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Plug Power (NASDAQ:PLUG) is a company that has had a long history of high expectations and subsequent disappointment for investors. It has made many people rich and has clobbered others over the years. In the past two months, the stock is up about 700 percent. As such, the stock has always been about timing. We may have missed the first big move, but I think that on a pullback, the fundamentals are setting up nicely for continued returns.
The company works primarily on alternative energy technology. For the most part the business focuses on designing, developing, manufacturing, and selling fuel cell systems for machinery. The primary technology the company is involved in working on is fuel cell and fuel processing technologies. It also employs technology to produce fuel cell and battery hybrids. A fuel cell combines hydrogen and oxygen to produce electricity and heat without combustion and exhaust.
Big potential in the GenDrive system
The GenDrive system is one of Plug Power’s leading candidates for ensuring future profitability. Around 5,000 GenDrive-powered forklifts have been sold to date, and there is substantial room for growth. Plug Power’s technology could replace traditional batteries someday. One huge issue is that traditional battery life for machinery is short; batteries can’t keep up with the demand for usage. This can limit industrial productivity.
This is where GenDrive fuel cells come in. They provide continuous power at all times, running superior to a lead-acid battery even in freezer environments as low as minus 22 degrees Fahrenheit. GenDrive-powered lift trucks continuously run at full speed and never require changing. Truck operators can conveniently refuel the units themselves at compact hydrogen fueling stations set in strategic locations on the floor of production facilities in a process that takes less than two minutes. Further, with traditional batteries, the standard practice is to have two, if not three, batteries to a truck. Standard practice also suggests purchasing more truck batteries than needed on an average day to cover spikes in throughput.
GenDrive can help eliminate the labor costs associated with changing batteries and significantly reduces the wear on lift truck motors caused by battery droop. This results in reductions in maintenance and repairs and enhances the ability to manage peaks in productivity. GenDrive is environmentally friendly. The GenDrive power units produce zero harmful emissions during operation. The byproducts of hydrogen fuel cells are heat and water. Unlike toxic batteries, fuel cells don’t leave behind any lead and sulfuric acid, eliminating the need to pay for disposal and/or cleanup. The maintenance required is minimal, and technicians can service GenDrive units as easily as batteries. And with respect to product life-cycles, GenDrive will outlast batteries. As long as fuel is supplied, the fuel cell operates at full power.
Multiple benefits of GenDrive
Battery-powered lift trucks lose speed over the last half of the battery charge. GenDrive fuel cells maintain constant power at all times, keeping the vehicle running at full speed throughout an entire shift. It can lower operating costs by up to 30 percent. This is because the GenDrive solution eliminates the need to change, charge, and manage batteries. The units run longer than lead-acid batteries and can be fueled in as little as 90 seconds, substantially reducing vehicle and personnel downtime. Finally, the GenDrive fuel cell solution produces zero harmful emissions and eliminates the costs associated with handling and storing toxic materials. The need for high-cost electricity is eliminated as battery charging racks are no longer needed, saving on power use.
Who does Plug Power do business with and how was 2013?
Plug Power sells its products globally but mostly in the United States. It has a product sales team and deals with original equipment manufacturers through a network of dealers. The company has a diverse customer base of large corporations, smaller businesses, and government agencies. In recent quarters, the company has really stepped up. Plug Power has received orders from Stihl, Mercedes-Benz, Lowes (NYSE:LOW), Wal-Mart (NYSE:WMT), Proctor and Gamble (NYSE:PG), Coca-Cola (NYSE:KO), and BMW. These companies have recognized the value in Plug Power’s technology.
The fourth quarter 2013 notwithstanding, Plug Power has seen growing sales that justify its share price momentum, making it now an investable stock once again. From January 1, 2013, to May 15, 2013, the company had $1 million in bookings. Bookings exploded from May 15, 2013, to October 8, 2013, to more than $11 million. From October 8, 2013, to November 14, 2013, when results were reported, bookings surged to $14 million. These bookings are a mix of product sales and maintenance orders from significant customers — think Wal-Mart, Procter & Gamble, etc. At the time of the Q3 report, sales orders totaled $26 million for 2013 and are higher since. This is huge for a company that had been struggling. Many thought a reverse split was coming. Thankfully with the share price soaring, it will not be necessary, and the company has also met the Nasdaq listing requirements.
Revenue for the third quarter of 2013 was $4.6 million, comprised of $4.2 million for product and service revenue and $0.4 million for research and development contract revenue. This compares to total revenue of $4.8 million in the third quarter of 2012, which was comprised of $4.3 million for product and service revenue and $0.5 million for research and development contract revenue. Research and development expenses for the third quarter of 2013 were $0.8 million compared with $1.3 million for the third quarter of 2012. Selling, general, and administrative expenses were $2.8 million for the third quarter of 2013 compared with $3.1 million for the third quarter of 2012. Additionally, $0.6 million was expensed for amortization of intangible assets during the third quarter of 2013 and 2012.
Plug Power shipped 155 units during the third quarter of 2013 compared to 186 units in the third quarter of 2012. This was a decline, but I believe it is a calm before the storm of orders to come in 2014. But there was still a net loss for the third quarter of 2013 of $16 million, or 19 cents per share on a basic and diluted basis. Included in the net loss for the third quarter of 2013 was an $8.2 million charge related to the change in fair value of previously issued common stock warrants. Net loss for the third quarter of 2012 was $10.3 million, or 27 cents per share.
2014 could be a great year
The company thought it would be profitable in 2012. That was in 2009. It took until late 2013 to make things happen, but that’s why the stock could be an investment after a pullback. At the time of this writing, shares are at $2.03 on news that the company met its fourth-quarter sales order target. Further, Plug Power believes it will meet or exceed Q4 2013 bookings. Plug Power secured a contract to deploy multiple sites with a single food distribution customer using the GenDrive technology. This will also include products, service, and hydrogen for its customer. The company also saw repeat business with key material handling giants like Wal-Mart, Kroger (NYSE:KR), Mercedes-Benz, and BMW, resulting in fleet expansion and follow-on orders. These orders include both products and recurring revenue for service. The company also saw the addition of several new customers to its growing customer base.
There is risk
Plug Power has historically had issues with finances and has nearly gone bankrup, but has managed to pull through. Plug Power is still not profitable — yet. The company has a deficit of more than $820 million and has losses of about $20 million for 2013 (estimated). The initial costs to acquire GenDrive technology for companies are expensive, though not prohibitively so, as there will be a return on investment. The high costs relative to traditional batteries could ward off smaller would-be customers. That said, the overall cost savings are impressive.
This could change if the cost of hydrogen refueling stations and product development comes down, but for now, costs are preventing exponential growth. But with Q4 bookings at an outstanding level and Q1 2014 bookings expected to be significant, major corporations are ponying up the cash for Plug Power’s offerings. Plug Power also took steps to raise more cash in a recent offering.
The offering was for 10 million shares of its common stock and accompanying warrants to purchase 4 million shares of its common stock. The shares and the warrants were sold together in a fixed combination, with each combination consisting of one share of common stock and 0.4 of a warrant to purchase one share of common stock, at a price to the public of $3 per fixed combination for gross proceeds of $30 million. The cash will be used for working capital and helps cut into the company’s deficit.
Conclusion
My overall sentiment is that there is significant upside potential despite some risk. That said, the company is taking steps to turn things around. Bookings are up. Demand is up. Plug Power is raising cash. I think you wait for a pullback after this huge run, then consider a long position.
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