By David Sterman
For the past decade, investors, government regulators, and concerned citizens have focused on a pair of catchphrases: "climate change" and "off the grid."
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 electrical grid.
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
) and FuelCell Energy
). In 2012, these firms had gross margins of minus 55 percent and 4 percent, 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 appeal.
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 such as Ford
) and Daimler
). 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 percent, and right-sized operations," note analysts at Lake Street Capital Markets.
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 percent 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 investors.
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
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 around 20%.
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 percent 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 prices.
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.
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