Earnings Preview: FuelCell Energy

| About: FuelCell Energy, (FCEL)


FuelCell Energy should report strong results after disappointing last time.

FuelCell Energy's outlook could be positive as the company has a strong order backlog and is entering into contracts with new clients.

FuelCell's relationship with POSCO will enable it to gain traction across the globe, while capacity expansion and operational efficiency can improve the business further.

FuelCell Energy (NASDAQ:FCEL) disappointed investors the last time it reported earnings. During the second quarter, FuelCell's revenue dropped 10% year over year as the company missed the revenue estimate by a big margin. In addition, its non-GAAP loss was a penny more than what analysts had expected. But, will FuelCell be able to turn its fortunes around when it reports its third-quarter results on September 8? Let's find out.

A look at the expectations

Analysts expect FuelCell to report revenue of $53.64 million for the third quarter, flat from the year-ago period. But, this will be a massive improvement over the drop of 10% seen in the previous quarter. In addition, FuelCell's loss per share is also expected to remain flat at $0.03.

Now, when FuelCell reported its second quarter, it said that it will generate revenue of $100 million to $120 million in the second half of the year. At the mid-point of this estimate, it should generate $110 million in the last two quarters of 2014, or $55 million in each quarter. So, there is a probability that FuelCell will be able to post good results this time and outperform expectations if it delivers on its outlook.

Long-term prospects look impressive

But, investors need to look at the company from a long-term perspective. FuelCell Energy operates in the fast-rising fuel cell industry, as a result of which it is seeing robust growth in order inflow. For instance, in the second quarter, new orders and awards stood at 12.6 megawatts, or $80 million. As a result, FuelCell's inventory of new orders has increased to 16.3 megawatts this year. Looking ahead, the company expects to declare more orders that will strengthen its pipeline.

According to management, the company has a robust sales pipeline, including several projects in the last stages of closures. As a result, the company expects to deliver a robust second half of the year.

In addition, FuelCell has enhanced its relationship with its partner in Asia, POSCO Energy. The two companies have entered into several strategic initiatives to bring together global customer opportunities. They will also integrate their worldwide supply chain to bring down costs.

FuelCell has signed an agreement with POSCO to enable demand for fuel cell projects from multinational customers in their geographic territories. Concurrently, FuelCell is streamlining its integrated global supply chain to achieve the overall planned decrease in material costs. The company will be able to achieve volume targets for reducing pricing by grouping purchases within the same supply chain. So, the alliance with POSCO will allow FuelCell to utilize the company's unique strengths to grow its markets, while reducing costs and enhancing financial returns.

More orders will lead to higher revenue

FuelCell caters to key markets such as super-clean stationary base load distributed generation power plants, on-site combined heat and power, or CHP generation, and utility grid support. It has been gaining good traction in these markets. For example, FuelCell recently received a 5.6 megawatt order from United Illuminating, which is among the two electric utilities of Connecticut, for two 2.8 megawatt DFC 3000 power plants. This is believed to be the second-largest fuel cell power plant order the company has ever received in North America.

The United Illuminating installation in Bridgeport will provide 2.8 megawatts of uninterrupted base load power on nearly a quarter of an acre, supporting 5 megawatts of irregular solar generation. This plant will utilize 8.5 acres, and displays the power density characteristic of FuelCell's power generation solutions.

Focus on capacity expansion and operational efficiency

In addition, the company is also undertaking moves to improve its operations, which will lead to a positive effect on its bottom line. FuelCell is reducing the usage of construction-related financing, which will further decrease the cost of capital. In addition, the company is sustaining its 70 megawatt annual production rate at its Torrington, Connecticut, manufacturing facility. It plans to sustain its utilization rate going forward, and expand production on the back of increasing demand.

This capacity expansion won't come as a surprise, as FuelCell's install base is expected to expand as it delivers more successful projects that might lead to more inquiries. As a result, the company expects more orders in its on-site CHP and utility grid support markets.


Thus, investors should look beyond the weak results that FuelCell reported when it last reported its earnings, and instead focus on its strong long-term prospects. The company's partnership with POSCO, its increasing order backlog, and the focus on cost reduction should allow it to become profitable 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.