FuelCell Energy Makes A Comeback

| About: FuelCell Energy, (FCEL)

Summary

Carbon capture will be on of the most important products in the energy space long term.

The ability to literally clean coal and gas-fired power plants cannot be undersold. This is the future of electricity generation.

Exxon will be key to long-term growth.

FCEL, valued at less than $100 million, could be worth billions in less than five years.

FuelCell Energy (NASDAQ:FCEL) has been beaten up the past few months --everyone reading this already knows that. But the tide is turning and we saw the first glimpse of good news in a long time. This is still floating around the SEC filling pages, but I believe these rumors to be true. BlackRock (NYSE:BLK) has increased its stake in FuelCell Energy to over 1.8 million shares. Of course, it had already owned over 1.2 million between multiple funds, but this large increase during such a risky time gives me more hope than I had even on New Year's Day. This filing has been hard to find, but this has been a rumor for a few weeks now. While I'm not claiming it to be a fact, I again believe it to be true. Smart money all over is pouring into this cheap, high-risk stock.

This big firm is not the only one diving into the deep end. The flow of hedge funds is getting in at the below-$2.00 level. This has been a ridiculously cheap price, but soon that time will be over. I predict a huge run-up in FCEL over the next 12 months. I would like to make a real numeric prediction, but because of the different large deals in play -- or not in play, or back in play -- it's hard to be even close to accurate. But here's what I do know: FuelCell Energy will be a very successful stock this year.

When I wrote "Carbon Capture Creates Big Upside For FuelCell Energy," I made a few predictions about the prospects of FuelCell and the hydrogen market overall. There were more business predictions that were right than the financials; E. ON (OTCPK:EONGY) is the most important deal of 2016. The fuel cell going online in Germany was a big step to this most recent deal that was just announced. The Radisson Blu and E. ON partnership is just another example of how E. ON will be a key to success for FuelCell. Not only does the hotel model work well with FuelCell for both electricity and heat, but it also allows the business ex-Radisson to improve their image or gain customers based on their trend. It's now becoming more clear to companies that not just politics but public relations are playing a key role in the consumer's spending power. This has never been more important as politics and consumerism are being smashed together, as can be seen with the new president, his daughter, and all the major retailers in the U.S.

Speaking of the domestic market, FuelCell has Exxon (NYSE:XOM) and Southern (NYSE:SO), and that's really all they need. But, of course, there are other smaller deals being tossed around, more RFPs coming in. Another rumor has been going around the web that FuelCell can still salvage the Beacon Falls deal. I have been vocal on Beacon Falls not being the be all end all for FCEL. The carbon capture project is so much more important than anything else right now. Even with an environmental radical in power and all of his cronies already gutting so many programs already in place, they cannot stop the rest of the world from moving forward.

There are three countries that will become increasingly important to FuelCell Energy: Canada, Germany, and China. I would include South Korea as well, but that deal is only worth a 3.5% royalty and will not have a comparable impact.

Canada: The Great White North has always been a leader in liberal policies; single-payer healthcare is just the tip of the iceberg. Canada is going to be the most important country for FCEL over the next five years. They have multiple deals under way, including the Oil Sands Deal, which is not yet a full project but the beginnings of what I believe to be a long-term big money deal. I see Canada as a strong long-term partner for FuelCell; the politics in particular are very favorable to this technology.

Germany: Germany is a very interesting play for FuelCell. To start, they have E. ON, which I mentioned above. They are among the largest energy producers in Europe. They started with their original installation in Germany and now their second move with the Radisson hotel deal. But let's just look at the German economy and their political leadership in the region. Germany cannot afford to be inefficient. They have managed to climb the ladder once again as one of the most important countries in the EU politically and economically, and continues to be a leader on social policy. It is because of these points that Germany will continue to innovate on all levels: fuel cells and hydrogen power as additional means for electricity production and maybe some carbon capture.

