AENG Cliff notes through 6/22/1998: Part 1 An annotated summary of all the posts that matter.
In an effort to help newcomers understand the AENG, our diligent and indefatigable analyst, Oddjob has prepared the following synopsis which summarizes the SI posts worth reviewing.
While Advanced Engine Technologies, Inc. (AENG) touts its miracle
"little engine that could," all other indicators point to an engine that
simply "can't." Shareholders should beware of this stock, as red flags
emblazon this path. As the company makes sanguine claims about its new
OX-2 engine, discrepancies continue to surface daily.
Most notable among
the sources of these inconsistencies include information from AENG's own web
site, and from Greg Cummings (originator of SI thread for AENG). [For
readers unfamiliar with the information that has been shared on this thread
since its inception in February, this article will serve as a comprehensive
update, also featuring additional links to the info. cited. The relevant
disputes posted about the engine are summarized, minus the hostile personal
attacks from both long and shorts]
Discrepancies regarding patent issuance, pending contracts, and
independent testing have caused much confusion for shareholders. The
question of whether AENG is just another pump and dump scam has also arisen
due to concern regarding the high volumes of insiders selling, and Patterson
Travis' (TRAV) credibility as the primary market maker pumping this stock. As
AENG's stock price soared based on hype and unsupported by any financials,
one reporter published a thorough (albeit negative) story, only to have his
piece dismissed as "poor journalism" by Cummings and his fellow AENG
cheerleaders. Although little technical data is available about how this
engine actually functions, the sparse information that is available points
to numerous problems in the engineering.
ERRATIC BEHAVIOR OF THE STOCK
It would be highly unusual to see in a stable, legitimate company the kind
of movement that has been seen with AENG's stock. Between February and
early May, the price of the stock remained steady at roughly $7. [See
stocksite.com
For the Java Price Graph for AENG, Enter AENG in the box, and Select "Java
Price Graph"]
Then suddenly, volume traded seems to rise exponentially overnight. Note
that while AENG traded as high as 29 ¬ on volume of 565,600 (on May
20, 1998 under "Historical Prices" of this site), currently no information
detailing Financials, Earnings Estimates, or a proper printed research report was available.
This increase can only logically be due to insider hype, since no news releases or
financial data about the company were published at this time.
At one point when stock volume is soaring due to Cummings' pumping it up, he
explains the rise: "There's no news out of AENG, just investors realizing
the potential of the OX2 engine."
(http://www2.techstocks.com/~wsapi/investor/reply-4392530)
Additionally suspicious, the day Greg Cummings first announces that the
University of Washington will do the independent tests for the OX2 (Friday,
May 15, 1995) exactly corresponds to the Friday before the stock jumps up
nearly $13 in value over the weekend to its opening price Monday.
DISCREPANCIES IN AENG'S CLAIMS
Aside from the questionable movement of its stock, AENG has several other
red flags surrounding the company. On several occasions, AENG has been
found to have false information on its website. Of course, these mistakes
are labeled as "typos" when brought to the attention of Greg Cummings. Such
"typos" include trying to pass the stock off as a NASDAQ stock.
Furthermore, AENG diverts attention away from the fact that it lacks any
financial reports supporting its inflated market cap by calling attention to
the list of companies to which it has given demonstrations. Since no
independent tests have been conducted on the OX-2 engine, AENG tries to
validate the engine's performance based on the companies on its demo list,
but the fact of the matter is that DEMONSTRATION DOES NOT EQUAL
ENDORSEMENT.
The company also misguides investors by offering EXTRAPOLATED
data from its tests on the engine, instead of actual measured data. Another
point of caution is AENG's strategy for making its engine profitable. AENG
does not plan to manufacture the engine, but rather collect licensing
royalties. The problem with this plan is that when AND IF the engine
reaches the manufacturing stage, royalties collected with likely be small
(depending on the engine's application, still unknown) and at least twenty
to thirty years from now (based on comparable companies' time to market)
To read a more in depth description of these problems, see the following
list of internet addresses.
