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Summary

  • FuelCell Energy is poised to lose its biggest customer.
  • FuelCell has been riding high on a misconceived notion, handing it an absurdly undeserved market cap approaching $1 billion.
  • The company is selling stock and we wouldn’t be surprised to see more.
  • Can't seem to scale.
  • Losing money faster than you can say, “Fool cells”.

By Sonya Colberg, Senior Investigative Reporter

If only we lived in that magical world where we could scrape up leftovers from Sunday dinner, plop them into a device, add a dollop of fat and presto - the air conditioner churns on uninterrupted. And no messy rendering required between steps.

In that world, FuelCell Energy (NASDAQ:FCEL) might also become profitable. Or at least its stock price would rise and fall based on FCEL itself, rather than the misconceived mirroring of Plug Power (NASDAQ:PLUG). Most of all, FCEL wouldn't be poised to lose its biggest customer.

But this is the real world. And it's inconceivable to TheStreetSweeper how a company with an accumulated deficit exceeding $797 million could be worth anything approaching $1 billion.

"Anytime you're a single-dollar or two-dollar stock, there's a reason you're a single-dollar or two-dollar stock," said Jake Dollarhide, CEO of Longbow Asset Management. "They announced they're cutting costs. Well, cutting costs is not what you always want to hear - especially when it's a new concept company that doesn't have mass scale at this point."

The stock has a lot of people spooked. During "Lighting Round" Tuesday on CNBC, analyst Jim Cramer said this about FCEL:

"Ahhh, FuelCell! I mean, you know, these are just total rank speculation stories. I can't go there," Cramer said.

"I've got a lot of solid companies that have really good fundamentals that are inexpensive," he added. "I'm not going FuelCell."

Indeed, this is a company that is:

  1. Poised to lose its biggest customer.
  2. Riding high on a misconceived notion.
  3. Selling stock. And we wouldn't be surprised to see more.
  4. Can't seem to scale.
  5. Losing money faster than you can say, "Fool cells."
  6. Sporting a completely unjustified market cap.

We see stubborn challenges for the Danbury, Conn.-based company that makes and sells fuel cells that generate electricity.

FCEL did not respond to TheStreetSweeper's request for comment.

We agree with this recent article on FCEL, but investors may find both positive and negative viewpoints on FCEL here.

MISIDENTIFICATION PROBLEM

The unprofitable company has gone airborne, flying from a $98 million market cap to $750 million in a flash. Rather than FCEL actually accomplishing much in that time - and we'll explain below why we believe the company's main accomplishment is at risk - it has taken advantage of a bad case of misidentification.

Investors have operated under the misconception that FCEL is the little brother of today's fuel cell hot shot Plug Power, a company other short-sellers have told us is 60-70 percent overvalued.

PLUG rocketed Aug. 14 on an earnings report showing more revenue and a penny cut in losses to 4 cents a share, resulting in what we believe to be a short squeeze. All of which pulled up Ballard Power Systems (NASDAQ:BLDP) and FCEL right along with it.

Though FCEL had recently reported continued declining revenue, worse gross margins and a greater net loss to investors - it became the biggest shocker of the trio. In the hours and days of the full-blown fuel cell hysteria, the company's shares saw an 11 percent price boost, far better than PLUG's own 4.4 percent or BLDP's 2.25 percent.

"Shareholders of FCEL have certainly had a bumpy ride," said Mr. Dollarhide.

Very rocky. All three stocks struck out on a phenomenal ride from March 1999 to March 2000, as the chart below shows. In about one year, the stocks rose well over 500 percent, in FCEL's case a staggering 2,000-plus percent.

In that timeframe, fuel cell companies caught fire with news media and investors, erroneously handing multi-billion-dollar valuations to companies still in the early stages of testing. PLUG was selling for an adjusted price of $1,400 (~$6 now), BLDP then was about $130 (~$4 now), while SatCon Technology (OTCPK:SATCQ) stock commanded an adjusted price of $292 (~1 cent now).

Even though FCEL was still three years away from coming out with a commercial model, the stock surged from $1.40 to an adjusted figure of $21.

Here's a look at the chart combining FCEL, PLUG and BLDP over the maximum timeframe.

