It looks like that interest in fuel cell power provider FuelCell Energy (NASDAQ:FCEL) has grown all of a sudden. Over the last one year, shares of FuelCell have gained an enormous 150%. However, the stock has seen some weakness in recent times and it is down more than 40% in the last one month. The drop was a result of a report from short-seller Citron Research, that called FuelCell's peer Plug Power (NASDAQ:PLUG) a "casino stock."
Citron is of the opinion that the fair value of Plug Power is just $0.50 when the stock was trading at around $10. This led to a bout of weakness in FuelCell's shares as well and the stock is down massively from its 52-week highs. But, is this an opportunity in disguise for investors? I think yes.
A terrific performance
FuelCell Energy has turned in a solid performance in recent times. In its recently reported fiscal first quarter, total revenue jumped 22% year over year to $44.4 million. The developer of fuel cell power plants also reported a smaller quarterly loss, driven by higher power plant revenue and fuel cell kit sales. The net loss attributable to common shareholders narrowed to $11.4 million, or $0.06 per share, from $12.5 million, or $0.07 per share in the year-ago quarter.
Taking stock of FuelCell's business, the company achieved historic milestones with on-time completion of two large high-profile fuel cell parks in North America and Asia. Both projects are receiving worldwide attention from utility and prospective customers, and could help FuelCell bag more orders. These projects by FuelCell are contributing to heightened interest and demand for ultra-clean distrusted generation solutions.
FuelCell management has said that investor inquires and activity levels are strong and the company is highly-focused on strengthening its pipeline and clearing the backlog. FuelCell is in the final stage of closure of many attractive projects.
FuelCell is executing strongly on its project pipeline and is winning more projects, evidenced by the fact that its service backlog was $165 million at the end of the first quarter as compared to $150 million in the year ago period. Now, FuelCell needs to work hard on clearing this backlog. But the company is executing well in this department, as its backlog was $327 million as of January 31, 2014, down from $428 million a year ago.
In addition, FuelCell is seeing strong project finance activity. According to management, the company is looking to execute its near-term projects through various ways such as direct sales to utility and corporate customers, as well as financing through long-term power purchase agreements.
FuelCell's strong market potential is demonstrated by the fact that its advanced technology group is developing distributed hydrogen systems to reduce the cost of hydrogen and fueling applications, while also providing the advantages of onsite generation at the same time.
The potential market size of the trigeneration DFC-H2 is estimated at $1.6 billion in the U.S. alone for both industrial and transportation applications. Apart from generating multiple on-site product and revenue streams, the DFC - H2 adds value through process flexibility as the owner can generate more hydrogen and less electricity, or vice versa, depending on which is more valuable based on local prices.
Also, FuelCell has successfully deployed the world's largest fuel cell park that contains 21 fuel cell plants providing 59 MW of power to the grid and heat to a district heating system. The project was completed in just 13 months by POSCO and illustrates the speed with which scalable, distributed generation solutions can be deployed to lessen grid congestion, while also helping utilities comply with clean energy mandates. The fuel cell park is also slated to provide power to the adjacent railroad depot in case of a grid disruption or outage.
Focus on operational efficiency
FuelCell is also focusing on continued cost reduction at its current 70 MW production run-rate. FuelCell expects an improving revenue mix from increased activity in the U.S. and Europe, which is expected to lead to additional margin expansion this year. Moreover, management is aiming for positive quarterly cash flow as measured by EBITDA by the end of 2014. This target is based on anticipated order flow, improving revenue mix, and continued cost reductions and leverage.
FuelCell is also looking at improving its automation and manufacturing processes through reduced product costs and increased margins. The introduction of laser weld cell equipment is expected to increase the annual capacity of its manufacturing facility and lead to operational efficiencies. These process improvements have helped FuelCell increase the total annual capacity of its North American manufacturing facility to 100 MW.
On the other hand, POSCO Energy, FuelCell's South Korean partner, is on schedule with the construction of its manufacturing facility while its North American associates are implementing process improvements. These refinements will also contribute to lower costs and higher operating leverage, while increasing FuelCell's ability to meet growing demand.
Hence, it is clear that FuelCell is executing quite well and is reporting robust improvements in its business. Its revenue was up strongly in the previous quarter while the bottom line also improved. While the company doesn't have a trailing or a forward P/E yet since it is incurring losses, the prospects remain bright as the fuel cell industry is expected to grow at an annual rate of 22% during 2014-2020, which is very impressive. Hence, investors should definitely consider buying FuelCell after the recent drop as the stock looks well-positioned for the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.