(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Earlier this week, Plug Power (PLUG) announced a $10mm public offering. We are very excited about this transaction. We believe PLUG is now funded for success. It is exhilarating to discover distressed situations with tons of potential. In our opinion, PLUG offers great risk / reward potential, in particular now that the financing transaction has been completed.
Back in May of this year, PLUG received rescue capital to continue operations. However the overhang on the stock persisted due to the financing gap. This deal essentially closes the gap, as management plans to use this capital to carry the company until EBITDA breakeven sometime next year. Of course, there is risk to management's plans. But we feel strongly that management's assumptions are reasonable.
One of the things we pay close attention to in most of our investments is the activities of insiders. Officers and directors tend to be bullish in terms of what they say. Using personal capital to add to positions in distressed situations is an action that speaks volumes about the potential of the investment.
"Certain of our officers, directors and existing stockholders, including certain holders of five percent or more of our voting securities and stockholders who are affiliated with certain of our directors, have indicated an interest in purchasing shares of our common stock in this offering at the public offering price."
-Plug Power Filing
The Investment Thesis
PLUG is a company with real business products, revenues, and customer relationships. In addition, PLUG is a technology company with huge potential future applications. While EBITDA is still negative, the revenue and growth are real and tangible. The current price looks cheap even for the revenue stream, any you can think of the value of the potential future technology applications as a free option.
1. The Business
Plug Power is the Premier system integrator in rapidly emerging Proton Exchange Membrane (PEM) based fuel cell market. PEM fuel cells use hydrogen to produce energy in a clean manner, with water and heat the only emissions. Potential PEM fuel cell applications are broad, and could one day power cars and trucks. However, without infrastructure in place (hydrogen fueling stations), it is not yet a viable fuel for today's cars and trucks.
In the meantime, Plug Power has developed a commercial application for PEM fuel cells that is viable today. Forklifts in our nations warehouses and distribution centers use power constantly to move merchandise and load trucks. Most forklifts are powered by batteries, but Plug Power has created a PEM power alternative called GenDrive. Plug Power customers buy GenDrive to increase productivity, to lower costs, to implement green solutions, and for increased performance. Refueling stations within the distribution centers allow the trucks to minimize downtime and cut costs. $PLUG has to date deployed approximately 4,000 GenDrive units to some of the largest companies in the nation.
2. The Market
The company has a current addressable market of $4.0 billion in the U.S.A. and $4.0 billion in Europe, just in forklift truck applications. The company's solution provides about 95% of the hydrogen powered forklift trucks in the USA annually. PLUG is the dominant player in this market.
In addition, the company is working on potential new applications that could come online in the next few years.
3. The Strategy
Plug Power is focused on the forklift (and, generally, material handling) market because it is a market they can make money at it NOW. They currently have an impressive, growing customer list in this market. PLUG's intention is to conquer new markets horizontally, as new markets emerge for PEM based power solution. For example, in early 2014 Plug will be demonstrating 15 ground support units (flat trucks pulling containers on a tarmac) powered by fuel cell with FedEx at the facility in Memphis. There are over 1,300 of these units at the FedEx's (FDX) Memphis facility alone. This strategy allows the company to grow horizontally into new markets with minimal capital expenditures.
5. The Model
The company expects to be EBITDA breakeven around mid 2014 on an annual run rate of $55 million in revenues.
The cost of good sold are expected to be at 67% of revenues and SG&A at 12% to 15% (minimum of $12.5 million). The cost of good sold could be as low as 55% in our estimate.
The company had $26.1 million of revenues in 2012 and grew unit sold from 1,024 in 2011 to 1,391 in 2012, an increase of 36%.
The company's current manufacturing capacity is $200mm.
6. What went wrong?
The company has had its fair share of problems over a span of fifteen years. The situation, up until May, has looked like it was going to zero fast. Investors have been attracted to this situation based on the promise of its technology but each time the company has been nearing the finish line, it has been pushed back.
In February 2013, the company raised money and the stock plunged on a botched financing attempt. The stock dropped to $0.12.
The lead batteries manufacturers used this situation to point out to PLUG's customers that the company was toast.
Customers decided to pull out their orders and demand for GenDrive slowed temporarily.
On May 8, Air Liquide came to the rescue and invested $6.5 million in PLUG. At the time, we viewed the Air Liquide investment as the catalyst needed to reassure customers and bring back PLUG to its recent success track. The strategic investment from the worldwide producer of liquid hydrogen restored customer confidence in PLUG. This recent equity financing announcement was the next catalyst for strength in the stock price because it removes that overhang. So what is next? Customers and sales results. We are looking for an announcement of revenue numbers in the next few weeks, as management indicated in the May earnings call that roughly $20mm in sales could be booked by the 120-day mark. Specifically, several "large" customers could equip additional distribution centers with fleets of GenDrive-powered forklifts. Such sales would not only contribute to the bottom line, but also prove the benefits to PLUG's customers of converting to PLUG products. We eagerly anticipate these results, when and if they come to fruition, to drive the share price higher.
Additional disclosure: Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold about 3% of Plug Power. We intend to increase our position if the company's results track our benchmark. Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal.