12%
EV/PHEV Demand (Million Sq. M.) 25 27 50 80 98 132 180 201 223
Hybrid Market Demand (Million Sq. M.) 19 19 20 21 23 24 27 29 31 7.1%
Consumer Electronics Market Demand (Million Sq. M.) 37 37 46 56 72 78 85 92 101 15.5%
EV/PHEV Revenue ($M) 46 49 84 124 141 174 218 225 229
Hybrid Market Revenue ($M) 31 30 30 30 31 33 34 36 38 3.4%
Consumer Electronics Market Revenue ($M) 65 61 72 85 102 106 109 113 117 9.7%
Polypore Lithium-Ion Separator Revenue ($M) $143 $140 $186 $239 $274 $312 $362 $374 $384 15.5%
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Polypore Earnings Summary—Base Case
Source: FBR Research
Global Polypore Lithium-Ion Revenue Opportunity—Upside Case
Source: FBR Research and company documents
Polypore Earnings Summary—Upside
Source: FBR Research
2013E 2014E 2015E 2016E 2017E
Lithium-Ion Separator Revenues ($ in Millions)
Industry Revenue EV/PHEV 314 428 556 635 748
Industry Revenue Consumer 767 803 823 852 879
Polypore EV/PHEV Revenue 75 112 154 172 206
Polypore Consumer Electronics Revenue 56 72 85 102 106
Blended Market Share 13% 15% 17% 18% 19%
Lead Acid Revenue 317 338 355 369 384
HC/Industrial 193 201 212 216 227
Total Revenue 641 723 806 859 923
Net Income 44 70 97 117 140
Basic EPS $1.17 $1.47 $2.04 $2.45 $2.90
Polypore 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECAGR
2013E-
2020EEV/PHEV Market Share 40% 38% 38% 38% 38% 38% 38% 38% 38%
Hybrid Market Share 17% 16% 16% 18% 20% 22% 22% 22% 22%
Consumer Electronics Market Share 9% 8% 10% 12% 14% 14% 14% 14% 14%
EV/PHEV Demand (Million Sq. M.) 25 27 54 89 117 156 213 239 264
Hybrid Market Demand (Million Sq. M.) 19 19 20 24 28 34 37 39 42 12.0%
Consumer Electronics Market Demand (Million Sq. M.) 37 37 51 69 91 103 118 134 152 22.5%
EV/PHEV Revenue ($M) 46 49 91 139 167 207 259 267 272
Hybrid Market Revenue ($M) 31 30 30 34 39 45 47 50 52 8.2%
Consumer Electronics Market Revenue ($M) 65 61 81 103 130 140 151 163 177 16.4%
Polypore Lithium-Ion Separator Revenue ($M) $143 $140 $202 $276 $336 $391 $458 $480 $501 11.7%
2013E 2014E 2015E 2016E 2017E
Lithium-Ion Separator Revenues ($ in Millions)
Industry Revenue EV/PHEV 428 556 635 748 897
Industry Revenue Consumer 765 805 857 929 999
Polypore EV/PHEV Revenue 78 121 173 206 252
Polypore Consumer Electronics Revenue 61 81 103 130 140
Blended Market Share 12% 15% 18% 20% 21%
Lead Acid Revenue 317 333 349 363 377
HC/Industrial 193 201 212 216 227
Total Revenue 650 736 837 915 996
Net Income 46 61 109 144 170
Basic EPS $1.22 $1.28 $2.30 $2.99 $3.50
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Risks Increased competition in lithium separators from large players in Asia. The lithium separator industry is highly concentrated, and Polypore competes with a number of large Asian players, which have meaningfully greater financial resources than Polypore. Increased competition from these Asian companies either in terms of new product development or price competition could have a negative impact on Polypore’s earnings.
Continued pricing pressure and high levels of industry competition in the consumer electronics segment from Asian companies. The consumer electronics lithium separator industry is highly competitive, with a number of smaller Asian players in the market. Unlike the electric vehicle market, the requirements for product quality and longevity are much lower, and Polypore is more susceptible to market competition. Polypore’s dry separator process, while a large competitive advantage in the electric vehicle market, could somewhat limit participation in certain segments of the consumer electronics supply chain.
Product recalls and warranty issues, especially in the automotive segment. Automotive separators are expected to deliver performance in a harsh operating environment for about seven to 10 years versus two to four years for typical consumer electronic applications. Any increased level of warranty claims in the automotive segment could have a negative impact on Polypore’s profitability.
Changes in overall penetration of EV/PHEVs and hybrids in the marketplace. Growth in demand for lithium-ion separators heavily depends on sales of electric/plug-in hybrid vehicles. Weaker-than-expected sales of these vehicles could result in lower demand for separators and, in turn, for Polypore’s products.
Company Profile Polypore International, Inc., headquartered in Charlotte, North Carolina, is a global manufacturer and developer of microporous membranes, with locations in the U.S., Asia, Europe, and South America, and it is the only company in the world focused exclusively on this product. Polypore has four key businesses: energy storage for electronics, energy storage for transportation and industrial applications, separations media used in healthcare, and separations media used in industrial and specialty filtration applications. Many of the membranes that Polypore develops are used frequently in batteries, especially lithium-ion batteries found in consumer electronics and electric vehicles.
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Income Statement—Polypore International, Inc. (PPO) $ in Millions
Proprietary to FBR Capital Markets & Co. February 18, 2014 Aditya Satghare . 646.885.5472 . [email protected]
Source: Company documents and FBR Research
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