Plug Power (PLUG) is on the verge of transforming the fuel cell industry into a realistic fuel alternative. With several Fortune 500 companies already utilizing Plug's product offerings, horizontal expansion among their core products, and a blockbuster technology, Plug Power shareholders stand to be handsomely rewarded in the coming year.
Plug Power was founded in June of 1997, is headquartered in Latham, NY, and employs approximately 150 people. The company designs, manufactures, develops, and commercializes fuel cell systems targeted towards the materials handling market. Plug Power is currently teetering towards profitability, and several key developments are priming this stock to become a multi-bagger at these levels, including growing sales of their GenDrive system, planned expansion into Asia, and entering new markets by introducing new products that utilize the same fuel cell technology.(click to enlarge)
Plug Power has experienced a difficult 10+ years to say the least. Since going public in 1999, with an initial public offering of $15.00, Plug's share price has fallen from a high of $1497.50 in 2000, to as low as $0.12 earlier this year. Talk about destroying shareholder value. The stock price ballooned quickly thanks to extreme hype surrounding the emerging fuel cell industry, misrepresented data issued from previous management, and being in the midst of the dot com bubble. After destroying 99.96% of shareholder value from their 2000 highs, and with a long term downward trend line on the verge of being broken, I recommend that now is the time to open a long position in this reemerging company that is experiencing increased traction among customers, and overall excitement in the fuel cell industry.
Massive Fortune 500 companies seeking to reduce their costs and carbon footprint have purchased GenDrive systems, targeted to replace both diesel and battery-based forklifts and pallet trucks used in warehouses and distribution centers. Notable customers of Plug Power include: Coca-Cola (KO), P&G (PG), Ikea, Wal-Mart (WMT), Lowes (LOW), Kroger (KR), Wegmans, FedEx Freight (FDX), Sysc (SYY), CVS Pharmacy (CVS), BMW, and Mercedes Benz.(click to enlarge)
When compared to traditional battery based forklifts, Plug Power's GenDrive system blows the competition out of the water. Using a fuel cell hybrid system, GenDrive generates zero greenhouse gas emissions and has shown to reduce site emissions by up to 80%. GenDrive also eliminates operational costs by up to 30%, and frees up building space that would otherwise be used to house the large battery charging rooms used for older forklifts. On top of this, GenDrive increases site productivity by up to 15%, operates at full power until the fuel depletes, and takes a total of 2 full minutes to recharge. For massive companies with distribution centers or warehouses, this product is a no brainer. They can save millions of dollars by replacing GenDrive systems with their current forklifts and pallet trucks, which in effect would reduce costs, increase productivity and minimize their carbon footprint.
With more than 4,000 units shipped to date, Plug Power is finally executing their business plan and expanding into adjacent markets, which is consistent with their long-term goal of displacing lead-acid batteries and diesel engines in a broad array of applications. The company is first targeting markets that have the same dynamics as materials handling. They are currently in the process of developing range extenders for heavy-duty electric vehicles, replacing diesel based transportation refrigeration units (18 wheelers delivering food) with fuel cell based units, and introducing fuel cell powered utility vehicles and baggage tractors used at airports. Being at the forefront of this relatively new and exciting industry, the opportunity here is massive for Plug Power. Considering that Plug's current customers deploy a combined 250,000 forklift trucks, there are more than 6 million forklifts deployed globally, there are more than 290,000 transportation refrigeration units deployed nationwide, and airlines operate more than 60,000 ground equipment vehicles, the upside potential clearly outweighs the downside risk, especially when Plug Power is positioning themselves to become the industry leader of fuel cell products, and is expected to breakeven in the second or third quarter of 2014. Plug Power, selling a total of 4,000 units, and generating yearly revenue of $26 million for the fiscal year of 2012, has barely scratched the surface of their install base.
Take Away From Latest Conference Call
On October 8th, CEO Andrew Marsh provided a business update for the company. The updates given during the conference call were extremely bullish for the long-term prospects of the company, but the stock sold off more than 20% mid conference call due to a miss in sales estimates, and no concrete answer to the looming possibility of a reverse stock split. These two factors should be of no concern to long-term investors who see the true potential in this company.
Since May 15th, the company has booked $11.7 million in orders, which is well below their previously announced expectations of $20 million. However, as bearish as this may seem, there is a silver lining in these numbers. Marsh went onto explain that the miss in sales is only a timing issue, with Plug currently negotiating more comprehensive orders with their present customers. The company expects these transactions to significantly increase revenue, and hopes for them to be completed before the end of 2013. The company is experiencing increased customer traction. Plug Power's customers understand the true need and advantages associated with their products, and are holding off on orders the company expected to be placed, simply to negotiate much larger deals.
