Hi, everyone,
A post-Comdex appraisal, for what it's worth (I feel I should spell out FWIW):
In a post of several months ago, I pointed out how the race between production and finances to the Jan 27 "deadline" caused the Valence stock to have a kind of wasting-asset quality. I pointed out the analogy with a stock option approaching expiration.
Now, much closer to the "deadline," and without the announcement of production and sales or even an acceptable product, I continue to see the appropriateness of the wasting-asset analogy. Assuming no good news in the meantime, we are hardly a month from when more and more stockholders will begin to edge toward the exit in hopes of avoiding a major sell-off just before and after Jan. 27. Until some announcement of a "material" nature, that reality and its implications cannot be evaded.
This gloomy assessment notwithstanding, I feel increasingly optimistic about Valence's prospects. It seems to me that the last two months have produced increasing evidence that Valence is closing fast on the finish line where it can announce production and orders. Given the silence of the company but for a few press releases and conference calls, the evidence is mostly tangential. Still, the evidence considered as a whole is encouraging. The evidence comes in a number of forms:
Product: Lev indicated satisfaction with the present product, even though he expected it to be technologically superceded relatively soon. I take this to mean the design specification of the current product is locked in. Also, rumors suggest that at least some OEM's already testing the pre-production samples are satisfied with them. We await an OEM to signal their own satisfaction with the final product, but Lev's satisfaction suggests that should be forthcoming. It seems unlikely that at this late stage Lev could be confused as to what the OEM's expected.
Production: Lev says there has been considerable progress in bringing up the first "line," and evidently expects it to be running in production mode by the time of the analysts' visit Dec. 3. He also indicated that the second line would be installed and running in pre-production mode by Dec. 3. I am less optimistic about the second line within this time frame since he indicated the line was still in Italy at the time of the last conference call, but I would expect it to be up and running soon thereafter. More important, we have heard of nothing going wrong with the startup of the lines, either from Lev or from rumors. Delays, yes; disasters, no. Delays finally come through, and it seems the serious delays are now past.
Sales: Lev indicated that he and his two assistants were a sufficient sales force for their purposes. I take this to mean that he felt that securing a few large orders was likely, and I have to think he had good reason for this opinion. He indicated that some 2 dozen OEM's had samples. Perhaps half have had samples for some months now, suggesting that it was reasonable to expect to land a few large orders sometime soon. Conversely, had he felt that orders would be small and difficult, then I presume he would have already staffed a larger sales force.
Staffing: The hiring in NI continues according to Lev, and the Belfast newspaper ads seem to confirm it. The appointment of Bert Roberts to the board is an unmitigated good. Rumor has a new CFO with strong credentials is in the wings.
Inventory: I suspect from Lev's comments that the batteries now being accumulated in the course of starting line 1 will qualify and be marketable product. If Valence has inventory, the ability to produce is confirmed, and potential customers should be reassured as to delivery. With inventory, orders will result in earlier delivery and revenue. Inventories are also costly. Pre-production battery expenses that can be recaptured through sales saves working capital.
Insider purchases: On the scale we have seen, an unambiguously good sign.
Insider sales: Rumors have ex-employees exercising options, although on a relatively small scale. This holds back the current stock price (for better or worse depending on perspective) and dilutes the stock a bit, but provides extra working capital. I think this is not too bad a source of (a little) financing when the alternatives are considered. We know the problems of the floorless convertible, and a secondary offering now would be expensive to the company and highly dilutive for the current shareholders. If these options can be postponed a few months, their terms may be far more favorable.
Dec. 3 analysts' visit: Commitment to this hard date indicates confidence in impressing the analysts.
Recent stock price action: There seems to be strength in the stock price in its move from the 4 to the 5 to the 7-8 area in hardly a month. A 50% rise in the stock price on rising average volume in so short a time suggests investor confidence. Hopefully "the market" is telegraphing something more than the temporary interest of traders.
Comdex: There are various claims by people to having seen Valence batteries in a variety of new OEM products at the Energizer/Eveready suite at Comdex. They are rumors, but are among the best kinds of rumors. The product may not be announced, but several independent sources claiming to have seen it is certainly good if they're right (and independent). My hunch is that they are right.
I think it is plausible to discount each of the above bits of evidence as insignificant, or optimistic spins on small things, or too dependent on unverifiable rumor. No doubt the company's finances remain a grave concern. I increasingly suspect, however, that such discounting will prove to be a kind of fallacy of composition. It looks at the parts without considering them in aggregate. It seems to me that the overall picture presented by all the evidence considered as a whole is one of an R&D firm moving rapidly through the last stage of R&D before transforming into a production firm with product to sell. The pieces of the puzzle seem to be falling into place quite rapidly now, which I take to mean the puzzle approaches completion.
Given this appraisal, I will now update my long post of early September when I talked of 25% likelihood of failure. I now think the likelihood of failure is closer to 5%. In that earlier post, I argued that Valence's destiny depended on two sets of things: those things Valence could affect or control (e.g., how quickly could the various production problems be ironed out), and those things that were beyond the control of Valence (e.g., customer needs, competition, the economy, acts of God, etc.). It seems to me that the evidence suggests that for the most part, Valence has successfully handled the thing subject to its control. Because I think those factors outside its control are relatively unlikely to prove harmful to Valence in the very near-term, I think we can upgrade the chances of Valence's success from 75 to 95%, or downgrade the chances of its failure from 25% to 5%.
If someone (Robert) wants to extend this to the expected values I posted at the end of the September post, I suggest increasing the "great" outcome by 5%, the "good" outcome by 10%, and the "decent" outcome by 5%. As time goes on without the arrival of a large new competitor, it seems to me that the likelihood of a "good" outcome rises relative to either the great or the decent outcomes. Regardless of how the weights are apportioned, however, the expected value of the stock will rise considerably if my assessment turns out right.
While mildly disappointed, then, that Comdex did not produce a nice surprise, I find myself increasingly optimistic about Valence. The accumulating evidence of the past 2 months has done that to me. I think we are going to avoid the death spiral even if some dilution occurs after Jan. 27. (I do presume a secondary offering will occur sometime this spring). Indeed, I think it increasingly likely that Christmas will be good this year.
Your humble optimist, lws |
