Hands-Down Gamble With FuelCell
Tuesday March 9, 1:18 pm ET
By Seth Jayson
Investing in the future requires a great degree of "intestinal fortitude," as our high-school gym teacher used to refer to it. Though FuelCell Energy (Nasdaq: FCEL - News) is taking baby steps forward, it takes gutsy investors to hang on to a firm with a market cap approaching $700 million and trailing sales of $37 million.
The company released first-quarter numbers today, and fans of simple investing metaphors will be happy to know that the glass is half empty and half full. On the full side, FuelCell made a smart move acquiring Global Thermoelectric, which expands the range of FuelCell's power technology. FuelCell continues to fill orders for interesting applications, including plants to power wastewater treatment facilities, which can run on the local methane. In other good news, fourth-quarter revenues were up 29% over the same period last year.
On the empty side: Half of revenue came in as a result of the recent acquisition. Without that increase, sales would have sagged 28%. The red ink at the bottom line totaled $0.59 per share, a bigger loss than last year's $0.41. However, management pointed out that, disregarding the November acquisition of Global Thermoelectric, the loss would have been a narrower $0.33 per share. (Of course, if acquisitions become a regular thing, investors might want to rewrite these as normal costs in their mental accounting.)
Of course, you can't sustain operating losses and buy complimentary companies without some cash or stock to swap, so FuelCell pulled a few million shares off the paper-towel dispenser (Remember that Simpson's Internet-stock bit?), diluting the existing share pool by 21%.
While fuel cell stocks are off their sky-high valuations at the turn of the millennium (what stocks aren't?), FuelCell is nearly a triple today off the one-year low. And there's plenty of competition, including other small outfits like Plug Power (Nasdaq: PLUG - News) and Ballard Power (Nasdaq: BLDP - News), though their recent results were nothing to write home about. Possibly more dangerous is the fact that the smell of money has awakened sleeping giants, among them Dow Chemical (NYSE: DOW - News) and General Motor (NYSE: GM - News).
Given the increasing competition and continued cash burn, FuelCell investors would be wise to view the stock as a calculated speculation and place their chips accordingly.
Plug Power Fizzles
By Brian Gorman
February 26, 2004
Investors continued to bid down shares of Plug Power (Nasdaq: PLUG) today, with shares off more than 9% on top of yesterday's 7% drop. The fuel-cell developer reported Wednesday that its revenues ran out of juice in the fourth quarter, declining to $3 million -- a 12% year-over-year drop.
Like the shares of competitors Ballard Power Systems (Nasdaq: BLDP) and FuelCell Energy (Nasdaq: FCEL), Plug Power's stock has had quite a ride over the years. After spiking to around $150 in 2000, the stock plummeted to about $3 in 2002, before bouncing back to its current level of around $7. It's clear that investors continue to wrestle with the proper valuation for this company. Its technology seems to hold promise, but its ultimate success is far from certain.
One of the more telling aspects of Plug Power's results was that while total revenues for full-year 2003 grew 6%, product and service revenue actually declined 20%. Increased research and development contract revenue from government partners and Honda Motor Co. (NYSE: HMC) made up the difference and accounted for the rise in the top line.
Plug Power's alliances are important for the company's long-term success. But the revenue mix suggests that the firm is becoming more reliant on alliance money, rather than moving toward greater independence and eventual profitability from increased product sales.
Plug Power also went to lengths to stress that it improved its cash position, and that it's reducing cash used in operating activities. While more cash is certainly good, and the firm should strive to operate as efficiently as possible, cutting back on operating expenses when sales are flagging seems odd. Of course, the market for fuel cells is still very limited, so any sales increase would be small and largely symbolic of future market share. Still, Plug Power needs to spend ample sums to stay visible and carve out as large a position as possible, so when fuel cells do take off, it can be a leader.
In fact, success in this industry will probably require lots of spending over many years. Plug Power currently has approximately 10 years' worth of cash based on its current burn rate, but even this may not be enough. Utilities don't appear ready to give up on the traditional power grid system anytime soon, and the rise of hybrid vehicles makes it likely that a true "hydrogen economy" is at least a decade, and probably two or more, away.
