Will Plug Power Revolutionize The Sector?

Apr.11.14 | About: Plug Power, (PLUG)

Summary

The market for the material handling business is massive.

The cost benefit of the fuel cells powered vehicles will entice the businesses to make a shift.

Refrigerated trucks might be the next market for Plug Power to grow its revenue.

Plug Power (NASDAQ:PLUG) is working on changing the dynamics of the energy sector - the company produces fuel cells stacks which are currently being used in material handling equipment such as Forklifts. Businesses are usually hesitant in moving from conventional methods. However, one of the most important factors in the success of any business is the reduction in cost, and the businesses always look to find a way to decrease the operating costs - Plug Power is offering these businesses some help to achieve that goal. The product developed by the company has massive potential and the economic viability is not in doubt. However, the doubts about the stock price still exist. The stock has gained over 950% during the last six months, a massive gain for any stock. There is a fear that the stock has peaked and it might be on its way down, in the short-term, this might be true - however, in the long-term, I believe the stock price will grow substantially as there are a lot of unexplored areas for Plug Power where the company can grow its revenues.

Gendrive Fuel Cell vs. Lead Acid Battery

The company's product, Gendrive fuel cell is a substitute to traditional lead acid battery and is designed as a drop-in replacement for it. The Basic concept on which fuel cells operate is electrolysis. Hydrogen reacts with oxygen to form electricity in a closed system which contains platinum. The efficiency of this power generation is 40% to 60% generally, whereas an internal combustion engine only provides about 25%. It also has some advantages as compared to battery. After the battery is consumed by more than 50% of its charge, the power starts to decrease making it less efficient. In addition, lead batteries are heavy - On the other hand, fuel cells are significantly lighter as compared to batteries. This results in efficient power consumption. Also, they operate similar to an engine which means no drying out of power when the fuel is close to running out. Fuel cell operated material handling equipment is touching the mainstream for many reasons. One of the most important factors is that it does not have emissions, meaning there is no pollution. This makes it preferable for indoor operations such as warehouses, where Forklifts are widely used.

Hydrogen as a fuel

Hydrogen was produced primarily through electrolysis of water. This process requires great amounts of electricity. In addition, Platinum is used in the process which is an expensive element. These factors made Hydrogen expensive as a fuel for commercial use. However, due to the recent Shale revolution; Hydrogen can be produced from a second source, which is called "Steam Reforming". Through this process, Hydrogen can be extracted through series of processes by using hydrocarbons. Hydrogen produced from this source is less costly and can be produced in large volumes. As a result, Hydrogen is now becoming a viable source of fuel.

Another major problem with commercialization of Hydrogen as a fuel was its distribution. It is easily available in bulk for industrial uses. However, there are not many stations which offer Hydrogen. Plug power has come up with a solution to this problem through GenFuel. The company supplies Hydrogen supply systems to the sights where the customer intends to use the equipment and it works similar to a mini gas station.

Market Growth Potential

Material handling equipment market is operating close to maturity and the market was expected to grow at just 4% to $123.6 billion through 2016. However, during the first nine months of 2013, the market grew by 5%, slightly higher than the expected growth. In a maturing sector, an increase of just 100 basis points can make a substantial difference. As mentioned above, the benefit for the businesses to shift to the fuel cells powered forklifts is huge as the costs come down substantially. The batteries usually have 3-5 years of average life while Hydrogen fuel cells systems have an average life of 10 years. Furthermore, the maintenance and the average productivity lost between a battery change is far more for the battery powered forklifts. There is a dual benefit for the businesses to convert their fleets to the Hydrogen fuel cells powered forklifts: these forklifts not only decrease the cost but also increase the productivity of the labor.

The company expects a $4 billion opportunity for North American market alone, which grew 11% over the first nine month of 2013. Plug Power had delivered a contract of 70 fuel cells to Mercedes Benz, which extended its contract in the mid of 2013 for another 123 fuel cells. During the last year, the company's orders have grown by 47.6% while its order backlog has grown by 19.8% as compared to 2012. Plug power is the market leader of fuel cell stack market and will gain significantly as this market grows.

Other Projects

Fuel cells are not bound to only material handling equipment. Plug power sees an opportunity in refrigeration unit trucks. Due to loud noise of these trucks, their delivery schedule is restricted to a fixed time every day. If fuel cells are used in these trucks, the noise will be greatly reduced allowing them to make deliveries without time restrictions. There are 300,000 of these trucks in North America representing a huge market. The company is currently developing this technology for a Long Island based company, Sysco. Plug Power expects this market to be even more profitable than material handling equipment in the coming years.

Conclusion

Plug power has the potential to grow significantly over the next few years. The market for the company's product is huge and it has not even penetrated the first segment. The company is focusing on the forklifts business in order to support the viability and bring it to profitability in the short-term. The prospect of expanding into other segments makes it an extremely attractive investment. If the company is able to get the trucks market, the growth in the revenues will be enhanced substantially. Plug Power's stock price might come down in the short-term due to the 9 folds rise in the last six months and the expected correction. However, we believe its long-term prospects are bright and the company will revolutionize the sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.