Spotlight 2014 continued - FuelCell Energy a Pure Play on the $12 Billion Clean Energy Power Plant Market.
FuelCell Energy, Inc. (NASDAQ:FCEL) is an integrated fuel cell company. FuelCell designs, manufactures, sells, installs, operates and services ultra-clean, stationary fuel cell power plants for distributed baseload power generation. FuelCell's Direct FuelCell (DFC) power plants use a range of available fuels to produce electricity electrochemically, without combustion in a quiet, near-zero pollutant process. In June 2012, the Company completed the asset acquisition of select fuel cell assets by its German subsidiary, FuelCell Energy Solutions, GmbH, including fuel cell component inventory and fuel cell manufacturing equipment, and it also completed joint venture with Fraunhofer IKTS. In December 2012, the Company acquired Versa Power Systems, Inc.
Fuel Cell Energy services two primary markets: ultra-clean power and renewable power. The company's stationary power plants are scalable for multi-megawatt utility scale applications or on-site power generation for institutions and industrial applications.
FuelCell's plants are operating in more than 50 locations worldwide and generated more than 1.9 billion kilowatt hours (kWh) of electricity, which is equivalent to powering more than 135,000 average size U.S. homes for one year. FuelCell's installed base and steadily growing backlog exceeds 300 megawatts (MW).
FuelCell Energy's Direct FuelCell (DFC) power plants have tremendous value propositions offering a number of benefits for FuelCell's customers. DFC is Ultra-Clean. FuelCell's DFC power plants convert fuels, such as clean natural gas or renewable biogas, into electricity, heat, and water through an electrochemical reaction. DFC power generation process is combustion free and creates almost no pollutants compared to the highly pollutant average US Fossil Fuel Plant.
All three of FuelCell Energy's DFC power plants received certification under the California Air Resources Board's distributed generation standards, when operating on natural gas. The DFC1500 and DFC300 are certified for operation on renewable biogas. In the State of California, the CARB 2007 certification allows the local Air Quality Management District to exempt the fuel cell installation from the clean air permitting process accelerating the approval process.
DFC power plants are extremely efficient. DFC power plants generate more power from a given unit of fuel than similar size internal combustion-based power generation. They are 47% electrically efficient and can achieve total thermal efficiency up to 90% in a combined heat and power or cogeneration set up. FuelCell's hybrid power plants can achieve electrical efficiencies up to 70%. The chart below illustrates the emissions on the y axis and electrical efficiency on the x axis. All FuelCell's power plant technologies are much cleaner and more efficient than almost all technologies available.
FuelCell's DFC power plants are ideal distributed generation sources. Instead of traditional centrally generated power with transmission and distribution infrastructure, DFC power plants can be at the point of use. As mentioned, distributed generation avoids the need for transmission & distribution infrastructure. The transmission of power over long distances results in line power losses of 8-10% of the centrally generated power. Distributed generation also allows for increased power quality and reliability by eliminating transmission and distribution. It also increases energy security by eliminating reliance on the electricity grid.
FuelCell's DFC power plants use hydrogen and oxygen to produce electricity. Hydrogen is obtained from a fuel source, such as clean natural gas or renewable biogas, and is created within the fuel cell itself. This allows a number of fuel sources to be used when producing electricity creating savings as the user can select the cheapest possible input.
The chart below illustrates all the benefits of FuelCell DFC power plant compared to a 100% natural gas power plant. The National Fuel Cell Research Center estimates total savings per kWh is 5.2-20.4¢. To date, FuelCells DFC plants generated 1.9 billion kWh. At the mid-point of estimated savings FuelCells DFC plants have saved $244.4 million.
FuelCell Energy estimates their market opportunity at $12 billion with a potential for $6 billion in revenues from power plants and $6 billion in revenues from services.
Why Buy Now?
Government Regulations are creating significant demand for cleaner energy. With concerns over global warming and carbon emissions, governments around the world are creating regulation to favor clean energy. Fuel cells, one of the cleanest energy sources, will be a huge beneficiary.
Many nations and states have created Renewable Portfolio Standards (RPSs). An RPS is a mechanism designed to promote the adoption of renewable power generation.
