A Maker of Tiny Earbud Batteries Gains 250%, Beating Everyone in Germany

(Bloomberg) --

In a small industrial zone in the town of Ellwangen in southern Germany, abandoned warehouses are awaiting demolition. Yet just around the corner is the home of what is currently the nation’s hottest stock.

Beyond a building with boarded windows is the main office of Varta AG, one of Germany’s oldest and best-known companies, whose microbatteries power some of the most sought-after gadgets in consumer electronics. The shares returned 250% this year, making them the best performer on any of the major German indexes and one of the best stock-market launches in a decade.

Varta’s high-capacity, miniature batteries have made the company the global leader in powering hearing aids, a fast-growing market benefiting from favorable demographics. At the same time, demand is soaring for earbuds, the type of wireless headphones made popular by Apple Inc. as “AirPods.” Varta’s size advantage –- its latest models are half the diameter of a dime –- have prompted most leading manufacturers to enlist the company as supplier.

A Maker of Tiny Earbud Batteries Gains 250%, Beating Everyone in Germany

The boom means the company’s headset battery business will grow more than twice as fast as the underlying market in 2019, which is set to expand at an annual rate of 30% in coming years, Chief Executive Officer Herbert Schein said in an interview.

While Varta lists headset makers from Samsung Electronics Co. to Sony Corp. as customers, the CEO avoids mentioning Apple, which holds about 60% of that market.

A Maker of Tiny Earbud Batteries Gains 250%, Beating Everyone in Germany

This is due to Apple’s preference for keeping the identity of its suppliers secret, according to analysts. The release of its next AirPods is the reason behind Varta announcing production capacity hikes twice this year to 150 million cells by 2022, according to Robert-Jan van der Horst at MM Warburg.

“Their massive expansion is a strong indicator that the company has already won Apple as a client,” van der Horst said. Varta -- which publishes its latest results on Tuesday -- currently has a significant edge over its competitors in terms of product performance, he added.

Company History

Founded in 1887 in Hagen by Adolf Mueller
Powered German submarines in both world wars and Neil Armstrong’s camera on the moon
Part of portfolio of companies Harald Quandt, a stepson of Joseph Goebbels and father of BMW AG heirs Stefan Quandt and Susanne Klatten, inherited in 1954
Sells industrial and car batteries unit in 1990s due to competition and cost pressure
Deutsche Bank buys company in 2000, retains only micro batteries business
Sold to Montana Tech Components in 2007, a holding company owned by Austrian entrepreneur Michael Tojner, who sells shares to the public in 2017
Varta this year acquires European consumer battery business from Energizer Holdings Inc.

Apple declined to comment. Varta climbed as much as 4.6% in Frankfurt trading, the second-best performance in Germany’s SDAX index for small stocks. The shares were up 4.4% at 12:05 p.m.

On the downside, MainFirst Bank’s Florian Martin Pfeilschifter said Varta’s lingering capacity limitations are a bottleneck that is forcing the industry to slow product rollouts.

Apple alone will need 120 million headset batteries next year, more than Varta’s entire production, so the U.S. company will likely continue to sell its current model, alongside a new top variant, Pfeilschifter said.

A Maker of Tiny Earbud Batteries Gains 250%, Beating Everyone in Germany

Beaming with pride as he showed off the company’s production halls buzzing with robots, CEO Schein said Varta will this year introduce batteries with 20% more energy than current models, and its existing technology will allow for another 50% hike.

Varta produces its headset microbatteries only in Germany, safeguarding its know-how from rivals in China and Korea, with automation making up for the country’s relatively steep wages, added the 54-year-old engineer.

Expensive Stock

The company’s success stems from innovations in battery chemistry and construction as well as precision in production technology. Machines squeeze as much as 3 meters (10 feet) of foils into miniature cases before medical needles inject the necessary liquids.

A Maker of Tiny Earbud Batteries Gains 250%, Beating Everyone in Germany

To be sure, Varta is among Germany’s most expensive stocks, priced at more than nine times book value, and almost 12 times sales. Its price-earnings ratio of about 112 is one of the highest in Germany, about the same as Bayer AG. The drugmaker in 2018 earned as much operating profit in three days as Varta did in the entire year.

Analysts’ expectations for revenue top company guidance for this year, meaning Varta cannot afford to slip up. Principle shareholder Tojner in 2017 said he sees Varta’s sales rising to 1 billion euros ($1.1 billion) within five to 10 years. Sales were around 270 million euros in 2018.

A Maker of Tiny Earbud Batteries Gains 250%, Beating Everyone in Germany

“There are only a few other investment cases in Germany with the same prospects of explosive growth over the next 18 months,” said Commerzbank AG analyst Stephan Klepp. ​“Even though the share price tripled in 2019, the story is only starting. If you owned just one German mid-cap stock, it better be Varta.”

©2019 Bloomberg L.P.

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