(click to enlarge)

While PLUG and BLDP are related and might be expected to sometimes travel tandem, FCEL is just along for the ride. PLUG focuses on fuel cell use in forklifts, while BLDP actually supplies PLUG with fuel cells.

But fuel cells produced by FCEL are different. They are designed to convert natural gas - or sometimes biomass - to hydrogen gas, which then generates electricity for use in onsite plants and backup generation.

So, the FCEL niche is far different from the PLUG niche. They just all happen to be in the fuel cell sector.

Take a look at the more recent stock charts, FuelCell first:

(click to enlarge)

Then, the Plug Power chart:

(click to enlarge)

Here's the Ballard chart:

(click to enlarge)

The stock movement among the three shows striking similarities. Hooking onto PLUG might be good for FCEL this moment but the crowd can be fickle.

It's really beginning to sound like the type of wreck TheStreetSweeper has seen time and again. Though FCEL lacks some bad traits of other companies we've written about, it falls in line with trends in our report on another tiny, financed-to-death player that lost its key customer, Revolution Lighting Technologies (RVLT: then $4, now $2) and our report on The ExOne Co. (XONE: then $70, now $28), underdog to 3-D Systems (NYSE:DDD) part of the once searing-hot 3D printing gang.

SELLING STOCK

FCEL has already pulled off one public stock offering this year in January, as well as a private offering.

"They just recognized the prices are really high and they wanted to take advantage of the situation," said an analyst who requested anonymity.

Now, we wouldn't be surprised if FCEL accomplished another raise in the future. We believe a hint may be seen in recent analyst actions.

Though misplaced sentiment related to PLUG's earnings report sparked a big bump in FCEL stock price, the initial jump came when Cowen upgraded FCEL to "outperform" from "market perform" and slapped a $3 price target on it, sparking a move from $2.32 to $2.54 over three days before closing Tuesday at $2.81 and then opening Wednesday at $2.75.

One of the author/analysts formerly worked for Stifel Nicolaus, which managed FCEL's equity raise early this year and assisted with one in 2012.

Stifel managed, with help from Cowen and Co., the Jan. 17-23, 2014 public offering of 25.3 million FCEL shares at just $1.25 apiece. New investors' shares got diluted about $1.01 apiece. In stark contrast, FCEL bankers led by Stifel split about $1.5 million just for handling the offering.

One month earlier, Stifel reiterated a "buy" rating and raised the price target a quarter to $2. The report noted problems such as failure to convert pipeline projects into contracts but said Stifel was "pleased to hear of pipeline growth and lack of obstacles in financing for 2014…"

Cowen did not respond to TheStreetSweeper's request for comment.

FCEL inked another stock sale on July 30. Partner NRG Energy bought 14.6 million shares of FCEL for project development and financing, and extended a $40 million loan. Though this looks exciting at first glance, NRG, which now owns over 6 percent of FCEL, last year reported a stunning $368 million net loss.

Now, with about 269 million shares outstanding, FCEL looks like a serial raiser.

We've got to wonder: If FCEL is really on the verge of profitability, why does it keep selling shares? Even though the company had $72.7 million before its recent equity raises, it still sold. Is it getting ready to sell more shares?

SCALE DIFFICULTIES

Though company filings warn, "We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future," FCEL execs have chatted up profitability for years.

"And within 2013, the latter part of 2013, early 2014 - based on the backlog and based on the trajectory and the diversity we have in the revenue streams - we will attain profitability, EBITDA basis…," CEO Chip Bottone said at the Needham Growth Conference on Jan. 16, 2013.

That hasn't happened.

In order to start making more money than it spends, FCEL needs to annually hit 80-90 megawatts. FCEL is at 70 megawatts now.

FCEL also keeps hyping 210 megawatts as the target. This is just a distraction that certainly isn't going to happen anytime soon, if at all, in TheStreetSweeper's opinion. After all, Posco built the largest fuel cell plant in the world - and it is just 60 megawatts. And that's not much in the big picture, anyway. One megawatt is only enough power for about 1,000 homes.

In fact, scaling up is vital, but, unfortunately, selling fuel cells isn't all that easy.

The appeal has to reach both hearts and wallets. Based on cost of electricity by source, at $150 per megawatt-hour, fuel cell technology can produce electricity for less than solar or ocean power. But fuel cells work out to be close to three or four times pricier than coal. And fuel cells are higher than wind and two to three times more expensive than natural gas.

