Why These 3 Fuel Cell Stocks Are Great at Losing Investors Money

Warren Buffett is famous for saying, "In the short run, the market is a voting machine. In the long run, it's a weighing machine." What the Oracle of Omaha meant is in the short term, stock prices are largely a popularity contest ruled by the latest hype and speculation. However, in the long term a company's shares will trade based on earnings it can deliver to shareholders. 

In the last year, few industries have been victims of rampant hype-fueled speculation more than fuel cell stocks -- Plug Power (NASDAQ: PLUG  ) , Ballard Power Systems (NASDAQ: BLDP  ) , and FuelCell Energy (NASDAQ: FCEL  ) . 

PLUG Chart

PLUG data by YCharts

The share spike was triggered by Plug's announcement of a major contract with Wal-Mart (for 1,738 fork-lift power units over two years) and a contract with FedEx (for a $3 million DOE-sponsored test of fuel cell range extenders in 20 FedEx trucks).

With the recent sharp pullback in price for all three stocks, investors might be asking if this represents a buying opportunity for a promising growth industry. As this article will explain, the potential for fuel cells is much less than the recent share price explosions would indicate, and there are several fundamental flaws with how all three companies are run -- flaws that are likely to either result in long-term underperformance or outright losses. 

What's the deal with fuel cell companies?
The major fuel cell companies -- Plug Power, Ballard Power Systems, and FuelCell Energy -- operate in three separate niches.

Plug Power specializes in cargo movers, specifically fork-lifts and delivery truck systems, a potential $4 billion market. Ballard Power Systems specializes in remote power generation and gas-fed fuel cell back-up systems for things like telecommunication systems, a $4.5 billion market. FuelCell Energy operates in the larger, $10 billion-$12 billion, heat and power generation industry (and it sells larger systems to utilities).

Interestingly, until Plug Power's recent $4 million acquisition of ReliOn Inc (makers of power backup systems) the company didn't make fuel cells, but rather the components to incorporate them into fork-lift power systems. Plug sourced its fuel cells from Ballard Power Systems, which provided 10.6% of Ballard's 2013 sales.

Two reasons against investing in fuel cells
There are two primary reasons against investing in Plug Power, Ballard Power Systems, and FuelCell Energy: market uncompetitiveness and a fundamental problem with the companies themselves.

Specifically, I am referring to the fact that currently the cost of using fuel cells as either energy generators or backups is 20%-30% more expensive on a price/watt installed basis than natural gas or certain forms of renewable energy.

This will greatly hinder the adoption of fuel cells in general and limit the size of the potential markets of these three companies. Even if these basic economic realities change and fuel cells become cost-competitive, there are two fundamental flaws with how these companies operate that are likely to make them bad long-term investments -- even if the companies themselves prosper. 

PLUG Revenue (Annual) Chart

PLUG Revenue (Annual) data by YCharts

PLUG Chart

PLUG data by YCharts

What these graphs indicate is a fundamental problem for these companies both in terms of profitability and share dilution.

Ballard Power Systems and FuelCell Energy are better off than Plug Power with positive gross margins. However, Plug's margins are catastrophically bad and look to be getting worse, despite management's insistence that EBITDA break-even will occur by Q2 or Q3 of 2014. 

In fact, I feel I must call out Plug Power's management for some of the most misleading guidance I've ever seen from any company. For example:

  • "Plug Power will achieve a gross margin percentage in the mid-teens." [in 2009]
  • "We do expect that both a ramp in shipment volumes and an increase in share of shipments from new product platforms over the remaining quarters of 2012 will boost gross margins into positive territory."
  • "Plug Power will generate between mid $40 million and low $50 million in revenue." [in 2009]
  • "We're also on track to meet our target of shipping $40 million of revenue in 2012."
In fact, Plug's 12-month revenues have never exceeded $33 million, its gross margins have never been better than -25%, and its quarterly EBITDA is moving exponentially in the wrong direction. 
 
But perhaps the biggest reason investors should avoid Plug Power, Ballard Power Systems, and FuelCell Energy is because all three companies are guilty of heavy shareholder dilution, though Plug Power with its 11-fold increase in share count in just four years (82% CAGR growth in shares) is by far the worst. However, even Ballard Power Systems (12% annual dilution rate) and FuelCell Energy (32% annual dilution rate) print shares at a pace that makes growth in earnings per share -- the sole long-term determiner of non-dividend paying share prices -- very difficult. 
 
Foolish bottom line 
Fuel cells are currently not economical, and even if that changes and they develop widespread adoption, it's likely that companies such as Plug Power, Ballard Power Systems, and FuelCell Energy would continue to struggle with profitability and share dilution that would make market outperformance difficult to come by. Until these fundamental problems with both the fuel cell industry and these companies in particular are fixed, I advise against owning all three. 

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Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2014, at 5:01 PM, mark1326 wrote:

    Nice one-sided article ..... We can sure tell that you are short PLUG .... Come August lets see if you are right or wrong when PLUG comes out with their next earnings report that should show some very impressive revenue numbers .....

  • Report this Comment On June 19, 2014, at 9:24 PM, AdamGalas wrote:

    I am not short PLUG (if I were it would have to be in the disclosure or I'd lose my job) and I wouldn't advocate anyone short it either. Momentum stocks such as PLUG can be very volatile and shorting represents limited upside but unlimited downside.

    As the saying goes "the market can remain irrational longer than you can remain solvent."

    Plug went from $.26/share to $3. If you shorted the stock then watched it soar to $11, you got hosed, even though the stock dropped like a brick just weeks later.

