Why FuelCell Energy Is Set To Soar To New Highs

Jun.24.14 | About: FuelCell Energy, (FCEL)

Summary

FuelCell Energy has gained remarkably this year, but its recent results have led to a pullback.

FuelCell expects the slowdown to be temporary, and expects greater growth in the second half of the year.

Positive industry trends and FuelCell's new contracts should help it capitalize on the growth of the fuel cell industry.

Global fuel cell power company FuelCell Energy (NASDAQ:FCEL) is on a terrific run this year. The stock has gained an impressive 74% so far this year, but it ran into a hiccup recently, after reporting results for the second quarter. FuelCell fell 14% in just one day, as its losses exceeded the consensus estimate.

However, management believes that its results will improve in the second half on the back of various existing orders, which will boost its revenue considerably. As reported by Bloomberg:

Sales in the next two quarters will average $50 million to $60 million each, exceeding the $38.3 million in the second quarter, according to Chief Executive Officer Chip Bottone.

So, it looks like FuelCell Energy is headed for better times going forward, which is why investors should think of buying its shares on the pullback.

New orders to drive growth

FuelCell's new orders include higher-margin, power plant sales and service agreements, with which FuelCell expects to achieve break-even this year. It has bagged orders worth $80 million, and there are more to be announced in the coming months. The company has bolstered its relationship with POSCO Energy, which is its partner in Asia.

Currently, the energy market is a multi-trillion dollar industry, of which FuelCell expects its market opportunity to be worth $12 billion. To tap the fuel cell energy market, FuelCell is making solid moves. It was recently awarded the second-largest fuel cell power project in North America for two 2.8 MW Direct Fuel Cell [DFC] 3000 power plants. The company would be operating these plants for United Illuminating under a 20-year service agreement.

This unit will provide power to the electric grid on a continuous basis. One of the biggest advantages of a DFC power plant is that it utilizes less space. The 2.8 MW power plant utilizing around one quarter of an acre is similar to a 5 MW intermittent solar power plant, which utilizes around 8.5 acres. Thus, a large amount of space is required for solar power plants, which is not viable everywhere. But, a fuel cell plant requires considerably less amount of space as compared to the former.

Another added advantage of using a fuel cell power plant is that it produces clean, on-site combined heat and power [CHP]. The company recently bagged a 1.4 MW power project from Bridgeport University, and this CHP configuration increases the overall efficiency of the project, which is best suited for universities.

FuelCell has successfully completed many similar projects, as a result of which, it has established a strong reputation for itself. Consequently, the company is receiving a lot of inquiries, which will help it bag more orders. Moreover, FuelCell Energy is now bidding for multi-site megawatt utility projects.

The POSCO angle

As stated earlier, FuelCell has strengthened its strategic relationship with POSCO that will enhance its global market development and also help reduce its product costs. There are mainly two objectives for this strategic partnership. First, it will help FuelCell Energy support multinational customers expressing interest in fuel cell projects in the other partners' geographic territory. Second, it will synchronize its integrated global supply chain, which will reduce its overall material costs.

In the words of CEO Chip Bottone:

Our strategic alliance with POSCO is a powerful differentiator in the industry. This strong partnership leverages our organizations' respective strengths as we work together to grow our markets while driving down costs and improving financial returns.

Apart from POSCO, FuelCell Energy has also partnered with Fraunhofer IKTS. This will open doors for the company in Europe for further product enhancements by leveraging its research and development capabilities.

Positive developments in the fuel cell industry

Recently, the U.S. government has been supportive of companies adopting clean methods of generating power. The Connecticut legislature has enabled companies to own renewable power generation assets, which was previously prohibited to them. Similarly, last month, the Fuel Cell and Hydrogen Infrastructure Act for America was introduced to the U.S. House of Representatives.

Such developments are not only taking place in the U.S., but in Europe as well. These easing of regulations will support FuelCell Energy, as legislative and regulatory policies can lead to the adoption of clean distributed generation without financial incentives.

As such, FuelCell Energy looks well-positioned to benefit from a fast-growing fuel cell market, which is expected to grow at a CAGR of 22% during the period 2014-2020, according to a RNCOS report.

Conclusion

Since FuelCell is still in its early days of growth, it doesn't have typical valuation ratios, such as trailing and forward P/E. However, the good thing is that the company has low debt and a strong cash position. FuelCell has cash worth $64.25 million on its balance sheet. In comparison, its debt is $25.65 million.

The company might have put in a mixed performance in the previous quarter, still, it looks well-positioned for the long run, considering the expected growth of the fuel cell industry. Moreover, FuelCell is recording good growth in its contracts, so it should be able to capitalize on the industry's growth, making it a good buy for the long run.

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.