Subsidies help make fuel cells more attractive to customers, but these incentives vary across the globe and are difficult to nab because sources such as wind and solar are generally considered cleaner.

LOSING ITS BEST CUSTOMER?

Since December 2013, FCEL has been operating and maintaining its Bridgeport project located in the middle of Bridgeport, Conn. The plant produces 14.9 megawatts of energy which is purchased by Connecticut Light & Power under a 15-year plan. It is taking five fuel cell power plants plus an organic rankine cycle turbine to produce enough power for only 15,000 homes.

But FCEL's biggest customer is Posco Power, a partnership utilizing the South Korean government's incentives for renewable energy to make and distribute fuel cell power plants.

But here's the rub with Posco, FCEL's biggest shareholder at 12 percent ownership and biggest customer at 75 percent of past six months' revenues. Though FCEL announced a new contract to supply equipment to Posco - and this appears positive in respects to Mr. Dollarhide and other analysts - this is another step in Posco's plan to acquire FCEL technology and know-how. And, we believe, to kiss FCEL goodbye.

Here's how a recent article describes Posco's intent to continue developing a wide range of fuel cells for its clean energy project started in 2007:

The company pledged to further develop the fuel cell technology as part of its energy project, which would also help boost the nation's manufacturing industry.

"About 1,400 components are needed to build a fuel cell power plant. This helps create jobs in the related field, as in our case where we work with about 380 contractors," Posco Energy CEO Hwang Eun-yeon said.

"The company operates fuel cell power plants with a total capacity of 146 megawatts in 26 locations in South Korea…"

See this Google book for details about Posco using fuel cell technology to build its own plants.

As it uses FCEL equipment and technology to build more of its own power plants, it's obviously becoming more and more independent while FCEL steps deeper into the shadows, clinging to relatively tiny licensing fees and royalties. Until, we believe, FCEL is barely in the picture at all.

Mr. Dollarhide said it's common that such big investors like to diversify their overall energy presence - or just as often "they'd like to develop the technology on their own."

FOOL CELL LOSSES

FCEL has been losing money faster than Tesla Motors CEO Elon Musk can spit out criticism of fuel cells.

"As people probably know, I'm not the biggest fan of fuel cells - I usually call them 'fool cells,' " Mr. Musk said in Tesla's annual meeting in June.

Mr. Musk also called them "bull&*%$" last October, asserting that hydrogen fuel cell vehicles are more a marketing ploy than long-term solution.

But there are many fans who believe that fuel cells will power the future. And many of them have been willing to hang on to FCEL executives' prognostications and promises that come quarter after quarter. But those pesky finances keep coming back to bite them.

In the most recent quarter, EBITDA was -$7.5 million and FCEL scored a jaw-dropping 124 percent increase in net losses.

In fact, the net loss was greater than any quarter since April 2011.

A drop in demand and higher costs fed those losses and, combined with analysts' average estimates of a 3 cent loss rather than the 4 cents reported, investors hurled the stock price downward by over 7 percent in 24 hours.

Here's a closer look at the quarter's financial numbers:

Net loss: $16.6m -7 cents/share (2013 2Q: $7.4 m; -4 cents)

Revenue: $38.3m (2013 $42.4m 10%drop)

Product sales: $27.7m (2013 $34.4m 20%drop)

Gross margin: 4.2% (2013 5.5%)

Even if we can get past the risk of losing its biggest account, the misconceived parallel with PLUG, stock selling, and difficulty scaling, those numbers tell the dirty tale behind this clean technology company that's been dragging along for four decades.

"For every one or two winners I can think of 30 or 40 losers," said Mr. Dollarhide. "Companies that had a great technology but couldn't scale it up in time. Couldn't make a profit in time and either went under, went bankrupt or just became irrelevant.

"So, there's plenty of risk. Plenty of risk. Most of those companies had big investors and a promising story and momentum at one time, too," Mr. Dollarhide added.

Yep, and when the cult decides another stock is the new, hot wave, then they're all going to jump off and ride that hot wave. And FCEL, PLUG and BLDP will get killed, TheStreetSweeper believes. We think FCEL will be the first to go.

Additional disclosure: The owners of TheStreetSweeper hold a short position in FCEL and stand to profit on any future declines in the stock price. •Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org