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Summary

  • Plug Power has potential to reach $6 in our cash flow analysis.
  • The company has some solid prospects but a good deal of risk.
  • In part one, we investigate its pricing. In part two, we investigate its social responsibility.

Overview

As we continue our investigation of socially responsible investing companies, we turn our attention to Plug Power (NASDAQ:PLUG) now. The company, which develops fuel cell systems and fuel cell powered material handling devices, has been one of the hottest stocks over the past year, up over 1500%. The stock has more than doubled already this year as well. That growth definitely has brought the spotlight on the stock for its positives and negatives. We wanted to take a long look at the company to determine two major points: what is the stock really worth and is it a socially responsible investment/company. In this first portion, we will look at the company's main catalysts and business moving forward to determine our overall price target.

Catalysts

Plug Power is really going through a revitalization process right now. With a lot of attention to alternative energy as well as companies looking to improve efficiencies and cut costs where they can, renewable energy for material handlers is a definite positive that would attract a lot of customers to Plug Power. That is what we are seeing as of late. Yet, this is a company that has for many years been unable to sustain profitability on top of many promises of being able to turn its business around. As early as 2009, the company promised positive gross margins, which is something they have not been able to achieve since they went public.

With that said, things seem to be picking up for the company. Plug Power has gotten swept up in the hysteria surrounding alternative energy led by Tesla (NASDAQ:TSLA), and that hysteria has definitely led to a lot of overvaluations. The company is pricing at nearly 30x sales, 13x book, and nearly 200+x future 2015 estimated P/E. Overall, the company has made quite a move on little actual results. Yet, as we all know, the question is really the future of the business, not the present state.

The company has several strategic objectives moving forward - GenDrive and GenKey, moving into new markets, GenFuel infrastructure, and acquisitions.

GenKey has really seen some positive progress as the company mentioned in its latest quarterly report. The company expected to ship 650 GenDrive units in Q2 2014. The company has booked $80M in just the first few months, more than 2x the bookings in 2013. The company closed eight new GenKey deals with a great deal to get 1700 units at six sites for WalMart (NYSE:WMT). The company has more than doubled its backlog to nearly 3200 units as of mid-April. That success shows some solid momentum for the company. The company had a goal of $150M in bookings for the year, so they are well on their way.

The value proposition for GenKey systems is strong. Battery-powered forklifts or tools that work with material handling is old technology. It takes only about two minutes to refuel fuel cells. Fuel cells will last 7-10 years on average versus typically a much shorter time in batteries. Further, as the customer uses hydrogen more, the cost of the overall solution continues to decline.

Additionally, we believe the company is making the right investment in personnel. The company is looking to double its sales staff this year, which will be a benefit in the long run to hit bookings and to get deals done that are ready to be made. As CEO Andrew Marsh points out:

I think you always highlight why I'm investing more in sales, too, because I find these big deals require one salesperson full time to make sure they happen. And that's what we did with Walmart, and one of the reasons I'm actually assigning individuals who would just have responsibility for a single account to accelerate and close those deals.

The company, further, believes that they have a lot of opportunities for add-on with current clients, which has been the most recurring point of business.

GenFuel is also quite an interesting development, and it may end up actually being the future of Plug Power overall. The company has a strong value proposition for its material-handling companies. The company has established that as more per mile fuel is consumed, the cost becomes less significant. The company believes that hydrogen infrastructure is a place to grow their business for their GenKey system as well as hydrogen refueling stations moving forward. The company is already doing this in a modest way, but the real money is in larger fuel stations that are built either through government grants and/or through Plug Power moving into this business as a larger part of its overall plan.

Here is the company's first part of this plan:

We feel our GenKey sites are natural distribution points to provide hydrogen to retail stores and wireless sites. For example, one GenKey site could service 50 to 75 retail stores and a distribution center. This could more than double the revenue that we could generate with each sale if the stores associated with the distribution centers were included. Additionally, this can increase our servable annual addressable market in North America in material handling from 6 billion to close to 10 billion. We've had a number of retail customers show interest in this solution.

Finally, we see the company making an international push for the first time. The company has noted that the European fuel cell market could be as large as $18B in 2015, and the company is working with HyPulsion as a partner there. The company has deals with BMW in Germany (an American client) as well as IKEA in France. Further, the company is looking to advance into Asia through a joint venture with Hyundai Hysco. That deal is expected to be done by the end of July, and that deal will be a big win for the company to expand into a market that is going to likely be a large buyer of fuel cells in the future.

Overall, there is tremendous potential in this market with around 22% CAGR till 2020 expected, according to Mitu Anand. The majority of the demand is expected to come from Asia as well as for applications outside automotive like telecom, household power, and backup power for industrial needs.

Yet, the issues that have plagued PLUG for its entirety are still there. The company has not been able to turn profits. They have made promises before, that they did not hit. The company has a lot of hope for its future, but until the market really demands the product...things are only speculative. That is the best we can surmise PLUG's catalysts as ... speculative. What we will attempt to do in the next section is to determine a best-case and mid-case scenario based on these speculations to fit price targets to the stock.

