Woe to be a fuel cell company these days. Once awarded huge market caps by starry-eyed investors, not even $50-plus oil prices can fire up the sector these days. Part of the problem is, of course, the fact that no fuel cell company is close to staunching the bleeding of cash flow that comes from its ongoing losses.
As suggested by its fiscal first-quarter earnings report for January, FuelCell Energy (NASDAQ:FCEL) isn't any different.
Odd as this may sound, FuelCell might not be spending enough money right now. Looking at rival on-site fuel cell company Plug Power (NASDAQ:PLUG), FuelCell has considerably higher product sales and more assets, but it spends only about 60% as much on non-contract research and development.
More than anything else, FuelCell needs to focus on making its fuel cells both more profitable to operate (less costly per kilowatt-hour) and more profitable to manufacture. While the latter may be possible through simple volume increases, this Fool believes that the company needs to try to do more on the engineering front to improve both its systems and its operations.
Part of the problem with fuel cells in general is that they often aren't cost-competitive. In the case of FuelCell, the company's Direct FuelCell costs about $0.15 to $0.20 per kilowatt-hour to operate, whereas the national average price for electricity is more like $0.09 or so. Even though fuel cells produce their electricity with much lower pollution, that doesn't really resonate with customers, unless and until governments (local or federal) provide tax incentives that narrow the cost differential.
To its credit, FuelCell isn't wasting time on low-probability markets. Although the national average may be around $0.09, there are areas of the country (California, the Northeast, and some major cities) where the local price for electricity is considerably higher.
In terms of California, FuelCell's recent agreement with Starwood Hotels (NYSE:HOT) shows what the company can offer in high-cost states. Given the benefits of cogeneration, better reliability, and favorable state regulations, FuelCell can offer Starwood a cost for electricity that is very competitive with its normal grid rates.
While Starwood will be starting small (the fuel cells at the San Diego site will provide about one-quarter of the facility's power), the company owns roughly 750 hotels, and success in California could be parlayed to other high-cost markets in the future.
That said, FuelCell might not have the time. The company has good partners like Caterpillar (NYSE:CAT), ChevronTexaco (NYSE:CVX), and Marubeni, but that isn't stopping it from hemorrhaging cash. While the company does have more than $230 million in cash (and minimal debt), it used $20 million in cash for the January quarter.
What's more, FuelCell estimates that it needs to ship about 100 MW to achieve break-even net income. Accordingly, it's almost certain that the company will need additional funding, as its run rate for fiscal 2004 was only 6 MW and it only has current capacity for about 50 MW per year.
FuelCell may be among the best-positioned fuel cell companies, but that may not matter. My biggest fear with the fuel cell industry remains unchanged. That is, that the big boys (GE (NYSE:GE), United Technologies (NYSE:UTX), etc.) are simply biding their time, waiting for investors to get sick and tired of supporting these money-losing companies, and then hoping to snap up the valuable R&D for a fraction of its true worth.
Should this vision come true, the hydrogen economy may in fact come to be, but the owners of fuel cell stocks won't see much of the benefit. That's something with which potential owners of companies like FuelCell, Plug Power, or Ballard Power (NASDAQ:BLDP) must come to terms before they invest in these promising, yet extremely risky, endeavors.
For more on fuel cells, check out these other Foolish notions:
Are fuel cell companies like FuelCell Energy potential Rule Breakers? Find out with a free trial to the Motley Fool Rule Breakers newsletter.
Fool contributor Stephen Simpson has no ownership interest in any stocks mentioned
