FuelCell Energy (FCEL, Financial) reported unimpressive results for the recent quarter. It reported revenue of $41.7 million, a drop of 6% from a year earlier quarter. Moreover, its revenue failed to beat the street estimates of $48.0 million for the quarter. In fact, its revenue has declined to $177.5 during fiscal 2014 from its level of $192.5 million in 2013.
This is exactly why the company is not able to generate enough profits on the board. However, its loss of $0.02 per share came in line with consensus estimates for the first-quarter of 2015, and, was 5% better than its performance in the first quarter 2014. This is due to its continuous efforts of bringing down its levelized costs of energy.
The problem and the solution
These earnings numbers reflect its weakness to tap the growing market for fuel cell across the world. The fuel cell market is forecasted to expand from a projected $2.61 billion in 2014 to $5.20 billion by 2019. This indicates that this market will grow at a compounded average growth rate of 14.7% during this period, demonstrating significant growth for fuel cell worldwide.
These positive numbers suggests that FuelCell has a big addressable market ahead, but it is failing to generate profit. Also, its fundamentals, such as cash flows and EBITDA are pretty weak. It has operating cash flow of $-54.67 million, levered free cash flow of $-54.99 million for the last twelve months. It has EBITDA margins of $-20.59 million for the trailing twelve months. This does not create a healthy financial picture for investors and shareholders.
However, it has started seeing progress on these fundamentals, that should ease out some pressure from its investors. Its recent move of shifting its focus to multi-megawatt projects from products and small size installation, should lead to better revenue and profit margins, going forward. The company expects that the investment in the multi-megawatts project better reflects the value of its solutions and attributes.
Catalysts to consider
It is making significant progress on this transition that should create competitive advantage for the company in the future. This focus will assist the company to fetch greater share in the utility business segment with better financial returns. For example, the company has recently bagged a turnkey project and long-term operating agreement for advanced hybrid power plant through its partnership with UIL Holdings. This is Direct FuelCell Energy Recovery Generator, or DFC-ERG, a new power generating facility that will provide clean natural gas with enhanced revenue. In fact, the UIL Holdings have got three orders for FuelCell in less than 12 months.
Further, FuelCell has grouped the range of solutions and services of UIL Holdings and Iberdrola, USA. The company is quite excited with this combination, as this combination will lead to enhanced scale and scope, expanding the product and service offerings into new geographies. Also, this should help the company to beg many megawatts of projects in different markets.
In addition, the company is effectively reducing the losses. The greater adoption of its technology and solutions will lead to better profit margins in the coming years. Also, it is making progress on the manufacturing expansion. It has received approval for the expansion of its Torrington facility by the Connecticut Bond Commission. The company expects this facility to fully start functioning by the end of this fiscal year, that should support the growing market demand for fuel cells. Also, its partner POSCO Energy’s is done away with the new manufacturing building and has added production equipment to the facility that should lead to greater production, going forward.
These facilities will help the company to tap extra market share in the utility grid support market. It has highly efficient fuel cell hybrid power plant, designed for applications with significant power needs and minimal thermal energy demand. This innovative adoption of core technology, coupled with targeted solution, such as carbon-capture solutions for its large-scale utilities using fossil-fuel-based power plants, will deliver attractive economics to the global data center market, going forward.
The carbon-capture market offers tremendous potential for FuelCell Energy in the future. The company sees approximately $1 billion market opportunity in the near future under this segment. It plans to provide nearly 120 megawatts of fuel cell plant capacity with new equipment in the coming years.
Moreover, the company is strategically controlling its costs. Its levelized costs of energy has fallen to $0.12 per kilowatt hour. This signifies that its operating models are best aligned with the market opportunities that should increase its competitiveness in the future. This should assist the company in developing more projects in the future with greater efficiency.
Conclusion
FuelCell Energy is a good bet in the long-run. The analysts expect its earnings to grow at CAGR of 40.00%, greater than industry average CAGR of 2.21% for the next five years. It has PEG ratio of -0.47 that is reflective of its earnings growth in the future. It has a total cash of $84.66 million, which is quite enough to cover its entire debt of $26.76 million.
