Having started the year on a high, fuel cell company FuelCell Energy (NASDAQ:FCEL) has lost steam in the last three months. Although FuelCell shares have gained more than 60% year-to-date in 2014, they are down almost 36% in the past three months. Moreover, the company's recently reported second-quarter results made matters worse as its shares plummeted around 14% on account of wider losses and a decline in revenue.
Bad, but not too bad
FuelCell's revenue fell 10% year over year to $38.2 million in the quarter, missing the $45.2 million estimate. The fuel cell maker reported a non-GAAP loss of $10.7 million, or $0.04 a share, a cent more than what analysts were expecting. However, looking ahead, FuelCell's revenue guidance for the second half of the year is expected in the range of $100 million-$120 million, in line with analysts' expectations.
The company had to endure a wider-than-expected loss on account of higher operating expenses, which is quite natural for a company that's still in its growth phase. FuelCell is focused on making its business profitable in the long run. It received new orders and awards worth 12.6 megawatts, or $80 million, in the quarter, raising its year-to-date new orders to 16.3 megawatts.
A key partnership
FuelCell has gradually strengthened its relationship with POSCO Energy, its partner in Asia. The company's new strategic initiatives include collaborating on worldwide customer opportunities and integrating its global supply chain to drive down costs. Year-to-date, FuelCell's pipeline has strengthened on the back of multiple projects in advanced stages of closure, which will allow it to deliver a strong second half.
FuelCell's relationship with POSCO will enhance global market development and contribute to further reduction in product costs. First, it's collaborating with POSCO to support multinational customers expressing interest in fuel cell projects. This allows it to support global customers in local markets to ensure consistency of communication, quality, and execution.
Second, it is synchronizing its integrated global supply chain, which is primary in achieving the overall material cost reductions being planned. The consolidating purchase with the same supply chain will allow FuelCell reach volume targets that lead to lower pricing.
The strength behind FuelCell's business model is that POSCO is committing the capital for the facility, while FuelCell benefits from the further validation of its project solution by the continuing investment in capacity and market development by POSCO, as well as a second source of supply. The strategic alliance of FuelCell with POSCO is a powerful differentiator in the industry. This strong partnership enables both companies to display their respective strengths as they work together to grow their markets, and also drive down costs to improve financial returns.
The company is executing on key initiatives that will enable it to penetrate the estimated $12 billion market opportunity in fuel cells. It looks like its moves are gaining traction. According to Bloomberg, FuelCell is actively seeking new opportunities to grow the business, which is why management said that:
"Our second quarter was not as high in revenue as we would have liked," Bottone said today on a conference call. His team is negotiating for sales contracts that could lead to orders of 300 megawatts of power plants in the U.S. and Europe. "We are actively bidding on multimegawatt utility projects that we were not in a position to pursue in the past."
FuelCell currently serves two primary markets with ultra-clean stationary base load distributed generation power plants, utility grid support and on-site combined heat and power, or CHP generation. Two recent orders, including to a utility company and to a university, characterize each of these markets in project repeatability.
The fuel cell major recently announced a 5.6 megawatt award from United Illuminating, one of Connecticut's two electric utilities for two 2.8 megawatt DFC 3000 power plants.
Apart from making its offerings better, reducing the price per kilowatt will further accelerate demand and expand the size of the market opportunity for FuelCell. FuelCell is operating at its highest activity levels, and it is expanding its install base rapidly. It's actively bidding on multi-site megawatt utility projects, which were not possible in the past. Moreover, FuelCell's relationship with Fraunhofer IKTS should allow it to tap the European market.
Strong fundamentals and final words
FuelCell has a strong balance sheet, important for a growth-stage company. It is not laden with debt and is cash-rich. FuelCell has a cash position of $64 million while debt is just $25 million. In addition, the company has a strong current ratio of 2.08, which means that it can easily meet its obligations going forward.
Moreover, analysts are upbeat regarding the company's prospects, expecting its bottom line to grow 26% this year and 64% next year.
Hence, it is clear that FuelCell has a number of areas where it can tap growth and it is backed by strong fundamentals. Although the company has lost steam of late, it can continue growing on the back of opportunities in the fuel cell market. Its project pipeline looks strong and its tie-up with POSCO should drive growth in the long run.
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