The companies operating in the fuel cell sector have been extremely volatile over the last few months - the price of these stocks has been up and down; however, the overall trend has been upwards. FuelCell Energy (NASDAQ:FCEL), Plug Power (NASDAQ:PLUG) and Ballard Power Systems (NASDAQ:BLDP) are the three most exciting names in this sector. However, all three businesses are focusing on slightly different markets. Having discussed Plug Power and Ballard Power Systems in our previous articles, we are now focusing on FuelCell Energy. The basic idea behind the product of the company is electrolysis just like the other two companies. However, its application is a little more interesting. FuelCell Energy has managed to build plants based on waste heat recovery systems to generate electricity, the heat which would otherwise be wasted in the environment and create pollution.
FuelCell Energy's Advantage
FuelCell Energy has various products which use different inputs to produce clean electricity. The applications of these are also different. Firstly, the company has simpler products which use clean natural gas to produce electricity - unlike Plug Power, which relies on pure hydrogen, and Ballard Power Systems, which uses HydroPlus (A mixture of methanol and water). With the usage of clean natural gas, the availability of fuel becomes easy and transportation and storage costs are decreased. Also, FuelCell Energy offers a complete power generator for large scale electricity production, which broadens its market.
Another interesting application to the company's product is in hydraulic fracturing. In the process of oil and gas extraction, water is used in hydraulic fracturing to extract oil. Recently, General Electric (NYSE:GE) reported that it is working on a project through which a special form of CO2 gas can be used for hydraulic fracturing instead of water. As a result, the transportation cost of water can be eliminated and more importantly, wastage can be avoided.
Generally, during the process of electrolysis, the natural or bio gas is converted into water and CO2. FuelCell Energy has designed its production units in such a way that while producing electricity, the waste products, i.e. carbon dioxide and water are injected deep into the ground in order to carry out enhanced oil recovery. As a result, cost of power generators and water transportations can be substituted by Direct Fuel Cell power plants. However, the size of the plant makes it almost impossible to move and it will be best utilized where the company is planning to operating for a longer time period.
Waste Heat Recovery Systems
Another important area where the company is taking the initiative is using combined heat and power to generate electricity. The company has four business models in this area. Wastewater, Landfills, Agriculture and Food and Beverage processing. In this area, the company has designed its fuel cells to use Biogas as an inlet. With the majority of the waste materials, methane gas can be extracted. The unprocessed form of this hydrocarbon can be called biogas.
This application of fuel cells is attracting many industries to consider it primarily because of three reasons. Firstly, the cost is lower with these systems and most of the businesses will try to decrease cost and increase efficiency. Secondly, as these systems use methane and water to generate electricity; the costs on properly disposing of methane and water will be eliminated. The third reason is the tax advantage as many governments are encouraging the use of the alternate energy.
For these reasons, we believe that the company is uniquely positioned to benefit from an untapped market. FCEL has recently reported its strategic alliance with POSCO Energy through which it has won 5.6 megawatts of fuel cell module orders to meet the growth in Asian power demand.
Fundamentals and Risks
FuelCell Energy has not reported profit in any of the past three years - the revenues of the company has been growing; however, the EPS has remained negative, and at the same time, the number of shares outstanding has been increasing - meaning that the company has been funding its capital requirements through the issue of new shares. Furthermore, the total liabilities have also been increasing. Over the last three years, the cash flows from operations have been negative for FuelCell Energy. So, it is clear that based on fundamentals alone; FCEL will look like a poor investment choice. However, for the companies working on disruptive technologies; the fundamentals usually do not paint a pretty picture at the start. The investors mainly look at the future prospects of the business if the technology goes mainstream. In case of fuel cells, it looks like the major players in different industries are trying this new source of energy and it might have a bright future. However, investors in this sector should be ready for large swings in price as the price is affected by a small piece of news.
Companies in the fuel cell sector remain high-risk, high-reward investments. The volatility in the stock price of these companies is high, and investors with high risk tolerance should consider these stocks. FCEL is up about 93% for the investors who bought it a year ago - however, those investors who bought it at the start of March this year are sitting at a loss of about 40% -- this shows how much volatility is present in this 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.