More than a century ago, governments in the United States and Europe decided to pave over dirt roads. They knew that many citizens would soon be driving automobiles and would soon sour on bumpy, rutted dirt paths. Now, a similar move is afoot. A wide range of incentives are being enacted to enable a smooth transition to the age of the electric car. Luckily for patient investors, the companies that stand to benefit from the coming e-car revolution have already fallen out of favor, and their share prices stand near all-time lows.

Putting the Pieces in Place

A number of auto makers have announced plans to sell electric and hybrid cars and trucks that utilize lithium-ion batteries. Toyota’s (NYSE: TM) popular Prius uses older heavier battery packs, but many of the planned cars will have driving ranges of less than 100 miles. So consumers will need access to frequent and convenient recharging stations. The U.S. House and the Senate have released separate bills that would provide millions of dollars to a handful of select cities that install a network of charging stations. The regions chosen will likely be the first ones to see robust vehicle sales. Other countries are also building up infrastructure to support e-cars.

We’re closer than you think. Nissan will be selling its all-electric Leaf later this year. Ford Motor (NYSE: F) will be selling all-electric versions of its Focus and Transit Connect minivans next year, followed by an expected release of an all-electric Volvo in 2012. Lithium-ion batteries will also find their way into a wide range of hybrid vehicles over the next three years, although those cars and trucks will get their charge from an engine as well as a plug-in option.

As a brief technical background, a range of companies are developing lithium batteries, though some are pairing it with manganese, others with iron, and some with cobalt oxide. Each of those various chemistries has pros and cons in terms of power, durability, and discharge rates. Most battery packs weigh upwards of 600 pounds, so engineers are constantly seeking ways to boost power while cutting size and weight.

Horses in the Race

Investors can choose from four stocks that are ramping up their expertise and production capacity for lithium-ion batteries. A123 Systems (Nasdaq: AONE) is the most well-known as it had been the beneficiary of a highly-touted initial public offering (IPO) last September. Investors seemingly forgot that the industry is still evolving, and proceeded to dump shares once they realized that it will be several years before the company can grow large enough to generate profits. Shares now trade for less than one-third of the 52-week high.

But that selling may prove myopic. A123 Systems is expected to boost sales 50% next year to around $136 million, and more than double in 2012. Yet it’s fair to wonder if those targets can be met, considering the company has already had to lower guidance several times. A recently-announced expansion of a deal with Navistar (NYSE: NAV) could help. Navistar has developed a fully-electric truck that is suitable for package delivery firms and courier services, and will use AONE’s batteries. Heavy vehicles are especially suitable for electrification, as electric motors have a great deal of torque and do not strain under extreme load conditions.

A123’s rival, Ener1 (NYSE: HEV), is also making good strides, but has also seen its shares fall sharply from the 52-week high. The company has inked deals with Volvo and Norway’s THINK, and has also signed a far-reaching deal with China’s largest battery manufacturer. That deal could prove to be a king-maker. Analysts think China will be the largest market of electric cars, thanks to massive government support that aims to boost air quality and cut down on oil imports.

The deal with THINK will be seen as validation of Ener1’s technology. THINK has designed an all-electric car from the ground up, and has been building up a backlog of orders. Ener1 is building 25 battery packs per week (to support a backlog of 2,000 units), and expects to ramp up output to 900 packs per week by early next year. A recent $65 million capital injection is expected to lead to much higher manufacturing capacity in 2011, right at a time when many new electric cars are expected to hit the road.

Ener1 may also look to target the massive market for electric bikes. There are currently nearly 40 million electric bikes in China powered by heavy and inefficient nickel batteries. Lithium-ion powered bikes currently represent just 1% of that market, but could grow quickly as volumes ramp and costs come down.

Perhaps the safest way to pay the lithium-ion revolution is by investing in Polypore International (NYSE: PPO), which already has an extensive background in building separators that manage the flow of ions (a key consideration in light of the exploding lithium-ion battery packs of a few years ago). Polypore, along with a division of ExxonMobil (NYSE: XOM) and Japan’s Asahi Chemical, control 90% of the market, and all three should benefit from much higher demand for membranes used in lithium-ion batteries. Polypore’s membranes are believed to be used in upcoming electric vehicles from Nissan and Ford.

Share gains for Polypore will likely be more muted as its existing businesses are growing at a moderate pace, and 15% to 20% annual sales growth is probably the best investors can expect. That could lead to more robust profit gains, and shares could approach $30 by late next year if analysts are correct in their anticipation that per-share profits could rise to around $1.50 by 2012.

In a similar vein, investors may want to check out Johnson Controls (NYSE: JCI), which has a joint venture with battery maker Saft. The joint venture’s batteries are expected to be used in upcoming vehicles from Ford and BMW. But like Polypore, Johnson Controls is also involved in slower-growing more mature businesses, so its sales and profits won’t grow as fast as the lithium-ion auto market.

Action to Take –> Both A123 Systems and Ener1 are high-risk/high reward plays, though with shares close to their lows, much of that risk may already be in the stock. It will likely be a bumpy ride as this new market develops, but the potential upside is vast.