Why Plug Power Could Charge Up Your Portfolio
Oct. 25, 2014 10:35 PM ET | About: Plug Power, Inc. (PLUG)
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PLUG over the next 72 hours. (More...)
Summary
Coverage of Plug Power has been limited of late and after driving by the company's home base I felt compelled to opine.
Have you missed the boat?
Why the stock might just be a real investment.
What will make or break the company to close out the year.
I recently closed on a home at a real estate office located about 100 yards from the headquarters of Plug Power (NASDAQ:PLUG) in Latham, NY. It got me thinking that it was probably time to write about this company in depth, as it has been relatively quiet of late in terms of coverage. Each time I pass Plug's HQ, I always think of the times I didn't get into the stock and wish that I did. Remember this time a year ago when it could have been had for less than pocket change? A question many have asked is "have I missed the opportunity." In part, yes. The exponential gains are over. But in this article I will discuss why the stock can still be invested in. The stock is shifting from a trader's momentum stock to an actual long-term investment. I think there is still significant upside potential in the name.
Now I know, the company was terribly run for a decade. I don't need to be reminded of that. But companies can and do change. It had a long history of high expectations and subsequent disappointment for investors. It has made many traders rich, and has clobbered others who bought into the 'technology of the future' over a decade ago. The stock has always been about timing, relative to growing profitable companies. Although you may have missed the big move, I think after a huge pullback from over $10, the fundamentals are in place to make a profitable investment here.
For my followers who are totally unaware of this company, you should know that Plug works primarily on alternative energy technology. For the most part the business focuses on designing, developing, manufacturing and the sales of fuel cell systems for machinery. The primary technology it is involved in working on is known as the proton exchange membrane fuel cell and fuel processing technologies. It also employs technology to produce fuel cell and battery hybrids. More on the proton exchange membrane can be read here. All you really need to know is that basically a fuel cell combines hydrogen and oxygen to produce electricity and heat without combustion and exhaust. It's pretty eco-friendly and efficient. But how is it employed?
The GenDrive System
Okay, this may be a review for some of the Plug experts out there, but it needs to be discussed. The GenDrive system is the company's leading candidate for future profitability. There are numerous benefits to the system. One huge issue is that traditional battery life for machinery is really short. Batteries can't keep up with the demand for usage and often die, need to be removed, charged up and replaced with a fresh battery. This can severely limit industrial productivity. This is where GenDrive fuel cells have an advantage. The GenDrive batteries can provide continuous power at all times, running superior to a lead-acid battery even in environments as low as -22°F. GenDrive-powered lift trucks continuously run at full speed and never require changing. Truck operators can conveniently refuel the units themselves at compact hydrogen fueling stations set in strategic locations on the floor of production facilities in a process that takes under two minutes. This allows more goods to be moved and production to be consistent. This is why orders have exponentially grown this year.
GenDrive is advantageous over regular battery systems. Battery-powered lift trucks lose speed over the last half of the battery charge, which also limits productivity. GenDrive fuel cells maintain constant power at all times, keeping the vehicle running at full speed throughout an entire shift. This is what is the key for potential customers. While there is a large upfront cost, the potential customer can make up for the loss with increased output. Just think, the GenDrive solution eliminates the need to change, charge and manage batteries. That saves time. The units run longer than lead-acid batteries and can be fueled in as little as 90 seconds, substantially reducing vehicle and personnel downtime. Less downtime = More work time. It also should be noted that the GenDrive fuel cell solution produces zero harmful emissions and eliminates the costs associated with handling and storing toxic materials. Compact fueling stations replace large battery charging rooms, freeing up valuable warehouse space for other purposes. The need for high-cost electricity is eliminated, as battery charging racks are no longer needed. It's a long-term win for customers.
So is there actually a market here?
