Clean Energy Fuels (NASDAQ:CLNE) is having a bad time in 2014. The natural gas provider's shares have dropped almost 20% so far this year. But, is this an opportunity for investors, considering the expected growth of natural gas vehicles? The likes of Westport Innovations (NASDAQ:WPRT) are making solid moves to increase the adoption of natural gas vehicles with new, high-powered engines. However, the increasing usage of fuel cells and the rise of companies such as Plug Power (NASDAQ:PLUG) might prove to be a threat for Clean Energy.
In such circumstances, is Clean Energy Fuels a buy? Let's find out.
A solid infrastructure
Clean Energy has 96 truck-friendly fueling stations open, which is four times its closest competitor. It has increased its gallons-delivered volume by roughly 10% on an annual basis. Moreover, management is extremely focused on getting the company to profitability. Clean Energy has already deployed capital to build station infrastructure and scale up its capabilities. It is committed to being disciplined with its capital to align its investments with the growth of the market.
The release of the Cummins Westport 12-liter engine has pushed the sales of heavy-duty trucking to begin the transition to natural gas fueling. In addition, Westport recently launched a new spark-ignited natural gas 3.8L turbocharged engine featuring the Westport WP580 Engine Management System for the North American market. This engine management system is slated to find its way into Indian auto company Tata Motors' (NYSE:TTM) 5.7-liter engine that targets medium-duty truck applications.
This is a smart move by Westport as India is fast adopting natural gas vehicles. According to Rajendra Petkar, Head Power Systems Engineering, ERC of Tata Motors --
"India has one of the largest natural gas light-duty vehicle fleets in the world, and we see an enormous opportunity for natural gas trucks and buses with the development of fueling infrastructure. By expanding our portfolio of natural gas engines, we are focused on increasing our market share of the natural gas vehicle and engine market."
So, this move will open up a big market for Westport to enhance its business in the future. Additionally, the introduction of more natural gas vehicles will give rise to the need for more fueling infrastructure, and this is what Clean Energy provides. In addition to the new engine availability, the introduction of new natural gas sleeper cab options from Kenworth and Freightliner at the Mid-America Truck Show in March is another catalyst for Clean Energy.
Clean Energy's customer accounts are also increasing at an impressive pace. Kroger (NYSE:KR), the country's largest grocery retailer, has decided to enter into a partnership with Clean Energy to convert its large fleet to natural gas.
Customer adoption is rapidly increasing
Kroger's trucks are made to serve its network of stores, and are expected to use 1 million gallons annually. Additionally, Clean Energy signed a contract with EPES Transport Systems, one of the preferred carriers for Lowe's (NYSE:LOW) home-improvement centres.
Further, it signed on Cardenas Markets, a California-based supermarket chain for an order of 15 CNG trucks, along with their fueling throughout its Southern California network to serve their stores in the region.
Saddle Creek is another very important client for Clean Energy. It already operates one of the largest fleets of CNG trucks in the country with over 115 trucks in their fleet, and has announced to increase the fleet to over 200 within a year.
Clean Energy also supports UPS (NYSE:UPS) and its growing fleet of natural gas trucks. It currently fuels 230 UPS trucks daily at nine of its stations across the country. Further, Clean Energy plans on fueling 15 additional heavy-duty UPS trucks at its stations in Jacksonville, Florida, and Los Angeles.
Clean Energy is also seeing strong growth in transit, refuse, airports, and fleet services. A few months, ago it was awarded the operations and maintenance contract of the four CNG stations it built for Dallas Area Rapid Transit. These stations fueled over 1.3 million gallons in the first quarter of this year. DART is currently operating about 186 CNG buses and 112 light-duty CNG vehicles, and expects to take delivery of another 185 CNG buses during the second quarter.
Moreover, customers in Las Vegas have ordered over 100 new CNG vehicles, including 40 limousines and black cars for MGM Resorts (NYSE:MGM) and 65 new taxies and buses from Bell Transportation. These will also drive growth for Clean Energy's public stations. Bell currently operates 180 natural gas vehicles and expects to have over 300 in its fleet by the end of the year.
The Plug Power threat
Thus, all in all, everything looks positive for Clean Energy and investors might be compelled to buy the stock post its pullback this year. However, the threat from fuel cells and their growing application is real. According to Reportlinker, the market for fuel cells is expected to grow at a CAGR of 22% till 2020. Also, fuel cell company Plug Power's products are finding solid traction in the market. The likes of Wal-Mart (NYSE:WMT), Sysco (NYSE:SYY), and Procter & Gamble (NYSE:PG) are increasingly adopting fuel cell-based vehicles from Plug Power.
Recently, Wal-Mart ordered 1,700 GenDrive units from Plug Power for deployment at six sites. In addition, Kroger is also planning to deploy Plug Power's GenKey solution at two of its sites later this year. Moreover, Plug Power will also begin constructing the GenFuel infrastructure at Volkswagen's (OTCQX:VLKAY) Chattanooga, Tennessee, plant in the near future. Volkswagen will start with 45 GenDrive-powered lift trucks, and this number is expected to increase substantially going forward.
Hence, Clean Energy Fuels should keep an eye on the growing prominence of fuel cells going forward as they pose a tangible threat to its business.
Projections and conclusion
Although Clean Energy is still unprofitable, the company has strong prospects going forward. First, the rapid growth expected in the natural gas vehicle market is going to be a big catalyst for it. Next, Clean Energy is also seeing a rapid increase in adoption rates and it has a strong infrastructure. Clean Energy's bottom line is expected to improve at a terrific pace of 25% for the next five years, more than triple of the industry's average. Hence, investors should consider buying it on the pullback.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.