"Plug" into "Fuel Cell"

03/17/2006 12:00 am EST


Michael Murphy

Former Editor, New World Investor

Michael Murphy considers alternative energy to be such an important market that he has made it an ongoing sectionand model portfoliowithin his New World Investor newsletter. Here’s a glimpse into a pair of his favorite alternative energy plays.

"Fuel Cell Energy (FCEL NASDAQ) focuses on stationary fuel cell power plants for industrial and office applications. I like that their fuel cells don't have to reformulate the 'feedstock', whether that's diesel, gasoline, natural gas, or methane. The fuel cell generates electricity twice as efficiently without combustion, and therefore without pollution. The only by-products are heat, which can be used, carbon dioxide, and water. It's also quiet.

"In my home state of California, we have very tough air pollution standards that include a classification for ultra-clean distributed generation technology. Wind power and solar panels qualify. So does a Fuel Cell power plant. They are exempt from air quality district permitting requirements. With the 30% tax credits, many critical businesses that depend on reliable powerbut could never get a diesel generator plant permitted will turn to Fuel Cell Energy.

"Think about the big data centers that run the Internet, and the phone and cable systems, or hospitals full of people hooked up to life-saving electronics. Or airplane reservation systems, airports themselves, and air traffic controllers. Or critical government and anti-terrorist offices. Starwood Hotels has already committed to the system. Being able to promise no brownouts or blackouts not only means no convention refunds, but becomes a marketing weapon. And they use the 'waste' heat from the system to heat their swimming pool.

"Fuel Cell Energy invested $77 million in research over the last ten years and still has $207 million in cash to carry them through to positive cash flow in about two years. The company recently announced that it had been selected by the Department of Energy to develop a coal-based fuel cell system. This project is initially estimated at $85 million. Though the details haven't been finalized, this is a major win for FCEL and is further proof that President Bush's Advanced Energy Initiative has some legs. Buy on dips under $11. I expect the stock to double over the next year.

"Plug Power (PLUG NASDAQ) started life in 1997 as a joint venture to develop a $10,000 fuel cell power unit for the home, but eventually turned their attention to stationary backup power supply applications, targeting telecom, broadband, utility and industrial uninterruptible power supply applications. While Fuel Cell Energy targets the primary power market with 50 KWh to 250 KWh systems, Plug Power targets the office backup and residential markets with the 5KWh GenCore systems.

"Meanwhile, they are still working on a residential system, a continuous power product with combined heat and power capability for remote small commercial and remote residential applications. These systems are already popular in Japan, and as oil prices increase or environmental controls tighten, they become more and more economically feasible. The company has good partners, including GE Fuel Cell Systems, Honda, Englehard, and Celanese.

"The firm's showcase installation involves the sale of 12 GenCore backup fuel cell systems to the Florida Department of Environmental Protection to provide backup power to DEP offices throughout the state of Florida. Plug Power was chosen in part because is durable enough to endure extreme weather conditions like hurricanes, which is exactly when the grid power is most likely to go out. PLUG is another small-cap company facing a big, big opportunity. Buy under my $7.50 buy limit for a move to $15 later this year."

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