Fuel cell maker Plug Power (NASDAQ:PLUG) has had a tough time in the last one month. The company's shares have dropped almost 40% since mid-April and Plug Power's recent first-quarter report wasn't great either. Plug Power shares fell almost 7% after the results, but the stock has bounced right up following an upgrade from Cowen.
Cowen analyst Robert Stone raised his rating on the company to outperform. As reported by The Wall Street Journal -
"Mr. Stone said his upgrade was driven by a rise in bookings for the company's fuel cells and a recent visit to the company's factory: "Our factory visit yesterday confirmed a high level of activity." He sent his clients photos as well, though they weren't included in the version sent to media."
Considering that Plug Power plies its trade in a fast-growing fuel cell industry, it doesn't come as a surprise that analysts expect it to grow at a good pace in the future. According to Reportlinker, the fuel cell market is expected to grow at a CAGR of 22% during 2014-2020. To tap this big opportunity, Plug Power is making a number of moves that deserve our attention. Let's take a look at them.
Why Plug Power can benefit from fuel cells
Plug Power management is focused on building a large, profitable company. Plug Power is making investments in its sales team, hydrogen generation, hydrogen distribution, geographic expansion, and stack technologies to benefit from the growth of the fuel cell technology in the future.
Plug Power is focusing on delivering cost-effective power solutions that increase productivity, lower operating costs, and reduce carbon footprints. Plug Power has long-standing relationships with well-known companies such as Wal-Mart (NYSE:WMT), Sysco (NYSE:SYY), Procter & Gamble (NYSE:PG), and Mercedes-Benz that use its innovative GenKey hydrogen and fuel cell system solutions.
Going forward, Plug Power's strategic objectives include growing the sales force to address the increasing demand for Plug Power products and expanding into new markets including Europe and Asia, completing opportunistic acquisitions, and focusing on hydrogen generation and distribution opportunities.
Product innovation will further help Plug Power's growth
Plug Power's value proposition is working in material handling applications because of the full utilization of the hydrogen infrastructure. Plug Power is providing a single offering to customers to convert a facility through a turnkey package, known as GenKey. As a key component of GenKey, Plug Power offers GenFuel, a hydrogen and hydrogen infrastructure, which are now vital components in its efforts to grow revenue.
The recent success of the GenFuel business has generated additional interest from customers and partners. The company is reselling hydrogen to its customers in material handling. Most of the increased demand for liquid hydrogen in North America is being used to fuel Plug Power products that have been recognized by potential partners.
Hydrogen is an opportunity to increase Plug Power's addressable market. GenKey sites are natural distribution points to provide hydrogen to retail stores and wireless sites. This could more than double the revenue that it could generate with each sale if the stores associated with the distribution centers were included.
Plug Power intends to increase its addressable market by expanding into retail stores by developing local distribution for hydrogen fuel. Given higher pricing at a retail store, this opportunity is expected to lead to higher margins for Plug Power.
More demand and a better backlog
Plug Power expects to ship approximately 650 GenDrive units in Q2 to customers including Wal-Mart, P&G, Volkswagen (OTCPK:VLKAY), Central Grocers, and Ace. This will be a massive improvement from just 165 shipments in the first quarter. Also, Plug Power has over $80 million in bookings so far this year, which is twice the bookings that it saw in 2013.
Hence, it is clear that the launch of its GenKey solution is propelling growth. GenKey is Plug Power's all-inclusive solution intended to provide ease of use to customers in the material handling space. GenKey combines together GenDrive fuel cell units, GenFuel infrastructure, and hydrogen molecule and GenCare service contracts in order to make the transition to fuel cell simple for customers.
In addition, Plug Power's backlog has grown significantly. Year-to-date, its backlog has increased from 1,439 units to 3,719 units as of mid-April as compared to the same period last year. It has closed nine GenKey deals, eight of them in the first quarter with clients such as Kroger (NYSE:KR), Volkswagen, and a key deal with Wal-Mart for over 1,700 GenDrive units at six sites. Plug Power is bringing online the GenFuel infrastructure at Wal-Mart.
GenKey is planned for deployment at two Kroger sites in the last two quarters of the year. One site is in Stapleton, Colorado, and is expected to be online in the third quarter, followed by another site in Louisville, Kentucky.
Plug Power will also begin construction of the GenFuel infrastructure at Volkswagen's Chattanooga, Tennessee, facility in the coming months. This infrastructure is expected to be completed in the third quarter this year. Volkswagen will start with 45 GenDrive-powered lift trucks, which is similar to facilities of BMW in Spartanburg and Mercedes in Huntsville. Going forward, the automaker is expected to expand the fleet significantly.