They lead the Greek bailout along with France, and they are one of the richer economies in the EU. For a better look, see the CIA Factbook on Germany. They have 80 million people, they have a strong GDP at $3.5 trillion, and a strong unemployment rate at 4.3%. Basically, if you consider the land, the population and the GDP, you get a very wealthy, highly educated, and liberal country that is fertile ground for an innovative product like fuel cells. The hotel-style project is also a relatively new model for this company, which for years has focused on corporate and public use like hospitals, jails, factories, and schools. And now a hotel -- given more than 50 installations, I'm not sure if there is even one FCEL product accompanying a hotel. Germany overall should be a good fit for FuelCell.

China: This country should be the final frontier; right now, there is no business between FCEL and China, but I would be shocked if there are no plans. Let's look at it from a purely logical perspective. China has seen a huge rise in GDP. Back in 2000, the U.S. had a GDP roughly 10 times the size of China. Now it is roughly double, which is still a lot. But, as you can see just from the GDP perspective, things have dramatically changed. But what did they buy will those billions in annual growth? Lots of smog, so much so that they have masks they wear so they don't get black lung. So much that there are now designer masks: Look at these masks made out of fashionable sneakers.

So, you have a newly rich country, one of the largest pollution problems ever and a product that can attach to a coal plant and reduce pollution between 70% and 90%. Please tell me why they are not going nuts for this? Because it's not 100% worked out; that's why the carbon capture project in Alabama is so important. This is not a billion-dollar deal for Exxon and the U.S. market; this a multibillion-dollar deal for the world. This is another reason why Exxon is so crucial to their success; they operate literally everywhere. Here is a list of the different operation locations from Exxon. As you can see, it's like the global cool kids' club; everyone who's anyone is on the list. It should help further the conversations regarding new deal making.

What does all of this mean: Major hedge funds are accumulating the stock, major international players are creating new deals, positive rumors? There have even been talk that short interest on the equity is decreasing. There are many bulls and bears that want CEO Chip Bottone's head on a spike. Five years ago, he was not CEO and there were no major deals to speak of. I believe Bottone is a great CEO, and while the share price has not indicated that recently, the flow of deal making and cooperation with customers is extremely indicative. So indicative that I question those investors' qualitative reasoning. I'm sorry to all you quants out there, but this will only give you a headache because it doesn't make sense numbers-wise.

This stock doesn't make sense by the numbers and that alone explains the last six months and the recent spike back up. Bottone has put together a long-term plan that won't be done until the middle of 2018, or maybe 2019; it's hard to say for sure. This won't just go up a few points a week for a month, and there is your surge. It's going to be big percentage moves in a short period of time for many reasons. One is the shorts covering. Two is that it's so oversold and undervalued that once the math does make sense, investors are going to realize that a $60M-$200M company will likely start talking about billions in revenue. It sounds nuts until you start doing some math and realize an 800MW-1.2GW carbon capture order is not as ridiculous as it sounds. A deal like that -- even a multi-stage, multi-year deal -- would equal a few billion in revenue.

The carbon tax is one major catalyst that could be extremely beneficial to a company like FuelCell. The Financial Times has a good article on pro-environment, pro-business tax ideas, which could be the best of both worlds. This would create a big opportunity for carbon capture. The tax doesn't yet have a definitive amount, but could be €30 per ton or $40 per ton in the U.S. Europe is likely to go forward with a carbon tax. FuelCell could clean up with carbon capture, allowing firms to spend money on a new power system or a carbon capture system that not only reduces pollution, but generates more power and saves money.

In the interest of full disclosure, FuelCell still hasn't made a profit. They are on a road to profitability -- that is clear -- but they have been on that road for a long time and many are skeptical they won't ever get there. The company has been under fire from retail investors for the past three years. Many believe the CEO should be fired for the recent performance. And this stock is currently in a valley right now. That does not mean it will stay in a valley.

Disclosure: I am/we are long FCEL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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