Never profitable, fuel cell pioneer Plug Power (NASDAQ:PLUG) has added insult to injury in each of its last three quarters by reporting numbers showing it to be even less profitable than Wall Street thought. Will its Q3 2006 report, due out Wednesday, break the chain of bad news?

What analysts say:

  • Buy, sell, or waffle? Seven analysts get turned on by Plug. The firm gets one each of buy and sell ratings, and five holds besides.
  • Revenues. On average, the analysts are looking for sales to decline 10% to $3.5 million.
  • Earnings. Losses are expected to narrow by a third, to $0.10 per share.

What management says:
Plug CEO Roger Saillant waxed optimistic in describing the firm's prospects in Plug's Q2 2006 earnings report, saying the firm is entering an "exciting, dynamic stage." And well he might -- earlier this year, private investment firm Interros, headed by Russian oligarch Vladimir Potanin, and Norilsk Nickel (which Interros currently manages) injected $217 million into the cash-burning energy firm in exchange for a 35% interest in Plug. Combined with existing cash reserves, this investment filled the corporate coffers to overflowing with $290 million in cash and equivalents at the end of Q2.

What management does:
Which is good, because Plug needs all the cash it can get. Ordinarily, in this section I run down a company's gross, operating, and net margins from the past half dozen quarters, to try and discern the trends. In Plug's case, however, our data provider threw up its hands in surrender when asked for operating and net margins, saying in effect: "These numbers are so bad, you really don't want to see them." (Any margins beyond negative 300% are not displayed by our data provider -- trust me, I calculated.) Here, then, is the gross margin story only:

Margins
%

6/05

9/05

12/05

3/06

6/06

Gross

(14.6)

(11.5)

(19.9)

(30)

(35.3)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
After a couple of quarters in which it looked like Plug was moving toward breakeven on a gross basis (i.e., the firm would not lose money so long as its employees agreed to work for free, the gas company heated its offices gratis, and so on), Plug's rolling margins turned sharply downward again in the December 2005 quarter. The reason? Well, reviewing the first half of this year's results over the first half of last year, it looks like "sales" -- most of which are not "sales" per se, but contracts to conduct R&D -- declined 27%, while cost of sales fell only 5%.

And of course, the decline in sales is itself a problem. In order for Plug to get its margins growing, it needs to spread its fixed costs out among more revenues rather than less. So, clearly, the first thing we want to see in Wednesday's news is a reversal in the recent trend and strong growth in sales.

The second thing we'll want to look at is cash burn. With free cash flow running negative to the tune of $21 million year to date, this company is currently on track to burn through $42 million in cash by year-end. If it keeps on burning at the current rate, its current cash hoard will last less than seven years. Plenty of time to get sales growing if grow they will, but every quarter that Plug continues to burn cash at its current rate brings the firm three months closer to needing a new cash infusion.

Competitors:

  • Ballard Power (NASDAQ:BLDP)
  • Capstone Turbine (NASDAQ:CPST)
  • FuelCell Energy (NASDAQ:FCEL)
  • Hydrogenics (NASDAQ:HYGS)

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has an energetic disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.