Also, at the beginning of April, Plug Power announced the acquisition of ReliOn, a developer of modular air-cooled hydrogen fuel cell stacks and unique low-cost stack assembly systems. This will provide Plug Power with a second source for fuel cell stack technology for its low-power products.
Opportunity in the fuel cell market
As we saw ahead, there is tremendous opportunity in the fuel cell market, which is expected to grow at a CAGR of 22% till 2020. According to another report, the fuel cell market is expected to hit a size of $2.5 billion by 2018, growing at an even faster annual rate of 32%.
The growth of this market will be driven by demand for renewable energy in Asia, where stationary fuel cells are in good demand. Moreover, the demand for fuel cells for applications such as household, telecom, automobile and power backup will also drive demand.
Also, according to Navigant Research, hydrogen consumption for non-traditional applications (those excluding the petroleum and chemical industries) will increase from 168 million kilograms in 2013 to nearly 3.5 billion kilograms in 2030. According to a press release from Navigant -
"While hydrogen has historically been a valuable commodity gas, today, it is increasingly recognized as an important fuel and energy storage vector of the future," says Kerry-Ann Adamson, research director with Navigant Research. "Increased energy demand, requirements to use renewable energy, growth in the cleantech backup power market, and the deployment of a growing number of fuel cell-powered vehicles in the transport sector will all push overall demand for hydrogen as a fuel to unprecedented levels."
The stationary sector, primarily focused on providing backup and prime power to mobile telecommunications base stations, is expected to lead hydrogen demand through 2030, according to the report. This is due to the current levels of adoption, which are much higher than in any other sector, alongside a healthy projected growth rate for fuel cell power stationary systems."
So, it is quite evident that the opportunity in the fuel cell market is huge and it is expected to grow at a greater pace in the future. Plug Power is trying its best to make the most out of this opportunity by building its infrastructure and tying up with more customers. Also, the company's fundamentals are quite strong as we will see below.
Fuel cells face a threat from the growing market for natural gas, which is gaining adoption as prices of natural gas are falling. Clean Energy Fuels (NASDAQ:CLNE) is rapidly building infrastructure for natural gas adoption. As reported at FuelFreedom:
"We're at the very beginning of a major shift to natural gas for trucking - a shift that could take a decade before the growth slows - and Clean Energy Fuels is the leader in the market," added Jason Hall of Motley Fool, who had been skeptical of the company in the past but is now turning enthusiastic.
"Natural gas vehicles are here to stay," added James E. Brumley on SmallCap Network, in one of the many enthusiastic endorsements the company received last week. "So Clean Energy Fuels is very much a right-time, right-place idea. It's not just that the company is the biggest and the best at what it does. There's a market of scale for what it has to offer."
Moreover, natural gas prices in markets like Europe and North America are declining. As reported by csmonitor.com:
North America is the only market where year on year gas prices are higher, driven by the coldest winter in forty years. Weather led to knock on effects on production, but prices could still only manage a rise of five percent year on year. There were spikes to over $6 in February, and New York/New England prices, driven by lack of pipeline capacity went over $100 at times for within day gas, but overall, the question should be what would have happened in the event of a normal, or warm winter. Last week Henry Hub was $4.5 but surging production and stranded gas with not enough take away capacity put prices as low as $1.99 in the North East Pennsylvania market. Mother Nature intervened to lift US gas prices, but what if she hadn't been around?
Supply and demand considerations also rule in Europe. The winter was mild all over Europe and the annual one year strip for UK NBP is down 15 percent to 60 pence per therm ($10.12MMBTU). Last week the day ahead was as low as $7.60, a 30 percent drop year on year. Put in the context of continuing Russia tensions, the most important thing about European gas prices is what is not happening, as William Powell of Platts explains here.
So, declining natural gas prices might hurt the prospects of fuel cells as they might be used as alternative fuels going forward. This is one trend that a company like Plug Power needs to watch.
Valuation and projections
Since the company isn't profitable yet, it doesn't have valuation multiples like trailing and forward P/E. However, analysts are quite upbeat regarding Plug Power's performance as its earnings are expected to grow 67% this fiscal year and 118% in the next fiscal year.
Moreover, Plug Power's balance sheet is also quite strong. It has a cash balance of $63 million, while its debt is just $3.7 million. In addition, a strong current ratio of 7.2 indicates that the company can easily meet its obligations going forward. So, Plug Power can easily invest in its business without much constraints and continue growing.
So, Plug Power is making a number of good moves to grow its business. Considering the rapid growth that's expected in the fuel cell industry and Plug Power's own strategies, I think it would be wise to buy Plug Power shares right now, especially because they have taken a huge beating over the past one month.
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.