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Quantum Technologies (NASDAQ: QTWW) shares are up nearly $2.30 since late January thanks in large part to record oil prices and the world's increasing focus on sustainable energy. Despite the recent run-up and massive increase in investor interest as of late, I'm still not a buyer at current levels.

Given the company's current fundamentals and the fact that the hydrogen movement - a key focus of QTWW - has yet to really gain momentum, I'm still viewing this as more of a story stock. A compelling story, sure. But still a story nonetheless and perhaps not quite a $3 story.

Simply put, this is the best, small cap growth story that I have come across in 2008. From the development of hydrogen combustion engines used in the next generation of alternatively fueled vehicles to 25% ownership of a major global solar module manufacturer, QTWW is a fully integrated alternative energy company.

As oil prices surge, the market has left no stone uncovered in its search for alternative energy plays and QTWW appears to be a favorite.

Quantum boasts a list of clients and partners that now includes: NASA, Shell, GM, DailmerChrysler, Toyota, BOSCH, and Lockheed Martin. With a strong focus on hydrogen power, QTWW is quickly gaining worldwide recognition for its ability to develop technologies that make hydrogen a more efficient alternative to current energy sources including oil.

Historically, storage problems have been the main roadblock preventing hydrogen power from being mass commercialized in transportation-related applications. From both an economical and safety perspective, the element brings with it a unique set of challenges in comparison to other fuel sources. Now partnered with Boeing and the U.S. Department of Energy to advance hydrogen storage capabilities, QTWW appears to be tackling the problem head on and helping make H a viable power source.

According to the Earth Policy Institute in Washington, DC "Photovoltaic production has been doubling every two years, increasing by an average of 48 percent each year since 2002, making it the world's fastest-growing energy technology".

In a move expected to yield $600 million in sales for both company's Quantum's 25%-owned German partner - Asola Advanced and Automotive Solar Systems GmbH - announced plans earlier this month to soon triple annual solar module manufacturing capacity to 45 MW (megawatts peak power). The agreement is already bearing fruit.

Last Tuesday, Asola announced a $17M contract from Sunworx GmbH. The $4.5M in revenues (25% of the deal) for QTWW could prove to be just the tip of the iceberg in regards to what the aforementioned relationship yields. Already benefiting greatly from an entrenched position in Germany - the world's fastest growing major PV market during 2006 and 2007, Asola is an ideal partner for QTWW as the company looks to diversify its alternative energy portfolio.

Financials are looking better as well. Here a few highlights for the company's third quarter filing:

* Total revenue in the third quarter of fiscal 2008 was $7.1 million compared to $2.3 million in the third quarter of fiscal 2007, a net increase of 209%.
* For the nine month period ended January 31, 2008, Company's consolidated revenues ($16.8M) were up 15% on from the corresponding period of 2007.
* Consolidated operating loss decreased from $5.8 million in the third quarter of fiscal 2007 to $3.8 million in the third quarter of fiscal 2008.
* Product sales for the Quantum Fuel Systems segment increased $1.7 million, or 213%, from $0.8 million in the third quarter of fiscal 2007 to $2.5 million in the third quarter of fiscal 2008.
* Product sales for the Quantum Fuel Systems segment increased $1.7 million, or 213%, from $0.8 million in the third quarter of fiscal 2007 to $2.5 million in the third quarter of fiscal 2008.
* Net loss decreased from $21.6 million, or $0.33 a share, in the third quarter of fiscal 2007 to $1.4 million, or $0.02 a share, in the third quarter of fiscal 2008.
* Net loss decreased from $124.3 million, or $2.05 a share, in the first nine months of fiscal 2007 to $80.3 million, or $1.06 a share, in the first nine months of fiscal 2008.

However, there are still a number of unfavorable factors associated with the company:

* The discontinued operations of the Tecstar Automotive Group business segment generated losses, net of tax effects, of $66.1 million in the first nine months of fiscal 2008.
* QTWW has stated that Future sales of substantial amounts of their common stock could affect its market price.
* The success of the business depends on the growth of hybrid and hydrogen based vehicles and the solar industry.
* Revenue is highly concentrated among a small number of customers.
* Negative EPS and P/E ratios, High P/B ratio vs. competition.
* QTWW may never be able to introduce commercially viable hydrogen products and hybrid propulsion systems.
* Long term solar cell purchasing agreement could result in higher than expected inventories and losses if market rates and demand drop.
* Documented history of operating losses and negative cash flow that may continue into the foreseeable future.
* Heavy reliance on GM partnership.

The company announced recently that it is conducting initial tests and trials on many aspects of its Fisker Karma (photo to left). The Karma is a plug-in hybrid that can travel 50 miles a day when charged every night and can reach top speeds of 125, continuously, in Sport Mode. The vehicle is being developed through a joint venture between Quantum and Fisker Automotive Inc.

With more than 80% of daily commuters traveling less than 50 miles a day, the Karma represents an ongoing fundamental shift in the auto industry towards Green vehicles and a major potential change for a U.S. economy currently plagued by exorbitant fuel prices, sky high inflation, and a volatile credit market.

While the $80K price tag may be a bit hard to swallow for many consumers, the concept behind the vehicle is not. With a life expectancy of 10 years and the ability to conceivably be refueled just once annually, the Karma is already gaining traction in the auto market, even prior to models becoming available.

From The Release: "Fisker Automotive is preparing to deliver its first Premium Edition vehicles by fourth quarter 2009. Currently, Fisker Automotive has received more than 500 orders for the Fisker Karma since its 2008 debut at the North American International Auto Show (NAIAS) in January. Fisker Automotive will reach a full production of 1,250 vehicles per month by the end of 2010. The starting estimated MSRP for the Fisker Karma will be approximately $80,000 or EURO 80,000"

I was reluctant to hit the buy button in both the $.70 and $1.30 ranges and given the company's laundry list of risk factors and potential need for financing going forward, I'm still staying away for now, but watching the story closely nonetheless.

Do I thihk QTWW has the makings of a great company? Yes. Do I think that is a great company today? No. QTWW just goes to show you that even in today's rough and tumble economy, there's still potential for a proverbial "5 bagger" in the sub-dollar range, even on less-than-stellar fundamentals. The market appears to be more than willing to pay for the potential here and some analysts have even set their 12-month price targets as high as $4.00. I however, am not.

Labels: QTWW, Quantum Technologies

Tuesday, June 03, 2008

Is The SmallCap Growth Story of 2008 Over?

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