With more than 300 megawatts of power generation capacity installed or in backlog, FuelCell Energy (FCEL) is a global leader in providing ultra-clean baseload distributed generation to utilities, industrial operations, universities, municipal water treatment facilities, government installations and other customers around the world. The company's power plants have generated more than 1.5 billion kilowatt hours of ultra-clean power using a variety of fuels including renewable biogas from wastewater treatment and food processing, as well as clean natural gas
On March 11, 2013, FCEL announced its first quarter ending January 31, 2013 results. On the surface, there's little to be excited about. Big sales but with bigger losses. Gross profits turned to gross losses, meaning, had the company not had any revenue whatsoever its income statement would have looked better. Backlog was up substantially, but without even turning a positive gross profit and worse with huge net losses it would seem to be hopeless for it to ever show decent results and survive long term.
My bearish feeling began to shift with the conference call. Buried in there is a bright spot that actually makes me lean bullish on FCEL and has me watching very closely. This bright spot could make FCEL a sleeper stock that pleasantly surprises going forward. The call, similar to the earnings PR, early on began to explain:
an isolated manufacturing issue, that was not anticipated and impacted our margins
My reactionary thoughts were: Okay, fine. But FCEL's margins have never been very impressive to begin with and certainly not high enough to have any meaningful effect on its huge quarterly net losses. Next:
margins in the quarter were impacted by an unfavorable product mix compared to the prior year as we -- and we incurred period costs related to the production ramp. This trend will reverse in the second quarter as the company is in the process of increasing the production rate by 25%, which will lead to higher revenues and expanding margins.
Okay, higher margins AND higher revenue. I'm listening. So what? Lots and lots of talk about projects and their various stages of completion then all the way down buried deep in the questions and answers section. That's where the bright spot is and also the most meaningful and overlooked metric was by Michael S. Bishop, CFO:
When we think about the business model going out a couple of quarters, we're targeting margins in the double digit range. So we would expect nice expansion here during the rest of the fiscal year.
Double digit margins, if achieved, for FCEL is a game changer. Here's a company with a long history of great sales with paper-thin margins at best. With double-digit profit margins, suddenly their large sales, growth, and backlog become meaningful. Backlog had a giant leap over the three-month period going from $319 million on October 31, 2012 to $428 million as of January 31, 2013. Filling that backlog at 10% profit margins (or better) would return a large amount of much needed cash to FCEL's bottom line.
Also interesting is that when pressed further on the raise in margins to double digit levels two quarters out, CEO Arthur A. Bottone stated that investors will start to see the leverage in margins this coming quarter.
FCEL has a lot of work to do and a long way to go to reach full company profitability, if ever, but with the stock in the dumps for years on end, any perceived turnaround in hope or prospects could make for a strong bounce. I take CEO Bottone at his word that FCEL will begin to show a turnaround with its next report.