Friday, October 20, 2006

Cells and Stocks

Some scientists claim that hydrogen, because it is so plentiful,
is the basic building block of the universe. I dispute that.
I say there is more stupidity than hydrogen, and
that is the basic building block of the universe.

Frank Zappa



The discussion of hydrogen as an energy source is continued in today’s post in a look at three of the fuel cell developers. There are a number of companies working on hydrogen fuel-cell technology that are doing exciting work. I mention three here since, as public companies, their stock is liquid and available for minority investment. These three have something else in common: market-ready products with customers and/or revenue.

The first two are working with Direct Fuel Cell technologies and have found success with “reforming,” i.e. using a fuel processor to convert hydrocarbon fuels into a gas mixture of hydrogen and other gases. Medis Technologies Ltd. (MDTL: Nasdaq) is a bit circumspect on its fuel source, indicating simply that it is a patented proprietary fuel. FuelCell Energy, Inc. (FCEL: Nasdaq) uses plain-old pipeline natural gas to set up the hydrogen/oxygen reaction inside the cell. In contrast, Ballard Power Systems, Inc. (BLDP: Nasdaq) produces fuel cells that use hydrogen as a raw fuel.

Medis Technologies is targeting its Medis 24/7 Power Pack at the market handheld devices, such as smart phone multimedia devices and power tools. The Medis 24/7 Power Pack is a disposable charger or auxiliary power built on patented direct fuel cell technology. One unit is expected to give up to 30 hours talk time for a cell phone or up to 80 hours listening time on an iPod. It produces no discernable heat output and is environmentally friendly. Medis has managed to get the expected cost down to affordable levels for consumers with a suggested retail price $19.99 to $24.99.

The key to the price level is production. Medis is installing a production line in Israel that could produce up to 1.5 million units per month when fully operational in 2007. A big hurdle for market introduction is certification by Underwriter Laboratories. Medis started the process

Just this week Medis signed a memorandum of understanding with two Russian groups, which will help Medis get the Power Packs certified for sale in Russia. The Russian partners has pledged to buy initial units produced in Israel, but will later set up production facilities in Russia.

As exciting as all these events might seem, investors are presented with a dear stock price ($24.31, 10/19/06) given that Medis is still several months away from production and sales. There are two published estimates for MDTL with apparently widely divergent views on the next year. According to First Call, one analyst expects a profit of $0.50 per share in 2007 on over $100 million in sales and the other expects a loss of $0.59 per share on $65 million in sales.

Ballard Power Systems has remained loyal to using hydrogen as a raw fuel in its Nexa product, partly because of the limitations presented by the “reforming” step. The fuel processors used by FuelCell Energy are dependent upon a strong distribution system for the fuel source. Natural gas, for example, is available only for stationary applications, limiting FuelCell Energy to its target market of power generation. Methanol is easier to convert into hydrogen but methanol is in limited supply. Medis is able to target portable applications because its fuel source is “on board,” that is already in the product.

A readily available fuel source is a key for Ballard, since it has set its sights on the electric vehicle market. It has allies in DaimlerChrysler and Ford Motor Company, which along with Honda, have introduced fleet demonstration vehicles to customers. Ballard also formed a partnership, Chrysalix Energy, with Shell Hydrogen to fund development of transportation infrastructure and support services. In fact, Shell Hydrogen signed an agreement last week with Proton Energy Systems, a subsidiary of Distributed Energy Systems Corp. (DESC: Nasdaq), to install a hydrogen fueling system in the New York City area to demonstrate hydrogen generation technology for vehicle fueling. Air Products, Inc. (APD: NYSE) is also a partner in the project.

Ballard’s first commercial fuel cell product, the Nexa power module, has been around about five years now. This product, along with materials, has helped build Ballard’s sales to $62 million in the twelve months ending June 2006.

Ballard is burning cash at the rate of about $10 million per quarter on operations. With $213 million in the bank at the end of June 2006, Ballard appears to have the resources for several more years to develop its technology. The nine analysts who have published estimates for Ballard are not looking for profitability any time soon. The First Call consensus estimate is a loss of $0.55 per share on 2007 sales of $79.0 million, representing only a small improvement over the consensus estimated loss per share of $0.66 on $62 million in sales.

Unlike Ballard, FuelCell Energy is targeting stationary applications, rendering the fuel sourcing and transportation non-issues. Using Direct Fuel-Cell technologies, FuelCell Energy has developed fuel cell power plants ranging in size form 250 kilowatts to 2 megawatts. Light industry, hospitals, schools and server farms that need back-up power sources are ideal customers. One of its most recent sales was to a buyer in the hospitality industry in California, which will use the 750 watt power plant to supply base load power for hotel operations. The heat byproduct from the power plant will be used to heat water for guest rooms.

FuelCell Energy not only has a broader analyst following than Medis, they also appear to be in agreement on next year’s prospects. The First Call consensus estimate is for a loss of $1.37 per share on $40.0 million in sales.

Clearly the market for energy sources is diverse and multiple applications are needed, leaving room for numerous players. Another question beyond the scope of the discussion today, is whether there are alternative energy sources, such as lithium ion batteries for portable or vehicle applications that will ultimately gain wider acceptance.

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