Is FuelCell Energy A Solid Long-Term Investment?

Jul.13.14 | About: FuelCell Energy, (FCEL)


Strong order backlog will allow the company to register solid growth in revenues over the next few months.

There is a considerable growth opportunity in the fuel cell sector in the domestic as well as international market as developed nations turn to clean energy.

Increasing demand from the industrial as well as domestic customers will ensure the revenue growth for the companies operating in the sector.

The fuel cell sector has investors' attention at the moment - the investors are betting on the transformation of the energy sector through fuel cells. As a result, stocks in this sector have been extremely volatile. The embryonic nature of the industry has resulted in considerable volatility in the revenues and earnings of the companies operating in the sector, which has translated into volatile stock prices. FuelCell Energy (NASDAQ:FCEL) is one of these companies, and its stock price has seen a fair share of volatility over the last few months. However, FCEL is one of the best-positioned companies in the sector due to its business model, which we have discussed in our previous articles. We are mainly focusing on the strength of the business model and the business prospects when it comes to evaluating a fuel cell company. We will further analyze the business prospects of the company in this article.

Strong Order Backlog ensures Future Growth

The alternative energy sector is making consistent progress across the globe by increasing clean energy acceptance and reduced fossil fuels usage by the developed nations. As the awareness for of the global warming issue is increasing, the demand for zero carbon emission, renewable energy and fuel cell energy market is increasing sharply. FuelCell Energy has also shown impressive performance over the last few years; however, the company incurred a revenue shortfall in the second quarter due to an unexpected sales decline. Nevertheless, the company is expecting a revenue gain in the third quarter - with new and existing orders to increase revenues by more than $100 million in the second half. Moreover, the increasing order backlog of the company will likely increase the sales in the next two quarters. At the moment, the total order backlog of the company stands at around $342.8 million, giving a strong support for the revenue growth over the next few quarters.

The company recently announced a project for University of California which includes the installation of a 1.4 Megawatt [MW] fuel cell power plant in the Irvine Medical Center. This project will provide both electricity and usable high quality heat to the desired region. Moreover, the power plant will be sufficient to fulfill around 30% of the facility electricity requirements while the heat produced will be used in a direct absorption chiller to generate around 200 tons of cooling for institutional requirements. The company will provide clean, quiet and affordable energy solutions to a medical center, a campus and an acute care facility with the help of this power plant.

The business model of FuelCell Energy has enabled it to serve the large industrial customers with high energy requirements at their disposal. Further, the increased adaptability of industrial customers towards clean energy has helped the company to prosper. Since the company's power plant will generate power without combustion, its exhaust is virtually pollution-free. Compared to the electric grid, the fuel cell installation will reduce the harmful emissions of around 28 tons of smog-producing nitrogen oxide, 64 tons of sulfur dioxide that causes acid rain, and several tons of greenhouse gases, annually.

Further, FuelCell Energy will install, operate and maintain the Irvine Medical Center power plant through long-term power purchase agreements with the institution. The company is expecting to close permanent financing on or before the commercial operation date of the power plant. However, the medical center has entered into a multi-year power purchase agreement to buy the electricity produced by the fuel cell plant, while the cooling benefits are provided as an additional benefit to the medical center. This will increase the services revenue stream of the company, which already showed tremendous revenue growth in the second quarter - up almost 75% compared to the last quarter.

Future Growth Might Also Come From Abroad

Asian developed nations are also looking to make a switch to clean energy - Japan recently announced a 25-year plan to convert its conventional energy sources into hydrogen fueled sources. The Japanese government has estimated and developed a 25-year plan to adopt clean energy production practices in automobile and several other industries. Further, Japan wants to implement this plan into three phases: first phase of plan will focus on clean transportation and will be achieved by the end of 2015. Many of Japan's prominent automakers have been planning to build a hydrogen fuel infrastructure throughout the country to prepare for the shift in the automobile sector.

The second phase of the plan will highlight the use of fuel cells in residential customers between 2020--30. Currently, Japan has around 1.4 million hydrogen fuel cells providing power solutions to residential customers, and the country plans to raise the number to around 5.3 million by the end of the second phase. The third and the last stage incorporates plans to achieve carbon-neutral industry wide hydrogen production methods and procedures. The increasing domestic demand of clean energy hinders Japan to fulfill the massive needs; however, it is planning to rely heavily on hydrogen imports from other countries. This posts strong growth opportunity for the whole fuel cell sector and will substantially increase their revenues in the coming years.


The fuel cell sector will benefit considerably from the shift towards clean energy over the next few years. We believe FuelCell Energy is well-positioned to exploit this growth opportunity. The business model of the company will allow it to take advantage from the increase in the industrial as well as domestic growth in demand. We see considerable strength in the FuelCell Energy business model, and believe this is one of the best picks in the sector over the long-term.

Disclaimer: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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.