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Summary

  • Recent large contracts have driven optimism about the future of fuel cells.
  • Fuel cells have the potential to be a "disruptive" product, dramatically altering the energy industry.
  • Not all are sold on the promise of fuel cells, especially not Tesla's CEO, Elon Musk.

Recently, fuel cell companies and other energy companies have been on fire. Companies like Ballard Power Systems (NASDAQ:BLDP), Plug Power (NASDAQ:PLUG), FuelCell Energy Inc. (NASDAQ:FCEL) and Power Solutions International (NASDAQ:PSIX) have all shown double-digit gains. This chart shows that returns have exploded over the past 5 days.

(click to enlarge)

The main catalyst has been votes of confidence by FedEx (NYSE:FDX) and Wal-Mart (NYSE:WMT) for fuel cell technology. In January, FDX signed a contract with PLUG to develop fuel cell extenders for 20 electric trucks, and then in February, PLUG inked a major deal with Wal-Mart.

What caught our eye in January was the Latham, N.Y.-company's deal with FedEx Corp. (NYSE: FDX) to develop hydrogen fuel cell extenders for 20 FedEx electric trucks...Then on Feb. 26, PLUG inked a huge deal with Wal-Mart Stores Inc. (NYSE: WMT). The world's largest retailer agreed to purchase 1,738 more of PLUG's signature GenDrive fuel cell units. On top of that, Wal-Mart selected PLUG to supply the requisite hydrogen needed to drive the units and signed a six-year contract.

What got me interested in PLUG is why companies are choosing to go with fuel cells. They are huge time, money and effort savers. Forklifts using conventional batteries usually have to have 3 batteries. One powering the lift, one getting charged and one cooling down from being used. The batteries are also heavy and require time to swap them out. Fuel cells reduce the number of batteries required, and greatly simplify the recharging process.

For every one GenDrive unit, there is on average three battery units for a forklift. Electric forklifts powered by massive batteries (some weigh as heavy as a washer machine) tend to have one installed in the forklift, one sitting on the charging station, and another cooling down after an extended period of use. Because GenDrives can be instantly filled with fuel and forego the long and tedious process of battery charging, only one unit is necessary for each forklift, and the backbreaking process of swapping out heavy batteries is eliminated. From an operational viewpoint, the GenDrive value proposition is through the roof, leading to increased productivity and measurable sustainability impacts.

My favorite investment themes are those products where companies can save money and increase efficiency by buying the product. The economics simply sell the product. With companies like WMT, FDX, Procter & Gamble (NYSE:PG), Kroger (NYSE:KR) and BMW already onboard, I would expect other companies with large forklift fleets to join the trend. Companies like Amazon (NASDAQ:AMZN), Target (NYSE:TGT) and UPS (NYSE:UPS) are all potential future customers.

If the trend continues, I would also expect to see forklift manufacturers like NACCO Industries (NYSE:NC), Crown Equipment and Caterpillar (NYSE:CAT) include fuel cells as options, or even as standard equipment on forklifts in the future. Oftentimes, that first big deal makes all the future deals much easier, and inking a deal with WMT will almost certainly open a lot of doors, if not drive customers to PLUG.

Ballard Energy is a derivative play off of PLUG. BLDP is a leader in the fuel cell industry, and supplies PLUG.

Nasdaq-listed shares of Ballard Power Systems Inc (BLDP), which supplies fuel cell products to Plug Power, were up 11 percent.

BLDP has multiple lines of products, but it is the recent events at PLUG that have gotten the markets excited. The opportunities created by the PLUG deals, however, should open the door for cross-selling of BLDP's other products.

Ballard's fuel cell business is divided into three areas - telecom backup power, material handling and buses. In the telecom backup power segment, revenues for the year rose 74% to $20.5 million. This strength came as Ballard shipped 796 of its ElectraGen system. The company shipped these systems to its core telecom backup power markets of Japan, China, Southeast Asia, South Africa and the Caribbean. The shipments went to both existing and new customers.

FCEL doesn't have as compelling a story, and has rallied largely in sympathy with PLUG and BLDP. The big news on FCEL is that it recently got a continuation loan from the US Dept of Energy. Good news, but PLUG's bird-in-the-hand WMT deal is worth more than two FCEL birds in the bush.

What: Shares of FuelCell Energy popped 17% today after the fuel-cell power plant company received a $2.8 million continuation of an award from the U.S. Department of Energy's Advanced Manufacturing Office.

FCEL's potential gains are still speculative, whereas PLUG and BLDP already have the contracts and products.

So what: The stock has soared in 2014 on optimism over growing fuel cell adoption, and today's news only reinforces those good vibes. So while the $2.8 contract amount is a relatively tiny sum, FuelCell will be able to "showcase" the tri-generation capabilities of its Direct FuelCell power plant for industrial applications, prompting investors to pile in on the expectation of even bigger deals ahead.

The Economist sees fuel cell technology as "disruptive," or as Austrian economist Joseph Schumpeter would call, "a gale of creative destruction."

The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day.

Not everyone, however, is a big fan of fuel cell technology. Tesla's (NASDAQ:TSLA) CEO, Elon Musk has strong words about fuel cells that aren't fit to be in print. WMT, FDX and BMWG don't seem to agree, however, and from Elon's comments, maybe NASA is a potential future customer for fuel cells.

"Oh god, a fuel cell is so (BS). Hydrogen is suitable for the upper stage of rockets, but not for cars." - Elon Musk

For those investors interested in a lower-tech, less disruptive energy technology, there is Power Solutions International. It makes natural gas-powered generators that are the ideal solution for coming EPA regulations regarding "flare" gas from oil drilling. Starting in 2015, wells will have to either trap or use the "flare" gas, they will no longer be able to just burn it off. Right now, firms truck in diesel fuel to power generators used for drilling, while they "flare" off the natural gas, which is considered a waste product. The PSIX generators allow the drillers to use the waste natural gas to power their generators, instead of costly diesel. It is a win-win solution.

While all these stocks have had dramatic increases lately, it may be worth considering putting them on a "buy on pullback" list. If the future for fuel cells and natural gas is as promising at some believe it to be, we are just witnessing the start of the trend. Companies like FCEL, PLUG, BLDP and PSIX don't even have positive earnings right now, so everything is based upon the hopes and dreams of tomorrow. If the markets are right, however, and Elon Musk is wrong, it appears that these energy stocks may have a very bright tomorrow.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Source: Fuel Cell Firms And Other Companies: Where There's Smoke, There's Fire