AmTech Research Initiates on Alternative Energy Stock Distributed Energy Systems With "Hold" (DESC)

| About: Distributed Energy (DESC-OLD)

American Technology Research analyst David Edwards continues his roll-out of the alternative energy technology stocks. Here's an excerpt from his November 14th initiation of coverage report on Distributed Energy Systems (ticker: DESC):

Distributed Energy Systems Corp.($10.07, Hold) Valuation Already Takes Into Account Good Prospects

Investment Summary

Distributed Energy Systems offers a unique investment opportunity, providing exposure to multiple markets including distributed generation project development, renewable technologies, and hydrogen generation equipment. The company is growing rapidly and margins are steadily expanding, but profitability is probably still two years away. While we like DESC's potential and believe it will prove to be an important part of an energy technology portfolio, we believe the value is priced into the stock at current levels and are initiating with a Hold rating.

Company Description:

Distributed Energy Systems was formed in December 2003 through a combination of Northern Power Systems and Proton Energy Systems. The company continues to operate separate business units focused on distributed energy generation project development (Northern) and hydrogen production products (Proton).

Northern Power Systems was established in 1974 as North Wind Power Co. and provides custom-engineered power solutions, which frequently use renewable and fossil fuel technologies, including solar and wind energy. It has installed over 850 systems in 45 countries on seven continents for a series of applications, including commercial/institutional facilities, manufacturing, and industrial infrastructure. Northern's business is split into three categories:

  1. Systems–73%. Northern's systems business is split about 50/50 between on-site and remote power generation. The on-site systems provide power for either primary or back-up use and are frequently co-generation systems which generate both electricity and heat. The remote systems provide power to locations where there is no grid. These projects often include renewable technologies, including the company's own North Wind 100 wind turbines. This side of thebusiness has seen good success in the oil & gas industry, providing powerforremote drilling and pipeline applications.
  2. Products–17%. In addition to testing and evaluating third-party products, Northern'spower technologies group creates a variety of power products such as wind turbines and power electronics. The company is focused on expanding this expertise to increase margins and internal responsibility for project success.
  3. Services–10%. Northern provides ongoing operations and maintenance for power projects. So far, this has proven to be a good business for Northern which has helped increase the gross margin.

Proton Energy Systems, founded in 1996, designs, develops and manufactures hydrogen generation products using its proprietary proton exchange membrane (PEM) technology. The simplest way to think about Proton's products is that instead of using hydrogen to generate power and water (as a fuel cell does), it uses power and water to create hydrogen. Proton's HOGEN hydrogen generation systems are targeted at the materials processing, power plant generator cooling and semiconductor manufacturing businesses. Proton'starget customers today use hydrogen delivered by industrial gas companies such as Airgas, LindeAG, and Praxair. Importantly, all three of those companies have signed distribution agreements with Proton. Proton has trained over 250 sales representatives so far and says that order flow is good.

Proton offers three families of HOGEN one-box, automated hydrogen generation systems. The HOGEN GC ($9-10k) is designed for scientific applications, the HOGEN S series ($50-60k) is designed for industrial processes and the HOGEN H series($135k+) is designed for power plant generator cooling. These systems allow process pressure without a compressor, virtually zero-inventory hydrogen, automated operation and predictable hydrogen purity.

These HOGEN hydrogen generation systems are composed of individual cell stack assemblies that utilize water and electricity to produce hydrogen gas. Deionized water enters the positive side of the cell, where electrolysis dissociates it into protons, electrons and oxygen, which is then carried away by the flow of water. The protons, attracted to the negative side of the cell, use the sulfonic acid ion groups embedded within the membrane for transport through the material. The electrons, having moved through thepower supply to the negative electrode, link up with the emerging protons to form molecules of pure hydrogen gas. This process results in 99.999+% pure hydrogen at process pressure without mechanical compression and without caustic electrolytes.


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