Charged Up Fuel Cells
09/23/2005 12:00 am EST
For over two decades, Michael Murphy has developed an industry-leading expertise in uncovering opportunities in the technology sector. Here, in a special report on fuel cells, he looks at a five-pack of stocks poised to lead in tomorrow's "hydrogen economy."
"The driver of the Industrial Revolution was cheap steel, and the power was provided by the steam engine. The driver of the Mass Production Economy was cheap oil, powered by the internal combustion engine. The driver of the Technology Economy is cheap semiconductors, and 21st century power will be provided by clean, sustainable electricity made in hydrogen fuel cells. The Hydrogen Economy is just around the corner. And I have five stocks that will give you an exciting opportunity to get into an industry that is still very young and has a lot of growth ahead.
"When talking about hydrogen fuel cells and alternative energy, one technology comes to mind immediately: the hybrid automobile. And one name stands out: Toyota (TM NYSE). Its Prius has been a smash hit. Toyota’s hybrids have a leg-up on other makes (notably the Honda Civic hybrid) due to their superior technology. The stock sells less than ten times this year's estimated earnings. They should be able to maintain 12% growth for a number of years, as the hybrid revolution rolls on. Add the growth rate to the 2% dividend and get a bit of multiple expansion, and I think we can earn 18% to 20% a year on this conservative, low-risk stock over the next couple of years. Buy TM under $77 for a double over the next four years.
"The next obvious place to look for investments is in those companies who supply the key parts of the hybrid technology. Energy Conversion Devices (ENER NASDAQ) is in the hybrid battery business. And, in fact, it’s the primary supplier of batteries for the Prius. Of course, ENER is far from a one-trick pony. The firm is also focused on phase-change memory devices for computing applications through their Ovonic memory subsidiary, thin-film PV solar panels, and nickel metal hydride (NiMH) batteries through Ovonic Battery, which owns a joint venture with Chevron Texaco called Cobasys. Toyota and Hyundai are named customers. They should turn profitable in the second half of next year, but for investors this will remain a concept story rather than an earnings story into 2008 or so. I’d like to buy ENER under $28.
"In 1983, a Canadian geophysicist, Geoffrey Ballard, and two partners founded Ballard Power (BLDP NASDAQ). Of the over 185 fuel-cell powered vehicles in fleet demonstrations, 86% will be powered by Ballard fuel cells. That's a leader, plain and simple. Ballard is not expected to generate significant product revenues or be profitable for several years yet. Over the last five years, Ballard has put $639 million into research, so at their current market cap, we are paying under one times their R&D investment. With the new energy bill making fuel cell motors for cars and other vehicles a top priority, and both Ford and Ballard saying the first cars are only five years away, this stock is very timely and dirt cheap. Buy BLDP right now up to $6 for a $12 target in 2006—and much higher levels after that.
"Plug Power (PLUG NASDAQ) targets the office backup and residential markets with its GenCore systems. They are also working on a residential system, a continuous power product with combined heat and power capability for remote small commercial and remote residential applications. They recently announced what will be their showcase installation to the Florida Department of Environmental Protection. Plug Power was chosen in part because it is durable enough to endure extreme weather conditions like hurricanes, which is exactly when the grid power is most likely to go out. PLUG has a $530 million total market cap and is another small-cap company facing a big, big opportunity. They are an obvious beneficiary of the new energy bill. Buy under $7.50, looking for a target of $15 by the end of 2006.
"Fuel Cell Energy (FCEL NASDAQ) focuses on stationary fuel cell power. 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. Starwood Hotels has already committed to the system. They already have a system in their Manhattan hotel, and I'm looking forward to a stay at Starwood's Sheraton San Diego Hotel and Marina. Fuel Cell Energy invested $77 million in R&D over the last ten years. It's a ‘small-cap’ stock facing a huge opportunity. They'll lose about $1.60 a share this year, a bit less than the last couple of years. I expect the stock to double over the next year as the implications of the new energy bill sink in. Buy FCEL under $11 for a move to $22 in 2006."
Editor's note: This special repot from Michael Murphy was written prior to Katrina, and this package of alternative energy stocks has risen 25%. He now says, "Is it too late to get on board? Not at all. Katrina has simply ushered in The Hydrogen Age with a bang!"