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Summary

  • FuelCell Energy has dropped on the stock market of late, but this looks like an opportunity considering that the fuel cell market is expected to grow at a terrific pace.
  • FuelCell's order inflow is strong.
  • FuelCell's partnership with POSCO will enable it to tap more customers in different markets.
  • FuelCell Energy's balance sheet is robust, and its bottom line is expected to grow at an impressive pace in the next five years.

Shares of FuelCell Energy (NASDAQ:FCEL) dropped recently after certain analysts expressed their concerns over the company's valuation, and even called it a speculative investment. However, it is wise to take a look at the company's long-term prospects, since the fuel cell industry is expected to grow at a robust rate.

According to Markets and Markets, "The fuel cell market will grow from an estimated $629.8 million in 2013 to $2,543.1 million by 2018, with a CAGR of 32.2% from 2013 to 2018." Now, this is a really impressive rate of growth, and in light of this projection, it won't be a good idea to discard FuelCell Energy and its prospective growth.

In order to tap the expected growth in the market, FuelCell Energy is focusing on expansion plans and is strengthening its business for long-term profitable growth. The company has fortified its partnership with POSCO to increase its presence in Asia. Moreover, with various strategic initiatives on the global front, management believes that it has positioned itself well to acquire more customers with a reduction in its product costs.

Getting more orders

FuelCell recently bagged a 5.6 MW order from United Illuminating for two 2.8 megawatt DFC 3000 power plants. This is the second-largest fuel cell power plant order it has received in North America till date. This plant will supply continuous power to the electric grid under a 20 year service agreement.

One of the biggest advantages of a fuel cell power generation plant over a solar power plant is its ability to produce the same amount of power in considerably less space. For instance, in the case of United Illuminating, it produces 2.8 MW using around a quarter of an acre. On the other hand, a 5MW solar power generation plant requires 8.5 acres of land, and in most urban settings, such large space is not viable for power generation.

Because of its compact power generation capability, fuel cells are gaining demand as an alternate source for clean energy. Consequently, it is no surprise that FuelCell received a 1.4MW power generation order from the University of Bridgeport. The company will incorporate its combined heat and power configuration (CHP) that will increase the overall efficiency of the plant. As far as financing is concerned, the company is in negotiation with multiple project investors, and by reducing the use of construction-related finances, the overall cost of capital will be lowered.

A strategic partnership

As mentioned earlier, FuelCell has strengthened its relations with POSCO to enhance its global presence. This partnership will be a boost for customers who are interested in fuel cell projects since the two companies can support each others' clients in their respective geographical locations for consistency of communication, quality and execution. In addition to global expansion, this relationship will also help them to take advantage of their combined purchasing volume that will ultimately lower the product cost for both firms.

POSCO's South Korean manufacturing facility should be completed by next year, which will provide a cost advantage to FuelCell. Looking ahead, management says, "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."

Currently, FuelCell has a 70 megawatt annual production rate at its Connecticut facility, and considering the near term order projections, it is confident of optimum utilization. Improving the manufacturing processes and reducing the cost of materials will strengthen its margins. Moreover, driven by recent orders from United Illuminating and the University of Bridgeport, the company aims to achieve its EBITDA break-even in the coming months.

Going forward, FuelCell is working hard to drive new order flow, and its already established projects will act as catalysts to drive more enquiries. The company has started bidding on multi-site megawatt utility projects. Apart from its existing contract at the University of Bridgeport, the company is also developing new projects, such as single-plant combined heat and power applications and multi-megawatt fuel cell parks.

In addition to POSCO, FuelCell has also partnered with Fraunhofer IKTS. This will act as a platform for the company in Europe. FuelCell will benefit from Fraunhofer's R&D capabilities.

Fundamental view

FuelCell isn't yet a profitable company, which is why it doesn't have any price to earnings multiples. But, the good thing is that the company's price to sales ratio looks reasonable at 3.49. In addition, the balance sheet looks relatively healthy with cash of $64 million and debt of $25.7 million. The current ratio of more than 2 indicates ideal liquidity.

Also, in the coming five years, it is estimated that FuelCell's bottom line is projected to grow at an annual rate of 40%. Hence, considering these statistics, it will be wise to ignore Mr. Cramer's views, and remain invested in FuelCell Energy for the long run.

Source: Why FuelCell Energy's Recent Drop Looks Like A Buying Opportunity