1) AENG claims to be negotiating deals, but where is this evidenced? Greg
Cummings, posting #78,
www2.techstocks.com
"AENG is not a R&D company. They're not a manufacturer. Their hope isn't to
"someday" have an engine to sell to the public. THEY HAVE THE ENGINE ALREADY
DEVELOPED AND THEY'RE NEGOTIATING DEALS." The fact is that AENG has not
signed a single contract with any of the companies it's given a demo to.
AENG's website boasts OX2's phenomenal success on performance tests, but
none of tests have been done by independent companies. Greg Cummings'
feeble response to this:
2) (Greg Cummings, #78,
www2.techstocks.com
"Regarding the need for independent testing of the OX2. Go back and look at
the list of companies where AENG has demonstrated their engine. These are
some of the sharpest minds in the ENGINE WORLD. Don't you think they could
spot a fraud or do you assume it's easy to deceive NASA, the DOD,
Caterpillar, Mercury Marine, Outboard Marine, Briggs and Stratton, Unique
Mobility, Carroll Shelby, Holly Hendrich, Bobby Allison, Bob Teague and
Eddie Lawson? Did these guys just graduate from high school engineering
class? Do we need to find someone really impressive to show the engine too?
GIVE ME A BREAK!! These guys could spot a fraud from a mile away."
AENG attempts to validate engine's credibility based on reputable companies
on its demo list. However, note that most of these companies are often very
willing to watch demonstrations of new products, but that does not mean they
will sign contracts to manufacture anything. The posting above implies
support from NASA, but Sword, employed by NASA, responds:
2b) (Sword, #85, www2.techstocks.com
"NASA never has and never will give product endorsements. Further, any use
of the NASA name or logo is illegal without prior authorization. AET may
have given a product "demonstration" to Lewis Research Center. NASA centers
are often asked by industry vendors for permission to give demos. This never
implies endorsement. It is unlikely that any NASA engine dynamometer was
used for the demo, but I will investigate this with my contacts at Lewis.
Any test or demonstration that used AET equipment and not independent test
equipment is useless because it is easily rigged to give whatever results
the demonstrator wishes. It could easily be fraudulent, not only at the
Lewis site but at any other site as well."
Sword makes the point that the list of companies on AENG's demo list say
nothing about the engine's validity.
2c) (Sword, #87 www2.techstocks.com
"I believe the list. It proves nothing. If I have a product, I can call
innumerable companies and ask to come in and demo it. A couple of engineers
from the marketing or engineering departments will attend and look it over.
If it is a scam, they'll say, 'Thank you very much. If we have any further
interest, we'll call you. Bye.' What does that prove? And why would any of
these companies waste their time publishing disclaimers? AET hasn't lied
about giving the demos. It just doesn't prove a single thing about their
product. There are NO endorsements! Just demos. There are no independent
tests!"
AENG provides very misleading information about the engine's performance.
The company compares EXTRAPOLATED DATA from its engine to ACTUAL data from a
Chevy engine. This "apples and oranges" comparison yields misleading results.
3) (wireless wonk, #304
www2.techstocks.com
". with the comparison to the 350 cu Chevy V8, I note that the graphs on the
web site specifically state "RPM (2000 thru 3000 projected Torque and HP
Values)" for the OX2. In contrast, the Chevy graphs start at 2000 RPM. This
is an apples to oranges comparison and cannot be characterized in any way
other than misleading. Moreover, the graphs for the OX2 extrapolated a
linear increase in torque, yet using the graph and the Shelby press release,
the increase is clearly not linear. (the Shelby release said 170 torque at
1250 RPM). Therefore, assuming the 1000 and 1500 RPM points on the graph are
measured values, then the increase in torque from 1000-1250 was 37, and the
increase from 1250-1500 is only 30 ft lbs of torque. That ain't linear,
torque is falling rapidly. Now extrapolating to higher RPMS, there is no
comparison to a 350 cu in V8."