For a long time the answer was no, there really was no market. But that all changed over the last few quarters. Plug Power sells its products globally, but mostly in the United States. The company has a diverse customer base of large corporations, smaller businesses and government agencies. In recent quarters, the company has really stepped up. Plug has received orders from Mercedes Benz, Lowe's (NYSE:LOW), Wal-Mart (NYSE:WMT), Proctor and Gamble (NYSE:PG), Coca-Cola (NYSE:KO), and BMW. Those are some huge names. The company is rapidly expanding this customer base. Every single quarter, Plug is proving the bears wrong. The bears still act like this company is worthless and will never turn a profit. History is on their side, but I suspect the future is not. Back in 2009, the company thought it would be profitable in 2012. The bears won when Plug failed to get there. However, it took until 2014 to really start making things happen, and that's why the stock could be an investment after a pullback to its current $4.00 level. Plug has historically had issues with finances and had nearly gone bankrupt, but has managed to pull through. Plug Power is still not exactly profitable, but this is likely to change. And the data support the bulls.
To the data
There really is no way to spin this negatively. Plug's 2014 has been outstanding and the most recent sales numbers are beyond impressive. The company shipped 857 GenDrive units in its third quarter. Why is this impressive? Because in 2013 in the comparable quarter Plug shipped 155 GenDrive units. This translates to a 453% year-over-year increase in revenue generating shipments. Let that sink in. It is pretty hard to be bearish on those numbers. The shipments went to most of the customers listed above, and is also starting to construct GenFuel refueling stations at sites for Volkswagen, FedEx (NYSE:FDX) and Wal-Mart. Much of this growth has to do with Plug's marketing if the entire GenSolution suite which packages all of Plug's products and services into one convenient offering. And the growth is expected to continue. The company expects to ship between 900 and 1,000 units in the fourth quarter of 2014 capping a record year for the company. Revenue should come in at $75 million for the year and bookings of future orders should total $150 million plus by year end.
Plug Power will release its third-quarter financial results in November of 2014. But the second-quarter finances showed continued growth. There is a strong possibility that Plug will break even for Q3. Revenues are there, but expenses remain high. Take a look at Q2's numbers. Total revenue for Q2 2014 was $17.3 million, which resulted from $12.6 million of product revenue, $4.4 million of service revenue and $0.3 million of research and development contract revenue. This is a huge year-over-year improvement from Q2 2013 total revenue of $7.5 million. That quarter saw $5.6 million of product revenue, $1.5 million of service revenue and $0.4 million of research and development contract revenue. I mentioned that the company continues to ship more and more GenDrives. Well, in Q2 2014 it shipped 687. Recall in Q3 2014 it shipped 857, so that is a 24.7% quarter-over-quarter improvement.
Costs continue to plague the company, but revenues are catching up. Expenses were up slightly year-over-year in Q2 2014 relative to Q2 2013. Expenses were $17.1 million in Q2 2014. This was primarily due to $10.4 million in costs related to generating product revenue, $5.9 million in costs to generate its service revenue and $0.8 million of cost research and development. This compares to total expenses of $9.5 million in Q2 2014. On an adjusted basis, this led to a net loss of $5.8 million for the company, or $0.04 per common share. For the third quarter, expenses will be the key. Revenues will be there, but just how much it cost to make those revenues will tell the story. I think it is a win if the company reports a $0.01-$0.02 loss and a huge win if the company breaks even. I don't think the company will turn a full profit in Q3, but if it pulls it off, expect the stock to rocket higher. My expectation is a $0.02 loss. The key really is whether the company's trajectory continues to improve. That's what the Street likes to see and it is what I am expecting. Analysts currently expect a loss of $0.03. I am a touch more bullish.
Take Home Message
The bottom line is that Plug has had a lot of ups and downs in its storied history and has made traders a bundle, but has lost investors significant sums over time. The stock had a major run early this year after I made my initial recommendation, at one point returning 500 plus percent. With the stock coming back down to around $4.00 and short interest at 25% of the float, the stock is sitting in a good position to move higher on moderately good news and will rocket higher on strong news. 2014 has been the turnaround year for this company. Bookings have grown exponentially. The company could turn a profit in Q4 2014 based on the expected huge sales gains. The customer base is growing. Despite moving from penny stock status to where it is today, the stock has upside. Below $5.00 I like it. But the Q3 financials will determine the ultimate course of this company and its stock.
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