Is Plug Power Still A Good Buy?

Jul.24.14 | About: Plug Power, (PLUG)

Summary

The increasing levels of days of inventory on hand, days of sales outstanding, and days of payables outstanding shows Plug Power will not turn profitable soon.

Fuel Cell's prospects don't look bright enough, which is why Plug Power shares will fall eventually.

Low efficiency will hold back the adoption of fuel cells.

The acquisition of ReliOn has proven to be a failure and will add to Plug Power's losses this year.

Historically, Plug Power has been destroying shareholder value, hence investors should avoid this stock.

Plug Power (NASDAQ:PLUG) is on a solid run this year. The company is riding positive trends in the fuel cell industry, and is investing aggressively in the business to tap growth in the long run. This was the reason behind Plug Power's weak performance in the first quarter.

Worsening fundamentally

It was recently reported that Plug Power's business efficiency is weakening based on three fundamental metrics, namely days of inventory on hand, days of sales outstanding, and days of payables outstanding.

(click to enlarge)Click to enlarge Source: ValueWalk

The above image shows that Plug Power's inventory has been rising for the past 2 years and this clearly means that the company is struggling to sell its product as quickly as it expected. In addition, the Days of Sales Outstanding, which signifies the average number of days Plug Power takes to collect revenue after a sale has been made, and Days of Payables Outstanding, which signifies the time taken by the company to pay its suppliers, is also rising considerably.

Source: ValueWalk

Source: ValueWalk

This clearly shows that Plug Power is worsening fundamentally and the company needs to change its business model in order to turn profitable.

Are fuel cells' prospects bright enough?

Plug Power is the first hydrogen fuel cell company to focus on powering a type of fleet vehicles, a forklift truck, which consumes hydrogen at a rate equivalent to the consumption at a gas station. The use of fuel cells in cars is also what Plug Power is working on. It is a bit confusing for investors to decide whether or not they should invest in Plug Power as several automakers such as Honda (NYSE:HMC) and Hyundai (OTC:HYMLF) are investing in fuel cells, compared to the battery-powered electric vehicles.

Fuel cells have some advantages that include less charge time, longer running time, and so on. The question to be asked regarding Plug Power is whether the forklift industry and some other niche applications of fuel cells can provide the earnings needed to justify the price.

The power efficiency of fuel cells can never be more than that of batteries. While a car battery can be powered directly, resulting in 80%-90% efficiency, powering a hydrogen car goes through many energy driven processes. Energy is used to produce the hydrogen, compress it, and then finally transport it to filling stations, all of which reduces the efficiency to about 25%. The costly extraction of hydrogen that is used in fuel cells is another reason that contributes to this less efficient technology.

Negatives to consider

Plug Power, with about 150 patents in fuel cells, is expecting growth, but the wider-than-expected loss for the trailing three quarters indicates that the fuel cell industry is not going to benefit the company. The company's acquisition of ReliOn, a developer of modular air-cooled hydrogen fuel cell stacks and unique low-cost stack assembly systems, proved to be a failure and it is expected to increase losses by $1 million this year.

Plug Power is doing well only in its GenKey business, and is expecting to ship approximately 650 GenDrive units in the next quarter to customers such as Wal-Mart (NYSE:WMT), P&G (NYSE:PG), Volkswagen (OTCQX:VLKAY), Central Grocers, and Ace. GenKey is an all-inclusive solution that provides ease of use to Plug Power's customers in the material handling space. It combines together GenDrive fuel cell units, GenFuel infrastructure, and hydrogen molecule and GenCare service contracts so as to make the transition of fuel cells customer-friendly.

The frequent rise and fall in the company's stocks state that it is not worthy for long-term investors. Falling revenue, decreasing EPS, negative gross margin of 42%, volatile earnings, all have been contributing to its woes.

Historically, Plug Power has been great at wasting investors' money by destroying shareholder value because of the consistent dilution of stocks. As pointed out by Jason Russ, shares outstanding have increased 11x since 2011 and this has been calamitous for investors. Russ explained,

"Since its inception, PLUG has lost nearly $850 million. PLUG has a decent amount of cash thanks to its most recent stock sale, so I will give the company the benefit of the doubt on that round of dilution and say that the jury is still out on whether or not it will be destructive to shareholder value. However, the previous sales most certainly were."

Moreover, on price/watt installed basis, using fuel cell instead of natural gas for generating energy proves to be costlier and this factor will restrict Plug Power's potential market by holding back the adoption of fuel cells.

Conclusion

So, even though Plug Power has appreciated strongly this year, its prospects are not as bright as they might seem. Hence, investors should stay away from this stock as it might fall from its perch badly in 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.