Fuel-cell technology specialist Plug Power (NASDAQ:PLUG) announced late last week that it will pay $45 million to acquire Cellex Power, a Canadian manufacturer of proton exchange membrane (PEM) fuel-cell power units for electric lift trucks. Notwithstanding attempts by Plug Power's management to spin the acquisition as a positive development, I heard nothing in the conference call that caused me to believe the deal will do anything to reverse the company's outlook.
For starters, even though some are emphasizing that the acquisition will diversify Plug Power's business by giving it entry to the $3 billion forklift market, Cellex generated only $500,000 in business revenue in 2006. Investors should demand a lot more "diversity" before they get too excited about this purchase.
Second, although Plug Power President and CEO Roger Saillant suggested that the acquisition will not add to his company's expected $50 million annual burn rate, I think investors should beware, because Cellex has its own annualized burn rate of $5 million to $6 million. Unless Plug Power has done something to slow its existing burn rate, I don't see how the acquisition can do anything but increase that rate to an even higher and more unsustainable level.
The most promising aspect of the deal is that Cellex's technology has been successfully beta-tested at two of Wal-Mart's (NYSE:WMT) distribution centers. Here, too, however, I wasn't left with a warm, fuzzy feeling. When asked when the giant retailer might begin ordering some of Plug Power's fuel cells, management indicated that nothing is expected until "the end of [the] year" and that future sales will still "depend on performance." Both statements should make investors nervous.
But here's the real reason I would encourage investors to hold back: I remain unconvinced that Cellex's fuel-cell technology will find much success, even if it performs as promised. Giant retailers -- whose fleets of forklifts represent the largest markets for Cellex's fuel cells -- will be very reluctant to move away from battery-operated technology, which they already understand and recognize as being durable and reliable. Under such circumstances, getting companies to adopt a new technology will be difficult until there is a strong and compelling reason to switch.
The same standard should apply to investing in Plug Power. Until there is a compelling reason to buy the stock -- such as growing sales -- investors should stay with companies that are more durable and reliable.
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Fool contributor Jack Uldrich doesn't own stock in any of the companies mentioned in this article. The Fool has a strict disclosure policy.
