As you may already know, the world’s hippest electric car maker, Tesla (NASDAQ: TSLA), is about to broaden its revenue profile by building the world’s biggest rechargeable battery production facility.
The factory, whose exact location Tesla has yet to unveil, will cost between $3 and $5 billion, employ 6,500 people, and sprawl across 500 to 1,000 acres of land situated near highways and railways.
For the factory’s own power generation, there will be ample space for a few hundred megawatts of solar panels and some wind turbines.
It’s ambitious, to say the least.
Due to start production in 2020, the factory will be the world’s largest battery-making facility, with production peaking at 500,000 lithium-ion packs (the same number of cars Tesla aims to produce that same year) — more than the entire world’s current capacity.
In short, it’s a big deal. It will all but certainly disrupt lithium-ion battery pack prices globally.
But there is one small, crucial element to this project that you probably haven’t heard about yet — one company owns the intellectual property rights to the batteries Tesla will be churning out, and they will generate royalties on the same magnitude as the factory itself.
Increasing Flow of Royalties?
The company is called Polypore International Inc. (NYSE: PPO), and it could be a very efficient way of tapping into the profitability of this new factory without paying the premium price for Tesla’s stock… a stock that’s seen its share of bad days this year after the company reported a $49 million first-quarter loss.
Polypore, based in Charlotte, N.C., produces microporous membranes that are used in medical devices, electronic products, and even lawn and garden equipment.
Its Celgard division, however, produces the lithium battery separators found in consumer electronics and electric cars.
And here’s the really interesting part…
Sumitomo Corp. (OTC: SSUMY) supplies the separators that Panasonic uses to assemble cells for Tesla’s Model S sedan — and it pays an undisclosed amount in royalties to Polypore to use some of its lithium-ion separator intellectual properties.
Extrapolating from sales and other data, and including the increased potential from Telsa’s planned battery plant, analysts estimate that Polypore could be on the receiving end of a $20 million-plus royalty stream from Sumitomo’s more than $700 million in annual separator demand.
For a company currently valued at $1.3 billion, this boost in revenue could have seriously positive implications — especially given that the stock is still down 10% from 12-month highs.
Partnership?
However, there is another potential scenario here.
Given the importance of Polypore’s separators to the success of this multi-billion dollar project, it could be more likely that Tesla will sidestep the red tape and simply partner with the company.
The latest analyst predictions are saying that this is the most likely path for Tesla and Polypore — a prediction that caused a stir earlier this week, sending Polypore’s stock up 3.75% in early trading this Wednesday.
Although it’s not yet certain that a partnership is the way this will unfold, given the low cost of Polypore’s separators, the company’s positive reputation, and its status as the only lithium battery separator producer in the U.S. (where Tesla’s factory will be located), the chances are better than 50/50 that this is exactly how things will play out.
Such a deal could potentially double Polypore’s income, with revenue from Tesla accounting for half or even more than half of its total business.
Remember what I keep saying about predictable trends…
You don’t need to be especially clever or original to spot them. In fact, it’s probably better if you’re not too clever, because a predictable pattern is also an easily noticed one.
This is one of those patterns.
Tesla, a company that was virtually unknown to the public as recently as 2009, is today one of the world’s most famous brands.
The story of its stock’s meteoric rise (146% up from 12-month lows, even with the recent correction to below $200) parallels the rise of the company’s cars from automotive novelties to regular sights on public roads.
Don’t Beat Them… Buy The
However, as celebrity venture capitalist and founder Elon Musk has clearly realized, in order to take the next big step, Tesla needs to gain a stronger foothold in the industries crucial to producing its flagship products — just as John D. Rockefeller did when he bought up railroad lines to more efficiently transport his oil around the country.
Polypore occupies an enviable strategic position within this dynamic because either its lithium battery separators or the licenses to produce them are essential to Tesla’s ongoing growth.
And since it’s a relatively small company, this deal will wind up being that much bigger to shareholders.
Here’s the catch, though…
The day an announcement is made on the partnership will be a day too late to buy Polypore stock.
Once the news hits the wires, it will be old news. That’s just how the cookie crumbles when you’re not an insider.
However, before you call this one a gamble, just remember one thing: Polypore’s revenues will increase no matter what happens.
It’s just a question of how much.
To your wealth,
Brian Hicks
Check us out on YouTube!Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.
