Please ensure Javascript is enabled for purposes of website accessibility

3 Great Reasons to Sell Plug Power Stock

By Rich Smith – Sep 27, 2016 at 10:46AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite all odds, and all arguments, Plug Power has stuck around for more than a decade. But has the time finally come to pull the plug?


Plug Power wants you to plug in to hydrogen fuel cells. Image source: Getty Images.

Over the past 52 weeks, investors have sold off shares of Plug Power (PLUG 7.20%) stock to the tune of a 20% loss.

Here are three reasons they're right.

But first, a few words on why they might be wrong

Panning Plug Power has been a pasttime of mine for years. In fact, I've been doing it since 2005. 12 years later, though, Plug is still chugging along today, alive if not exactly well, and valued at nearly $300 million in market capitalization.

So, what keeps Plug going? Dreams, for one thing. The prospect of a world that runs on technology turning nearly clean hydrogen gas into completely clean electricity and water holds a lot of appeal for the green energy crowd. Time has proven that this appeal will not soon evaporate, and there's no guarantee Plug Power will fail in the end.

In fact, the opposite may be true. A quick review of the three "big" players in the fuel cell world (where "big" is a relative term, and no one exceeds $500 million in market capitalization) shows that over the past five years, Plug Power has outperformed rivals Ballard Power (BLDP 9.02%) and FuelCell Energy (FCEL 7.14%) as well, growing its sales at a 40% annualized rate, and its profits (or rather, reductions in losses) by 38%. FuelCell is closest to catching Plug in the sales race, while Ballard has done the second-best job of growing earnings -- slash reducing losses.

All that being said, there are still as many reasons to doubt Plug's ability to earn an investor a profit today as there were a decade ago. Here are three of the best.

Plug has the most debt

With $64 million in debt on its books, Plug Power has the highest ratio of long-term debt to equity (0.56) of any of the fuel cell names discussed above. Granted, Plug also has $66 million in cash on its balance sheet -- enough to leave it (barely) in a net-cash position.

That said, relative to the competition, FuelCell Energy carries a similar debt load of $66 million -- but $94 million cash. Ballard Power has only $8 million in debt on its books and $41 million cash. In terms of financial flexibility, the ability to make acquisitions, and fund investments, both FuelCell and Ballard have Plug Power outclassed.

Plug achieves the weakest margins

Another area where the competition has Plug beat is in profit margins. Plug may be "growing" its non-existent earnings faster than its also-money-losing rivals are. But the Plug's profit margins are still anything but encouraging. According to data from S&P Global Market Intelligence, Plug Power reported gross profit margins of just 0.2% over the past 12 months (that's two tenths of 1%).

In contrast, FuelCell's 2.4% gross profit margin of 2.4% looks positively robust, and Ballard's 23.3% gross is almost enough to make it look profitable by comparison. At least, that's how it looks until you read down to where all three companies are still posting negative operating and net profit margins. And even there, Plug Power is worst-in-class, losing more than $0.57 for every $1 in revenue it takes in.

Plug's growth prospects seem sketchy

So, why do some investors continue to cling to the hope that Plug Power will one day turn the corner and earn a profit, and perhaps even earn some profits for their portfolios? Well, hope springs eternal, and right now, analysts actually have Plug Power pegged for the fastest five-year earnings growth rate of the three fuel cell powerhouses.

According to data from finviz.com, analysts who follow this industry see Plug Power growing its earnings (or actually, as we've come to understand, shrinking its losses) at the rate of 25% annually over the next five years. Relative to the projected 15% earnings growth rate assigned to FuelCell Energy, or the 0% growth projected for Ballard, 25% growth probably sounds pretty good!

And yet curiously, these same analysts who expect so much out of Plug Power over the long term have less aggressive objectives for the near term. Over the next year, analysts actually see Plug Power growing slower than its rivals, with its 38% historical growth rate decelerating to 25% -- while FuelCell Energy and Ballard Power accelerate their growth rates to 42% and 47%, respectively.

Foolish final thought

Granted, if you believe these analysts have a better view into the future five years out than they do into just the next year, you may agree with them that Plug Power will grow faster in the long term than it will in the short term. It's generally been my experience, though, that people see things better up close than from far away.

Consider, too, that Plug Power's weak profit margins and high debt load endanger its ability to even stick around another five years. Much as we might like to see Plug Power succeed, even thrive, and lead us all into a completely clean-energy future -- we've been waiting for this to happen for a decade already.

If it hasn't happened by now, I see little reason to hope it will happen five years from now, either.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Plug Power Inc. Stock Quote
Plug Power Inc.
PLUG
$23.39 (7.20%) $1.57
FuelCell Energy, Inc. Stock Quote
FuelCell Energy, Inc.
FCEL
$3.75 (7.14%) $0.25
Ballard Power Systems Inc. Stock Quote
Ballard Power Systems Inc.
BLDP
$6.89 (9.02%) $0.57

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.