Is FuelCell Energy the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if FuelCell Energy (Nasdaq: FCEL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at FuelCell Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.7% Pass
  1-Year Revenue Growth > 12% 2.9% Fail
Margins Gross Margin > 35% (18.6%) Fail
  Net Margin > 15% (62.4%) Fail
Balance Sheet Debt to Equity < 50% 6.6% Pass
  Current Ratio > 1.3 1.93 Pass
Opportunities Return on Equity > 15% (57%) Fail
Valuation Normalized P/E < 20 NM Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; FuelCell had negative earnings in the period and therefore fails valuation test. Total score = number of passes.

FuelCell only manages to rack up three points. But while most of the measures here are backward-looking, FuelCell has most of its potential ahead of it -- and could easily vault toward perfection with a few well-timed successes.

As an alternative energy company focusing on, well, fuel cells, FuelCell has seen its share of ups and downs. Just as fellow fuel-cell companies Ballard Power (Nasdaq: BLDP  ) and Plug Power have struggled in their attempts to become profitable, FuelCell has suffered through years of losses without even managing to score a positive gross margin.

Recently, though, enthusiasm for fuel cells has started rising again. In December, FuelCell reported that its order backlog was on the rise, offsetting the negative impact of its earnings miss.

But with gigantic competitors like General Electric (NYSE: GE  ) and United Technologies (NYSE: UTX  ) developing fuel cells for commercial applications, FuelCell has a lot to prove before it can turn the corner and get its income statement out of the red.

Although it undoubtedly has a chance to produce strong gains if it succeeds, FuelCell is far from perfect right now. Speculators might feel comfortable taking a flyer on the stock, but more conservative investors should steer clear at least for a while.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add FuelCell Energy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On March 24, 2011, at 4:20 AM, jaketen2001 wrote:

    If anyone is serious about looking in to fuel cell companies, I believe Ballard (BLDP) is a much better, and safer, stock. On any of the metrics looked at here, 1&5 year growth, net and gross margins, the balance sheet especially, Ballard is better that FCEL. FCEL has also gone through some dilutions and will apparently be issuing more. As opposed to that, Ballard has not issued any dilutions and will not need to. Ballard has a much greater chance of going cash positive before FCEL. Daimler's roll out of fuel cell EVs, using Ballard fc technology, may be the match that lights Ballards tinderbox. After years of R&D via a JV that included Daimler, Ford and BLDP, Daimler recently announced plans to build a factory in Vancouver next to Ballard's facility, and Daimler is actually also subleasing space from Ballard right in Ballards own facility. Although fc cars are only a small part of Ballards plans, they will play an outsized role in awareness of fuel cells and Ballard. If you haven't already seen them, log on to YouTube and search Daimler Fuel Cell Tour 2011. They are driving around the world in a fuel cell vehicle. Short version: fc vehicles get 3x the range of battery EVs, and only take 3 minutes to fuel. Germany has mandated H2 fuel build out by 2015, and even CA has an H2 highway in the works. Fuel Cell vehicles may over take public interested in battery EVs. Anyways, back to Ballard: down side almost nil. Limit : sky. FCEL, limit: sky; downside: insolvency. And PLUG uses Ballard fuel cells--they are not a competitor. I have FCEL in my CAPS, and it has outperformed recently, but in real life, its all BLDP. Long.

  • Report this Comment On March 24, 2011, at 11:27 AM, winningduh wrote:

    Commercial adoption rates should be much higher than consumer adoption rates for fuel cell technology. Since FCEL focuses on base station power products which is another name for "overhead" to business owners, I think this company will (over time) turn profit... and a lot of it.

    It seems reasonable that more and more commercial complexes will just make the switch to fuel cells over time. The companies that own gas stations on every street corner in this country might have a few words for BLDP.

  • Report this Comment On March 24, 2011, at 3:08 PM, piggy60 wrote:

    I started tracking this at $1.84, bought it at $1.99 and in one week I'm at $2.14. I love war!

    Seriously, news is good, and this is a very, very, very long play. Expect dips, but I like this company. I expect them to continue doing well in Europe, and they might get bought up if they really start competing. Once they get to $2.50, I'll put a stop/sell on the stock in the $2.35 range and then move it up 10% with every 10% climb in stock price..

  • Report this Comment On March 28, 2011, at 11:02 AM, Limnia wrote:

    Let me make you aware of http://www.limniaenergy.com

    A leader in next generation, clean, green, renewable energy.

  • Report this Comment On March 29, 2011, at 5:09 PM, salubrius wrote:

    FCEL is trying to produce a new, innovative product that has many advantages. It eliminates 99% of toxic pollution from its electric generation, it has high fuel efficiency in small sizes so it can eliminate investment and costs of operating losses in transmission and distribution facilities, it's heat energy can be used for cogeneration as its small size permits it to be located at the site of the load, it is safe, is has no radiation risks such as nuclear electric generation; so far its only problem has been the high cost of manufacture compared with the per kw cost of conventional generation. With its learning curve, FCEL has reduced its break even point from 500 MW per year to 90 MW.

    FCEL claims it has a sharply downward sloping production/cost curve. It has never reached break even because of the low volume of demand. It has lowered its breakeven point from 500 MW per year to 90 MW, but it has never produced in excess of 35 MW annually.

    South Korea has enacted a law that will result in its ordering fuel cell capacity far in excess of FCEL's break even point by 2012.

    One important feature of fuel cells is that one can get into the business of generating competitively priced base load energy for an investment of just $1 million to $5 million. With conventional coal fired or nuclear generation one must ante up, at a minimum $600 million for a coal fired plant to perhaps $2 billion for a nuclear plant. Therefore, the success of FCEL has the the liklihood of transforming the bulk power supply market structure from one dominated by monopoly, to a very competitive market.

    Fuel cells have also been impeded in competition because for each kW of peak load they must supply 1 kw of capacity. Load that is integrated by transmission and distribution lines can use far less because of variation in time of peak load of individual customers. For each 10 kW of residential peak load, for example, one needs to supply only 1 to 1.5 kW of generating capacity. However to integrate load, one must bear the cost of transmission and distribution facilities. About 10 years ago, the average cost of these facilities, including substations, was about $500 per kW. By now, new T&D and substations cost almost $1500 per kW. So when the cost per kW of fuel cells falls below the cost of integrating load fuel cells will no longer be disadvantaged. At last look, DOE announced that VERSA Power, of which FCEL owns about 43%, can manufacture solid oxide fuel cells in volume for $700 per kW and that it expects this number to decline to $400 by next year.

    What conclusions can one draw from these premises but that FCEL has some very good prospects.

  • Report this Comment On March 29, 2011, at 5:14 PM, salubrius wrote:

    Downward sloping production demand curves are not unusual. This normally results in decline in cost of 10% - 30% for each doubling of volume.

    As the product needed is "firm power", without integration the cost of reserves for emergency power would be increased. However one could use low per kW cost peaking capacity for this purpose.

  • Report this Comment On April 01, 2011, at 3:10 AM, jaketen2001 wrote:

    uh, Salubrius,

    The 'new' product that you are talking about is called a stationary fuel cell. Many companies, including FCEL, and Ballard, Bloom, et al. are producing them now.

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