These factors, coupled with the emergence of automakers and other established firms as competitors, mean Plug Power and other fuel-cell outfits need to be big and cash-rich to survive and compete. Consolidation seems to be the best way to achieve these ends, and Plug Power took a stab at this by buying competitor H Power. Nonetheless, this sector seems ripe for more M&A.
By W.D. Crotty
February 17, 2004
Today's earnings report out of Ballard Power (Nasdaq: BLDP) did little to further hopes that fuel cell companies will soon recapture their past glory. Revenue decreased and net losses increased from last year's fourth quarter. The company also forecast declining revenue and increased cash consumption for 2004.
If there was a bright side to 2003, it's that Ballard shipped fuel cell engines to partners DaimlerChrysler (NYSE: DCX) and Ford (NYSE: F), and fuel cells to Honda (NYSE: HMC). It is that momentum that keeps investors interested.
The company also cut its cash burn to $39.9 million for the year -- a 66% decrease. Even with $278 million on the balance sheet, cash consumption will be closely watched because profitable fuel cell commercialization is still years away.
Meanwhile, the fervor over fuel cell stocks has flickered, and Ballard, a high-flier that peaked at $144.94 in March 2000, opened at $11.55 today. Even financial partners have lost their lust for fuel cells. Last March, FirstEnergy (NYSE: FE) exchanged its interest in Ballard's stationary power generator business for Ballard stock.
As Alyce Lomax reported last week, General Motors (NYSE: GM) is developing a stationary fuel cell to power a manufacturing plant. GM is also focusing on the transportation market that once powered Ballard's stock into the stratosphere. Clearly, Ballard has to contend with some big-name competition.
As it stands, Ballard owes its $1.3 billion market cap largely to the strength of its partnerships and its strong patent position. All the same, without profits on the horizon, waiting for Ballard to return to glory requires a leap of faith.
Dow and GM's Power Play
By Alyce Lomax
February 11, 2004
Ready to party like it's 1999? A news item hit the wires yesterday evening that might remind investors of a different place and time. Dow Chemical (NYSE: DOW) and General Motors (NYSE: GM) announced they'd joined forces to power a plant using fuel-cell technology. It's being touted as the largest commercial venture of its kind to date.
Conspicuously missing are the companies that were once the usual suspects in fuel cells -- names like FuelCell Energy (Nasdaq: FCEL) and Plug Power (Nasdaq: PLUG). While those stocks generated excitement several years ago, the possibility loomed that bigger companies with a financial incentive toward development would really make the sector move.
Through the deal, Dow provides the hydrogen -- a byproduct of its chemical plant -- while GM provides the fuel cells to generate electricity. The initial fuel cell will generate 75 kilowatts of power, which is enough to power up 50 homes. Going forward, the two companies plan to install 400 such fuel cells to generate 35 megawatts of electricity -- enough for 75,000 homes, or 2% of the energy needed to power Dow's Texas site.
The interest in fuel-cell technology should come as no surprise. The Bush administration's fiscal 2005 budget included more funds allocated to hydrogen fuel initiatives, in a nod to the idea of reducing the need for foreign oil.
It's important to GM, though, given the company's interest in developing fuel-cell technology for cars. Most of the big auto makers see the writing on the wall when it comes to the traditional internal combustion engines. Ford Motor (NYSE: F), Toyota Motor (NYSE: TM), and DaimlerChrysler (NYSE: DCX) are all working on using fuel cells in automobiles.
The deal is expected to bring the cost of fuel cells down, as GM tries to reach its goal of producing such a car by 2010. However, as W.D. Crotty said recently, GM's work in fuel cells and hybrids may be interesting to follow, but won't garner much of a financial benefit for a long time to come.
In other words, while building for the future is always smart, the future isn't now, yet. We may all see the "hydrogen economy" in our lifetimes, but there's still plenty of time to watch the space.
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