    Shorting requires you to be fundamentally right about a company AND correct on the timing (much like naked options trading).

    Both are short term speculative strategies and that is not what I, or The Motley Fool advocates. Its possible to make a killing with such strategies but most of the time, (unless you are an insider) its luck rather than skill that rings that dinner bell (a fact I learned the hard way).

    I prefer to put my faith in solid dividend/distribution paying companies with proven track records.

  • Report this Comment On June 19, 2014, at 10:02 PM, tmorr55 wrote:

    I've said the same thing on SA and other forums, that I am sick and tired of reading how every author of any article pointing out flaws in whatever stock is deemed a "short" of that particular stock. This author is pointing out what so many of the sheep in the fuel cell fold simply want to ignore. OK, fine...you're right...let's see down the road what happens and who is right...but for god's sake enough of the short accusations.

  • Report this Comment On June 19, 2014, at 11:03 PM, pac1investor wrote:

    PLUG, BLDP, and FCEL are indeed momentum stocks, but are also good candidate stocks to hold for the long term, given their futuristic very promising business world. With our fragile planet inflamed by horrifying wars and man's unsatisfiable thirst for oil---that drive cost of fossil fuel continuously higher---soon exploding stock prices for these three well-known renewable energy companies, especially FCEL, will soon be the dismay and blunder of those who now ignore, and even short, them.

    Absent from the group is privately-owned Bloom Energy Corporation that offers affordable on-site clean renewable energy for Fortune 500 companies around the world.

  • Report this Comment On June 20, 2014, at 1:00 AM, scottchu1 wrote:

    I'm not sure how you can justify saying FCEL is great at losing investors money when a 1mo, 6mo, 1yr and 2yr chart shows a nice gain. Unless, of course, you are talking about 2 weeks of Fools chasing a run to the 4.70's.

  • Report this Comment On June 20, 2014, at 10:52 AM, HvyOnEzFool wrote:

    #1 Energy “Champions of the Status Quo” will soon suffer the fate of their benefactors

    #2 President's Climate Action Plan - soon it will be more expensive not to change

    On June 25, 2013, President Obama announced a series of executive actions to reduce carbon pollution, prepare the U.S. for the impacts of climate change and lead international efforts to address global climate change. As part of the Climate Action Plan, President Obama issued a Presidential Memorandum directing the EPA to work expeditiously to complete carbon pollution standards for the power sector. You can learn more about the President's Climate Action plan on the White House web site.

    • President Obama's Plan to Fight Climate Change

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    • Presidential Memorandum -- Power Sector Carbon Pollution Standards http://www.whitehouse.gov/the-press-office/2013/06/25/presid...

    • June 25, 2013, Remarks by the President on Climate Change

    http://www.whitehouse.gov/the-press-office/2013/06/25/remark...

    #3 Hilary Clinton in the White House (Game, Set, Match)

  • Report this Comment On June 20, 2014, at 10:58 AM, HvyOnEzFool wrote:

    - Hillary Clinton

  • Report this Comment On June 20, 2014, at 4:24 PM, chastenruin wrote:

    I bought PLUG at $.15 a share. Sold at $6.30 after the bump. Never going back.

    I've owned BLDP and FCEL at various points in time as well.

    I'm not touching any of them until they have more predictable earnings. If you're up on them, or taking a small loss, get the hell out. There are better investments out there that are far more stable.

    If you want something risky that appeases your future technology and latent Star Trek fetish, buy BIND.

  • Report this Comment On June 20, 2014, at 4:47 PM, AdamGalas wrote:

    Several thoughts.

    First, FuelCell Energy is down:

    38% since 2010

    38% since 2009

    79% since 2004

    UP 59% since 1992

    http://ycharts.com/charts/fund_chart_creator/fool/#/?calcs=i...

    However, a 59% increase in 22 years is a 2.1% return, hardly something I think most FCEL investors would consider adequate for a security that is highly speculative and pays no dividend.

    Second, if the Motley Fool published an article in favor of FCEL at those levels, that is most unfortunate. However, keep in mind that the Motley fool has hundreds of bloggers and writers, (at least according to our facebook writers group).

    That is a lot of difference of opinion. Also keep in mind that The Motley Fool is just that, Motley, meaning there is no official company position.

    One of our newsletters may recommend a stock but analysts running a different newsletter might completely disagree. Most newsletters have two or more analysts and sometimes they won't agree on a stock.

    Then there are Motley Fool writers who have no connection to newsletters and just write their own opinions.

    Next you have bloggers and...well you get the idea. The point is, our articles are meant to share our opinions, (hopefully well thought out and researched) but no one should take a single article as a sole reason to make any investment decision.

    Third: politics is a hard way to invest. Most of the time, its a short-term strategy tha that fails to generate statistically significant market beating returns.

    Fourth. Just because the president has outlined a strategy doesn't mean he can implement it.

    Fifth, even if he can implement it, picking out a winner from a loser can be very hard. For example, look at all the presidential/government support for Solar. That didn't do much for Solyndra or Evergreen Solar, both bankrupt.

    With the kind of track record of these companies, such as PLUG's 33.4 fold increase in share count since 2000 (29% annual share count growth):

    http://ycharts.com/charts/fund_chart_creator/fool/#/?calcs=i...

    It's hard for me to see how they'll be able to grow earnings enough to justify any kind of valuation.

    If you grow share count at 29% then earnings growth needs to be 29% just to keep EPS from dropping. And when you don't have dividends, EPS growth is, in the long-run, the only thing that will determine a stock's price.

    Too much dilution means that no matter how successful a company, shareholders will lose in the end.

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