The company has also expanded their GenDrive products into a long term service contract. While the company's main focus is to penetrate the market by selling GenDrive systems to customers with forklift trucks, they are now also providing hydrogen infrastructure to the company. Now, Plug Power's revenue consists of 40% product, 20% service, and 40% for the delivery and fueling of hydrogen, for many of the customers that have signed these long-term service contracts. Plug Power is not only a provider of fuel cell products, but thanks to matured relationships and increased trusts with their customers, they are transitioning to become hydrogen providers, with intentions to buy hydrogen in bulk and generate revenue per kilogram of hydrogen sold. This means recurring revenue from customers who purchased their GenDrive system years ago. This is game changing, and will add to the bottom line of the company once this reaches more and more customers, and will provide more predictability for their business as a whole.
Plug Power expects to ship more than 3,000 units at more than 20 sites in 2014. This is explosive growth when compared to the 1,100 GenDrive units that were sold in 2012. Plug Power expects that 50% of these sites will be covered with an extended service contract, providing recurring revenues for the company. As of September 30th, the company has $20.2 million in product and service backlogs.
The company, thanks to their joint venture with Air Liquide that was formed in February of this year and practically saved the company for bankruptcy, has also begun trial runs with customers in Europe under their HyPulsion brand. Ikea will be deploying units in one of their France locations in the fourth quarter of this year. It is encouraging to see the fruits of a joint venture occur with less than a year of existence.
Plug Power is also exploring potential deals similar to the one with Air Liquide that would give them exposure to the Asian market. With limited cash funds, the company does not plan to use their own equity or cash to develop these markets, but will rather rely on partnerships. Expansion into Asia would blow the cap off of this stock, and be just one more catalyst that could attract serious investor attention and help boost the share price.
Lastly, Marsh sees a great deal of opportunity with regards to the transportation refrigeration units (TRUs). Using fuel cells to generate the power used to run the massive 18-wheeler refrigerators results in a massive reduction in emissions, reduced operational cost for fuel, and low acoustic noise, which allows for deliveries to be made during all hours of the day. This can greatly improve the logistics for companies that have operations revolving around TRUs. The expansion into these adjacent markets is cost effective for Plug Power, and will add to the bottom line if sales begin to materialize as they have for their GenDrive system.
Risks Moving Forward
The company has managed to solve huge problems in the past with regards to the direction of the company and with finances and the possibility of bankruptcy. But still, there are many risks to consider. Currently, as has been for years, Plug Power is not profitable. The company has an accumulated deficit of more than $800 million, and incurred net losses of approximately $30 million in 2012, though this is an improvement over the $121 million net loss that occurred in 2008. More importantly (short term), the company will receive a non-compliance letter from the NASDAQ regarding possible delisting for being under $1 a share in the coming days. Once the company receives the letter, they will have a hearing with NASDAQ within 30 to 45 days. Management will present their case for why the stock price will move over $1.00 on its own, and will then either be granted a 180 day extension, or will be denied extension and be delisted in 10 days time. At that point, the company would initiate a reverse stock split to remain on the NASDAQ. However, the company believes that increased orders from large customers, and diversifying their business into service solutions and providing hydrogen, will help boost their stock price above $1.00. In any light, this is a big, near term risk for investors and those who are extremely risk averse should avoid this company until either a reverse split commences or the stock reaches sustainable levels of above $1.00.
With regards to Plug Power's business model, the one real factor that is holding back a massive transition from diesel and battery based forklifts to fuel cell bases is the initial costs of the system. When I contacted the company, they informed me that they want to keep the price of their products as private as possible, so one has to assume that the initial costs of a GenDrive system can be costly, especially with regards to the hydrogen infrastructure that needs to be installed to fuel the lifts. Based off of revenue from the company and the amount of GenDrive units sold, and the fact that battery based forklifts cost anywhere from $3,000 to $6,000, it is safe to assume that a GenDrive unit from Plug Power costs upwards of $15,000, possibly even more than $20,000. These costs may seem extremely daunting for companies, especially smaller scaled companies. Though the cost savings are massive, it may be difficult for companies to commit to such a product. Until the cost of hydrogen infrastructure comes down, this high cost will act as a barrier that is preventing wide spread adoption of these fuel cell-based units. However, do not expect these costs to scare away massive companies, as many Fortune 500 companies have been extremely enthusiastic about the product and its cost advantages.
The long-term, strategic outlook for Plug Power is stronger than ever, and the recent sell off during Tuesday's conference call presented an exciting opportunity to get into this stock at attractive levels. There is key support at $0.54, where the company priced its latest stock offering. Any announcement of a large order placed by a massive company, a materialization of their planned expansion into Asia, further developments or funding from interested parties (government, companies) regarding the transportation refrigeration units, or an avoidance of a reverse stock split and a granted 180 day extension from NASDAQ, will help boost the company's share price and long-term stability. With many insiders recently purchasing stock, impending profitability in the middle of 2014, and a stellar product offering overall, the bullishness behind Plug Power and its long term potential seems to be justified, and investors who jump in now should stand to be handsomely rewarded come 2014. Look for any of the above catalysts to be announced on November 14th during the company's third quarter conference call, December 11th during analyst day for Plug Power, January 14th for an investor update, February 19th for a second investor update, and a date to be announced in March for the company's year-end conference call. With all of these scheduled updates, a lot seems to be brewing for a company that is currently valued at a meager $56 million, compared to there once lofty valuation of more than $6 billion.