As the world continues to fight the Covid-19 pandemic, one highly promising sector that has been put on the backburner by the investor community is the green energy space. It only appears to be a matter of time before this comes back to focus, which is when companies like FuelCell Energy Inc. (NASDAQ:FCEL) will be back in the limelight.
FuelCell Energy is one of the oldest clean energy companies, and it managed to deliver an excellent quarterly result even in the lockdown situation. As it readies itself to issue an additional $75 million worth of stock, the price is falling because of the expected dilution. However, the future outlook of the company is bright, potentially making it a compelling investment opportunity in my view.
FuelCell Energy is engaged in the designing, manufacturing, sale, installation, operation and servicing of stationary fuel cell power plants for distributed power generation. Its core offerings work towards the efficient conversion of chemical energy in fuels into electricity through a series of chemical reactions. The company’s core product line, called SureSource, is based on carbonate fuel cell technology in various configurations, including on-site power, utility grid support, distributed hydrogen and micro-grid as well as multi-megawatt applications. Its SureSource power plants generate electricity and usable heat and cater to a wide variety of industries such as data centers and communication, educational institutions, healthcare services, industrials, wastewater treatment and hospitality. The company has its core business in the U.S., followed by South Korea, the UK and Germany. FuelCell employs close to 300 people and has its headquarters in Danbury, Connecticut.
FuelCell Energy recently reported earnings for its fiscal second quarter of 2020. The company reported revenue of $18.9 million, more than double the reported revenue from the corresponding quarter of 2019. This increase of 105% also ensured that the company beat analyst consensus estimates of $15.55 million by more than 20%. The company’s operating loss of $8.1 million is less than half of the $17.6 million operating loss in the prior-year quarter. This is the result of the strengthening unit economics. In 2019, FuelCell Energies was operating on a gross loss, but now it has managed to generate a positive gross margin. With the operations scaling up, the company is slowly approaching its break-even, as it reported a net loss of $14.8 million this quarter, or 7 cents per share, which was on par with the analyst consensus estimate. This was a significant improvement over the $2.06 per share loss reported in the same quarter of 2019.
The management has focused on accelerating revenue growth largely through Generation, Service and Advanced Technology. There was also a reasonable effort in terms of cost control, which is why we see the size of the negative bottom-line reducing rapidly. Also, cash and equivalents have nearly doubled this year. FuelCell Energy looks to gain access to more capital for scaling up, hence the $75 million issue. The reason for the issuance of equity is that the company already has high leverage and a high debt-equity ratio, but given the fact that it is not far away from breaking even, I think the future fundraises by the company should be limited.
The Exxon Mobil deal
FuelCell Energy struck a $60 million deal Exxon Mobil (NYSE:XOM) in 2019, which resulted in a higher level of activity under the carbon capture program. In fact, it was this deal that saved FuelCell from bankruptcy. This carbon capture technology agreement was announced by the companies on Nov. 6, 2019 with the purpose of optimizing the core technology, overall process integration and large-scale deployment of carbon capture solutions.
In fact, ExxonMobil is exploring options to conduct a pilot test of next-generation fuel cell carbon capture solutions at one of its operating sites. The long-term goal of the agreement is to reduce costs and increase scalability while achieving strong reductions of carbon dioxide emissions from industrial operations. FuelCell Energy’s proprietary technology uses carbonate fuel cells to efficiently capture and concentrate carbon dioxide streams from large industrial sources which is what gives it the edge.
The companies have developed a modular design that enables the technology to be deployed at a wide range of locations for reduced CO2 emissions. The company has a strong base of global clientele apart from ExxonMobil, such as Pfizer (NYSE:PFE), Avangrid (NYSE:AGR) and Toyota (TSE:7203). What the management needs right now is more agreements like the ExxonMobil deal that can propel the company forward.
FuelCell Energy has had a facelift over the past year. From a company that was nearing bankruptcy and was on its last legs, the management has managed to deliver a string of decent quarterly results showing excellent growth in revenue and gradual advancement towards the break-even. This is why we see a 1300% appreciation in the stock price over the past year.
Today, FuelCell Energy is on the verge of raising another $75 million for expansion, and while it did see some project closures, its progress overall appears to be promising. The management has also handled the funding needs of the company well after the bankruptcy scare.
Another big breakthrough came in the form of a line of credit that FuelCell Energy has received from Orion Energy Partners with a limit of $200 million, where up to $35 million may be used for general corporate purposes and most importantly, working capital. Overall, the company is no longer distressed and appears well on track for a strong year ahead.
Disclosure: No positions.
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This article first appeared on GuruFocus.