Fuel Cells: Driving Towards A Cleaner Future?

by: Justin Kuepper

There's a big problem with most alternative energies - they don't make economic sense without government support. This reliance on government support makes them inherently more risky investments, especially during a time when many governments are undergoing austerity. After all, who knows when governments will pull the plug (pun intended)?

But despite these arguments, it's hard to deny that alternative energy is the future. Economic issues associated with these technologies can often be solved with scale, while government subsidies aren't likely to completely dry up anytime soon. And many "green technology" companies have seen their share prices rise higher as a result.

One of the top performing sub-sectors has been fuel cell stocks, which have risen more than 27% this month, despite dropping more than 80% since the beginning of 2008, according to TickerSpy's index. But, will these trends continue or are investors better off putting their capital to use in other industries?

Companies in this index include:

  1. Ballard Power Systems Inc. (NASDAQ:BLDP)
  2. FuelCell Energy Inc. (NASDAQ:FCEL)

  3. Hoku Corporation (HOKU)

  4. Hydrogenics Corporation (NASDAQ:HYGS)

  5. Plug Power Inc. (NASDAQ:PLUG)

New Deals & Regulations Drive Sector Higher

The fuel cell sector has been hit by a number of new deals and some rumors of upcoming deals, which helped drive the sector higher in recent weeks. Meanwhile, improving government incentives for fuel cells has helped improve short-term investment in the sector and long-term prospects for commercial viability in a number of markets.

Some of the most recent deals have included:

  1. Ballard Power recently signed a MOU with WEG Industries and Tata Motors, while its fuel cell power system was deployed in India's Idea Cellular network.

  2. FuelCell recently announced a MOU to form a joint venture with Fraunhofer IKTS to market its products in Europe, while there were reports from GigOM that it may be named as a supply for Apple's new data center.

  3. Hydrogenics was awarded a contract from U.S. Hybrid Corp for five new generation HyPM HD Series Fuel Cell Power Modules.

  4. Plug Power recently formed a joint venture with Axane in France to develop fuel cells for the European materials handling market.

Some newer government incentive programs have also been improving commercial viability. For instance, the U.K. government recently announced that it would support firms developing self-contained hydrogen refueling stations that could be introduced to any contemporary gas station, along with a liquid catalyst fuel cell that could bring down the costs of fuel cells.

Losing Money or Investing in Growth?

Despite these deals and incentives, fuel cell companies all continue to lose money. For instance, FuelCell Energy - the largest company in the group with a $236 million market capitalization - posted a net loss of $57.9 million or 47 cents per share last year in 2011. And worse, the company didn't even have positive operating margins, with a gross loss of $12.61 million.

But the companies are heading in the right direction. FuelCell Energy's revenues jumped 75.6% in 2011, compared to 2010, while its net loss narrowed 1.6%. This means that the company's negative operating margin is moving closer towards the point where it can profitably scale the company. And notably, the stock trades at just over 2x its revenues.

Of course, not all companies are created equal:



Operating Margins

Net Loss

BLDP ttm

$76,000 (+16.9%)

-50% (+24.4%)

$39,000 (-11.4%)


$122,570 (+75.6%)

-37.2% (+40.7%)

$57,900 (+1.6%)


$3,647 (+39.9%)

-326.4% (-39.9%)

$11,837 (-117.9%)

HYGS ttm

$22,000 (+4.7%)

-45.5% (-2.6%)

$12,000 (-33.3%)

PLUG ttm

$22,000 (13%)

-154.5% (+38.8%)

$29,000 (+38.2%)

*Data taken from Yahoo! Finance and MorningStar where available and percentages are positive/negative impact on investors.

Stick with the Right Trends

Investors may want to stick with the companies experiencing positive trends across revenues, operating margins and net losses to find the winners. In particular, FuelCell Energy appears to be one of the best players in the sector with its improving fundamentals. And its possible deal to supply Apple's (NASDAQ:AAPL) new facility could give it an extra boost.

But it's important to remember that the sector is risky in that it continues to lose money, while the recent run-up may lead to some profit-taking. As a result, investors may want to average-in or wait for a pullback before buying.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.