3b) (from wireless wonk, #631,
www2.techstocks.com
"the torque and horsepower graphs comparing the engine to a 350 V8 is
misleading due to the extrapolation of the curves,,, a reputable
professional engineer would not dare to present the information in such a
fashion."
AENG wants to sell royalties to the Big Three automobile makers, not
manufacture engine itself. It will be a LONG TIME before shareholders see
profits, if they ever do.
4) (from wireless wonk, #304,
www2.techstocks.com
"According to the web site, the company intends to be a pure royalty
collection shop. No great need for significant additional infusions of
capital which could, in theory, be impacted by a languishing stock price
caused by short selling")
4b) (from Sword, #672
www2.techstocks.com
"Unless the patent is considered "fundamental technology" they are unlikely
to license it but instead implement an improvement that gets around the
secondary patent claims. As far as I can see, AENG owns no fundamental
patent on this engine." . "Development of a new engine for the commercial
market would entail over $500 Million in capital investment. Costs would
include engineering preliminary design (sorry, it hasn't been done yet with
this prototype), dynamic analysis, stress analysis, failure analysis, detail
design, fabrication and test of a large number of prototypes, manufacturing
tooling, vendor contracts, and a huge dollar investment in a fab and
assembly line. This engine is at least 5 years from the stage at which the
first engines would be installed in a vehicle sold commercially."
It will be a long time before AENG will get royalty income. Assuming AENG
will be able to take its engine to market after completing a similar path as
Orbital Engine (OE), it will be decades before shareholders can see profits.
5) (Sword, #713 www2.techstocks.com
"It's interesting to note that OE's engine is just now starting to roll in
royalties -- over 17 years after the first prototypes were built and tested.
In addition, the plant costs mentioned in the article
[http://www2.techstocks.com/~wsapi/investor/reply-4831840] for the engine
fab is $750 Million...not too far off from the 1/2 billion I guessed at in
my earlier post. Also, Ford and GM decided to drop the engine for domestic
production. Let's say that the AENG team is twice as smart and fast as the
OE team. Then we won't see much in the way of royality income for 8 or 9
years."
5b) (Goldfinger, #900, www2.techstocks.com
"'Info from a press release about a comparable co., Orbital Engine Corp.:
"Matthew Smith, Analyst with CIBC Wood Gundy in Australia said that
"Potential royalties to Orbital from Daimler Benz' annual production of
500,000 cars would be about $US 20 million, based on an estimated rate of
$40 per engine.' Peter Hatfull, Orbital CFO of OE said: "The automotive
industry are saying this is going to be the next step for engines. We've
been the world leaders for 25 years" Lets see 25 years, $238 M market cap. Vast amounts of invested capital ($US 99M=A$161.7M) and cumulative losses to date of $US 71 M with a current book
(that's total equity, Greg) of $US 83M. So what we have here in Orbital
Engine is a company that is coming into its own after 25 years that might be
profitable for the first time. It has chewed through just shy of $100 M in
capital to get where it is over 25 years. It has a US market cap of $238 M,
so that's a price to book of 2.9X. They've got cash of $US 15. So that's a
price to cash of 16X. So where are we with AENG? Total Valuation of $375 M
(more than a not really comparable Orbital Engine that has spent 25 years to
get where it is today?) Price to cash of >375X (since Murray raised $1 M
earlier, but the Winnebago doesn't get very good gas mileage). Price to book
of >375X or more. So on a comparable ratio basis; AENG has a price to book
multiple of 129X that of OE? Gimme a break."
Justification for comparing AENG to OE:
5c) (Sword, #719, www2.techstocks.com
"A very common practice in R&D is to benchmark performance. To do this, one
finds similar products and then makes comparisons to those products in a
defined set of parameters. These parameters can range from engineering
variables to financial indicators."
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