Maxwell Technologies Inc.’s (MXWL) steadily rising revenue and improving cost structure is in-line with our expectation of break-even in the final quarter of fiscal 2009. Maxwell Technologies develops, manufactures and markets energy storage and power delivery products for transportation, industrial telecommunications and other applications and microelectronic products for space and satellite applications.

However, its future performance will improve mainly through strong ultracapacitor sales growth. The company generates a significant portion of its revenue from ultracapacitors (43% in the first half of fiscal 2009). In the recently concluded second quarter of fiscal 2009, ultracapacitor sales grew 58% year over year, compared to 34% growth overall. Maxwell’s cost structure will also improve due to its gradual shift of production to China.

We are bullish on Maxwell’s ultracapacitor-driven growth story, as demand is expected to rise since key end-markets appear likely to benefit from the government stimulus programs as well as more stringent automotive emissions legislation. The European Union has taken the lead in enacting legislation requiring carbon dioxide emission reduction targets and leveling penalties for vehicles whose emissions exceed the mandated limit.

In the U.S. the Obama Administration is focused on increasing federal investments in greener transportation technologies, and the Chinese government is funding development and production of hybrid and electric public transit vehicles.

Maxwell’s geographically diversified ultracapacitor sales will benefit immensely through steady demand from heavy transportation, wind, braking recuperation and automotive programs.

In the near-term, however, the rate of penetration of ultracapacitor technology into broader markets, higher cost structure for ultracapacitor production and earnings dilutive issuances present downside potential. We maintain a market Neutral recommendation on the shares.
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