South Korea's RPS took effect at the beginning of 2012, requiring an increase of new and renewable power generation to 10% by 2022 from 2% in 2012. The program mandates the addition of 0.5% of renewable power generation per year through 2016 equaling approximately 350 megawatts, increasing to 1.0% per year through 2022 or approximately 700 megawatts per year. Fuel cells operating on natural gas and biogas qualify under the mandates of the program. South Korea also plans to require large conglomerates than consume more than 5,000 kW of electricity in a month to decrease their electricity consumption by 15%. FuelCell's largest customer is POSCO, South Korean steel company with the fourth largest steel output in 2011. Steel production is extremely energy intensive with electricity accounting for over 6% of production cost. POSCO accounted for 76% of FuelCell's revenues in 2012. These are sticky revenues as POSCO owns 16% of FuelCell Energy further evidence of their value proposition. The strength of their relationship with POSCO will lead to new contracts.
In the United States, 33 states plus the District of Columbia established RPSs. These markets represent a potential for an estimated 76,750 megawatts of renewable power by 2025, according to the Union of Concerned Scientists. Fuel cells using biogas qualify as renewable power generation technology in all of the RPS states in the U.S., and nine states specify that fuel cells operating on natural gas are also eligible for these initiatives in recognition of the high efficiency of fuel cells. Most of FuelCell's US power plants are in California and Connecticut. Both states enacted RPS programs. California enacted legislation in 2010 increasing its clean energy requirement from 20% to 33%. California is developing plans to deploy 12,000 megawatts of distributed generation by 2020. Connecticut's RPS requires utilities to purchase 20% of their peak electricity needs, or about 1,000 megawatts, from clean power sources by 2020.
Another reason to purchase FuelCell now is the nuclear disaster at Fukushima still has a dramatic affect on public opinion and regulations. Germany closed all of its old nuclear power reactors and decided to phase out nuclear power entirely by 2022. Italy held a national referendum. 94% voted against the government's plan to build new nuclear power plants. Referendum's passed in Switzerland and Belgium, as well. In France the strongly pro-nuclear government was defeated in a national election and, with 70 percent of the public opposing nuclear in some polls, it was replaced by a government promising to radically reduce reliance on nuclear power. Malaysia, Kuwait, Bahrain, and Taiwan all abandoned or radically changed their nuclear power plans. Many other countries are considering following with similar legislation. According to BP Statistical Review, Nuclear Energy consumption peaked in 2010 since falling by 4.2% in 2011 and 6.7% in 2012. Total primary energy consumption increased by 2.4% in 2011 and 2.1% in 2012. Nuclear energy accounted for 5.2% of total energy consumption in 2010, 4.9% of total energy consumption in 2011 and 4.5% of total energy consumption in 2012. Statistics confirm the shift away from nuclear energy. This is a great opportunity for renewable energies to take its place.
FuelCell Energy has a significant and growing pipeline. This confirms the strength of their technology and also illustrates the predictability of their revenues.
FuelCell Energy expects to achieve economies of scale as its backlog and revenues grow. Economies of scale means as revenues increase the total cost of producing each unit decreases allowing for improving profitability. This is significant as operating margins increase the value assigned to a company increases.
What is this opportunity worth?
The Focused Stock Trader values FuelCell Energy based of their Fiscal Year 2014 revenues and applies an EV/Sales multiple. EV/Sales multiple is an appropriate valuation metric for FuelCell given they are compete in an early stage industry with high growth, operating leverage and they are not yet profitable. Consensus estimates FuelCell Energy's revenues will reach $195.8 million. This figure seems very conservative given the strength of FuelCell's product and growing backlog. From 2009-2013, the average power industry EV/Sales multiple is 5.73x. Applying the 5.73x EV/Sales to FuelCells FY2014 sales leads to an end of FY2014 target price of $3.56 per share. This represents 107% upside from FuelCell Energy's December 6, 2013 closing price of $1.72.
Technical Analysis by Harry Boxer (TheTechTrader.com)
Fuel Cell went through a 3 year decline. Its share price slid from near $14 to multiple bottoms at just under $1 in 2012 and earlier in 2013. These bottoms created a nice base. This base broke on heavy volume, which is technically bullish! The stock traded 30 million shares in the last 3 session alone breaking through key short term resistance. Strong momentum may be developing which could propel FCEL further. Our projected technical targets going forward are $2.40, $3.50-3.75 and $4.75-5.00.
FuelCell has a strong technology with a tremendous value proposition. It operates in a $12 billion market with strong growth and strong regulatory backing throughout the world. The Focused Stock Trader believes FuelCell is the best way to take advantage of the FuelCell opportunity in serving Power Plants and the creation of electricity.