For the past decade, investors, government regulators, and
concerned citizens have focused on a pair of catchphrases:
"climate change" and "off the grid."
#-ad_banner-#The rapid deployment of solar and wind power
played into both of those themes. These power sources generate
zero pollution and can help to reduce demand on the world's aging
Yet as I just noted in
my recent review of a new set of rising stars in
the clean energy space
, hydrogen power suddenly has a new lease on life. Through
hydrolysis, the universe's most abundant element can be used to
create electricity while producing zero emissions. A range of
companies are now seeing steadily rising sales as they develop
hydrogen-powered fuel cells for a range of applications.
The key phrase there: "a range of companies." Though this
technology is undeniably exciting and will likely play a key role
in our energy future, there are so many companies working to lure
customers that competition is fierce and pricing is tough.
That's why I suggested caution with
Plug Power (Nasdaq:
FuelCell Energy (Nasdaq:
. In 2012, these firms had gross margins of minus 55% and 4%,
respectively. They may look to make it up on volume, but it's
hard to see how these firms will ever generate robust profits,
especially as they have several dozen rivals (most of which are
privately held) pursuing the exact same niche.
If you are tracking this industry, it pays to follow the moves
of Bloom Energy, which hasn't been around as long as Plug Power
or FuelCell Energy but has garnered a great deal of industry
buzz. The company
may actually be profitable already
in advance of a widely anticipated IPO.
The wiser approach to this sector may be to focus on firms
that aren't pursuing "me too" approaches, or at least have
significant technology development relationships with global
multinationals. Of the four companies mentioned in my previous
look at the industry, here are the two that hold the greatest
|1. Ballard Power (Nasdaq:
Ballard was an early leader in the development of fuel cell
stacks for automakers and other OEMs (original equipment
manufacturers). Its shares moved above $200 back in 2000,
thanks to major investments in the company by auto makers
. Trouble is, these kinds of relationships never bore fruit
and slowly died on the vine.
In the face of small revenues and high expenses, the
company's $233 million cash balance back in 2005 has
largely been frittered away. As the prospect of bankruptcy
began to come into focus, management pursued a radical
revamp of the business: Over the past few years, they have
"exited a money-losing joint venture, sold non-core
businesses, ended a low-margin contract manufacturing deal,
turned speculative R&D work into profitable business
lines, reduced product costs by 70%, and right-sized
operations," note analysts at Lake Street Capital
Though Ballard isn't abandoning OEM relationships (it is
currently co-developing fuel cell technology with
Volkswagen, Belgian bus maker Van Hool, and China's Azure
Hydrogen), the company is also starting to build its own
proprietary power systems for use as backup power or in
off-the-grid applications. Indeed, a sales relationship
with Nokia Solutions Network is opening many doors in
places like India, which is now enabling to sales to grow
at an annual rate of $15 million to $20 million.
Rising sales, coupled with a steady migration toward 30%
gross margins, are helping to slow the quarterly cash burn
rate to less than $3 million. Ballard could become cash
flow positive by early 2015. Simply proving that it can
live within its means will be a key milestone for some
But for others, it is still the very bright promise of
hydrogen-based fuel cells that remains in focus. Ballard is
now working with so many partners in the technology's
development, with each of these niches representing market
sizes in the hundreds of millions, that just one or two key
success would be a game changer. Ballard will be releasing
fourth-quarter results Feb. 24, and management is likely to
discuss the path to break-even and the latest developments
in the technology's development.
|2. Capstone Turbine (Nasdaq:
This company's natural-gas powered micro-turbines are a
simpler alternative to the trickier hydrogen-powered fuel
cells built by rivals. They are seeing a widening range of
uses where grid power is unavailable (or unsteady). For
example, a number of energy drillers are installing the
company's micro-turbines right at wellheads, where large
amounts of power are needed.
Capstone took a long time to get sales traction: Sales
finally reached the $100 million mark in fiscal 2012, yet
analysts now see revenues reaching $175 million in the
fiscal year that begins in April. Equally impressive: Gross
margins that have doubled in the past six quarters, to
Why are margins firming? Because deal sizes are growing.
The average selling price per micro-turbine rose from
$158,000 a year ago to a recent $184,000. "Capstone used to
be considered primarily for 1- to 5-megawatt opportunities
or installations, so we migrated up in project size, so
that Capstone is now being considered frequently as a
solution for projects that are in 25-megawatt range," said
CEO Darren Jamison in a recent call with analysts.
Firmer pricing and margins means that Capstone's long
streak of money-losing quarters may be coming to an end.
The quarterly loss fell to just $2 million in the most
recent quarter, down from quarterly losses that routinely
exceeded $8 million in recent years. The current $31
million cash balance suggests that the company won't need
to raise money in 2014. Management believes that Capstone
will hit quarterly break-even in the current fiscal fourth
quarter (which ends in March).
Still, shares have pulled back roughly 10% since
third-quarter results were announced, as revenues came in a
bit lower than analysts had expected. The fact that backlog
rose $10 million sequentially to $160 million softens that
blow. As was the case with Ballard Power, Capstone Energy
just got to the market too soon, burning too many investors
in the process. Yet the long-awaited growth spurt, and a
long-awaited move to break-even results, sets the stage for
much better days ahead.
Risks to Consider:
This is an industry characterized by rapid innovation, and
any of these business models would be threatened by any upstart
that can build more energy-efficient power systems at lower
Action to Take -->
All four of the companies profiled in this series have made
remarkable strides in recent years. But only Ballard Power and
Capstone Turbine have built sufficiently wide moats to help stay
insulated by technological commoditization.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.