Fueling the Search for Alternatives

06/19/2008 12:00 am EST


Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of New World Radar Report, finds an alternative-fuel company that’s making progress in its efforts to generate and sell electricity.

FuelCell Energy (Nasdaq: FCEL) is getting orders for large stationary fuel-cell plants in both the US and Korea. These produce electricity and heat, and make economic sense with oil over $100 a barrel. As their costs come down, that breakeven price point will also come down.

In their April second quarter, revenues shot up to $31.6 million compared with $11.4 million last year, while product sales tripled to $26.4 million. The company lost 38 cents a share, compared to 32 cents last year, because they are still losing money on every shipment. POSCO Power, their Korean partner, ordered 70 megawatts of capacity.

Their product-cost-to-revenue ratio fell to 1.50 from 1.85 in last year's quarter. That means it cost them 50 cents more to make every watt than they got in revenue, and I want to see steady declines in this ratio until they flip into positive gross margins. Most of their new orders are for megawatt-class equipment, which has better product margins than the smaller stuff. Backlog is up to $134.7 million, 266% above last year's.

Now that the California Public Utilities Commission has increased the size of projects eligible for cash incentives to three megawatts and increased total funding to $179 million, I expect significant new orders to follow the 19 megawatts FCEL has already sold into the state. Twenty-seven other states and the District of Columbia now have renewable power standards totaling about 30,000 megawatts. In Connecticut, one of those states, FCEL has won three projects using 16.2 megawatts of FCEL equipment.

According to an article in the June 1st New York Times, the US wastes 66% of its energy, and 33% of all [carbon dioxide] emissions come from electricity generation. If US industry recycled its waste heat and put waste gases to work instead of burning them, it could reduce greenhouse gases by 19%. Because FuelCell Energy's Direct FuelCell runs at a very high electrical efficiency, it takes less fuel to make a kilowatt hour of electricity. That results in lower CO2 emissions and substantial fuel cost savings.

On top of that, customers who feed the fuel cell with biogas can use waste heat to generate heat and power, generating essentially pollution-free electricity at efficiencies approaching 80%—more than double [that of] conventional power plants.

Obviously, FCEL is a long-term position for us, and they have to get their costs down the learning curve far enough to be profitable. I expect that to happen when they introduce their latest technology improvements in mid-2009.

The good news is that they are far, far ahead of anyone else in doing that with megawatt-class equipment, and their success in Korea (an expensive energy country committed to energy independence using green technology), California, and Connecticut shows that they can make these large sales.

FCEL is a Top Buy up to $12 for a $22 target. (It closed just below $8 Wednesday—Editor.)

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