The oil distribution channels reaching America from the Middle East, Venezuela, Russia, and Nigeria all carry the potential for disruption. In fact, the most frightening scenario is now directly before us, a potential war with Iran and its allies. And with religious-based scuffles erupting as far as Pakistan, any war in the Middle East portends spreading like a wildfire to encompass the entire region. You know what that means for oil…
Even without war, oil is pricey…
Oil trades above $70 and the spigots are open. Well, open yes, but constricted. OPEC has supply restricted so tightly that the International Energy Agency warned in mid-June of the unstable balance of supply and demand. Just a couple of weeks ago, the IEA indicated that the world was likely to face an oil crunch in five years time. There is little slack for an unexpected disruption, including that which could be caused by refinery outage due to hurricanes. You might think alternative energy stocks would excel in that kind of environment, and for the most part, they have.
Solar power companies are doing especially well, including names like Trina Solar (NYSE: TSL) and First Solar (NASDAQ: FSLR). Also, wind power companies like Vesta Wind Systems (VWSYF.PK) and peer Gamesa [GAM.MC] have soared above the clouds as well.
Company ---------------- Symbol ----------- YTD % Change (Aug. 8)
First Solar --------------- NASDAQ: FSLR ---- +268%
Trina Solar -------------- NYSE: TSL ------- +229%
Evergreen Solar --------- NASDAQ: ESLR ---- +27%
Vesta Wind Systems ---- VWSYF.PK -------- +62%
Gamesa Corp. ----------- GAM.MC --------- +42%
Joy Global --------------- NASDAQ: JOYG --- +6.8%
Peabody Energy --------- NYSE: BTU ------ +11%
Plug Power -------------- NASDAQ: PLUG --- (23%)
Ballard Power Systems -- NASDAQ: BLDP ---- (10%)
Fuel Cell Energy --------- NASDAQ: FCEL --- +41%
For the most part, alternative energy generation gets economically viable when the cost of oil and natural gas increase enough. That’s when these new age energy sources become price competitive, but they are often also supported by government subsidies.
But not all alternatives are energetic...
There’s a pooper in this alt-energy party, and it’s the fuel cell group. I followed three of them as a small-cap analyst, and became familiar with the particulars that are now likely driving them in a different direction than you might have expected.
Those three underachievers are Plug Power (NASDAQ: PLUG), Ballard Power Systems (NASDAQ: BLDP) and Fuel Cell Energy (NASDAQ: FCEL). Fuel Cell Energy has countered the downtrend though, rising sharply on the heels of its early June earnings report in which it posted 19% revenue growth and a narrower loss than was expected.
So what’s the problem, exactly?
The difference between the technologies is really quite simple, though a bit technical. Generally, fuel cell technology, in its current state, requires the input of expensive natural gas. In some special situations, this is not a problem. For instance, in the case of Fuel Cell Energy’s Direct FuelCell power plant, it can run on some seriously alternative biofuels as well.
For example, Fuel Cell Energy has sold its products to waste water treatment facilities that operate plants on the methane that is a natural byproduct of their own operation. It’s also being used by breweries, which can partially operate the machine on digester gas. In some instances, when the naturally occurring gas byproduct is not reliable in flow consistency, natural gas is used to steady it. Still, these types of opportunities are limited.
By now, you are putting two and two together: The key difference between wind and solar power, and fuel cell energy, is the fuel source. Where the first two use the naturally occurring wind and sunlight, fuel cells run on the input of natural gas. It’s that same natural gas that has increased well above historical average prices in recent times, and futures for the nearest month’s delivery now trade at $6.355/MMBtu. That’s not cheap folks! As a result, fuel cell energy generation does not gain advantage over fossil fuels.
To put it bluntly…
As the price of oil and gas rise, wind and solar energy become more cost competitive. It’s never mattered that they were clean energy supplies. The key reason they were not widely adopted in the past was because they were not economically viable, even with government subsidies. So, the winds of change have greatly improved the situation.
Making sense of valuations…
Since many of these companies are not profitable, we compare them using more relative valuation metrics than the P/E ratio. We use the price-to-book value metric here, which should still be more important than price-to-sales. This is because the sales of many of the players are still too insignificant and irrelative to value by.
Company ---------- Ticker ------------- Price-to-Book
Fuel Cell Energy --- NASDAQ: FCEL ---- 3.8
Plug Power -------- NASDAQ: PLUG --- 1.0
Ballard Power ----- NASDAQ: BLDP ---- 2.1
Trina Solar -------- NYSE: TSL --------- 7.7
Evergreen Solar --- NASDAQ: ESLR ---- 2.6
First Solar --------- NASDAQ: FSLR ---- 17
Clearly, the current viability of the product offerings are attracting higher valuations for the solar energy players. With fuel cells operating at a disadvantage, we can’t see them benefiting as much from both future government subsidies and investor support. Therefore, their divergence in valuation seems well-based. At this point we would take a closer look at ESLR to study whether opportunity exists on the upside, and FCEL to study whether opportunity exists either short or long. FCEL's valuation has edged higher, so we would want to study whether the catalyst is something that could take FCEL up toward wind and solar peers, or whether it might fall back toward its fuel cell peers. We anticipate taking a closer look at both companies for you in the future, and hope that we have helped improve your understanding of fuel cell stocks with this report.