Cash Flow

Before we do get to that, cash is an issue for any company that is not profitable and is highly speculative. The company has raised a lot of capital, with $174M in cash on its balance sheet ($73M in working capital and the rest from the IPO). The company had $63M in cash. In PLUG's defense, it is the highest its cash load has been in the five years of data we could look at, and the company was able to raise a lot of that capital due to strong price movement in the stock. With that said, the company still lost $130M in the TTM in net income as well as continuing to see around $25M-$30M negative FCF per quarter. So, unless something changes for the company, they will have to do another IPO and dilute the stock further. Given the market's appetite, though, the company seems to have supporters and will likely be able to raise more capital as well as use it as a catalyst for upside, buying them more time. This is the straight way to look at this. Bears say they will go bankrupt, and the bulls ignore the issue.

It is an issue, but the company has done a great job of "cheerleading" to allow them to raise a lot of capital and end up with still a pretty solid situation even despite the recent pullback.

Price Target Model

Revenue

The first place to look at the company is where they will be in terms of revenue. The company has already made over $80M in bookings through 3.5 months of the year, and the company expects to reach $150M in bookings for the full year. The company believes that it can translate those bookings into around $135M for the GenKey solution for the full year 2015. The company upped that expectation from the previous $100M with a sales staff build out at the beginning of the year.

The key, though, is closing more deals and seeing those deals continue to expand. While having a large backlog is a positive, these deals are now known and priced into the stock. The real question is can the company sustain revenue growth. The hydrogen market is looking strong with around 20-25% year/year growth expectations as we highlighted earlier. Overall, we believe the $135M number is unlikely to be achievable, and the company has always overestimated.

We believe a number around $60M-$70M is likely for 2014. We will use that as our mid-case with $80M being our best-case scenario for 2014. For 2015, the company will walk into the year with about $90M - $100M into billings, depending on how much backlog they work off. So, they are on a good foot to start the year with the potential to expand and grow.

The GenFuel deals will start to drive more revenue as well. The company has noted each deal will be worth about $1M upfront with $250K - $500K per year after that. They have nine deals signed, so we are looking at another $10M in 2015 as well. Therefore, a $110M-$115M area for 2015 is a fairly safe assumption, with the best-case being $135M.

From there, we will use the 22% CAGR rate for hydrogen to round our 2016-2018 for our five-year cash flow analysis.

Profitability

Profits have escaped Plug Power, and for the most part, the question is when (if at all) will Plug be able to turn profits. The company is in bad shape, with the inability to even turn a gross profit. The company has noted they expect to break even in net income in 2014. The company needs rising revenue to get to these levels, and the company has noted they are dealing with mostly fixed cost issues.

Additionally, the company building out their sales staff at both locations for where they are delivering GenKey hit them as well. The company believes product will be gross margin positive by Q3 and service by Q4. Based on these trends, we should see net income positive for 2014 but with only slight margins. Ballard Power Systems (NASDAQ:BLDP) has also not gotten into the black either. We would say by 2016 the company could see a decent net income, but this is really a crap shoot. By 2018, in a best-case scenario we will assume operating margins have gotten to 10%. In our mid-case scenario 6%.

CapEx/Debt

Here were the company comments on CapEx:

Our strategic objectives include growing the sales force to address increasing demand for Plug Power products, directing capital expenditures and expanding into new markets including Europe and Asia, completing opportunistic acquisitions; and focusing on hydrogen generation and distribution opportunities.

Plug Power may use some capital to assist in increasing our servable, addressable market by expanding into retail stores, by developing local distribution for hydrogen fuel.

We would assume that these would stay in the $3-$5M range with the potential for them to rise to about $10M by 2018 with an effort on expanding globally and developing distribution channels for GenFuel.

Here is how our two cases set up:

Mid-Case Scenario

PROJECTIONS
12345
20142015201620172018
Income from Operations-20-100512
Income Taxes-2-1011
Net Op. Profit After Taxes-18-90511
Plus: Depreciation45666
Less: Capex-2-3-5-6-8
Less: Increase in W/C-7-7-7-7-7
Available Cash Flow-9081216

Best-Case Scenario

PROJECTIONS
12345
20142015201620172018
Income from Operations-20-1051015
Income Taxes-2-1112
Net Op. Profit After Taxes-18-95914
Plus: Depreciation45666
Less: Capex-2-3-5-6-8
Less: Increase in W/C-7-7-7-7-7
Available Cash Flow-90131619

We use a 1.5% cap rate for each because this is a high growth stock. The company has no debt, so there is not a huge concern of them not being able to pay their interest. In the mid-case scenario, we come up with a $3.50 2014 price target. In the best-case scenario, we come up with a $6 price tag. These are 2014 targets, so we are looking at some upside for the name. The company is likely to hit the $6 level if Q2 is solid.

Conclusion

Things are decent at Plug Power, but let's not get ahead of ourselves. This is an exciting company with a lot of growth potential, but they have proven little yet. They need a couple solid quarters and to turn gross margin positive before we give them more hope for their future overall. In the next section, we will begin to delve more into the socially responsible side of this company to see if there is more merit behind their overall image.

Source: Plug Power: Worth $6 Per Share, Maybe More?