Friday, October 10, 2014

Fuel Cell Cars: Hedge Against Failure

Last month the head of Volkswagen’s Japan operations, Shigero Shoji, joined Tesla’s Elon Musk is expressing skepticism for fuel-cell powered cars.  Everyone expects Musk to down play the importance of anything but electric cars since he has staked his reputation on the Tesla all-electric car.  However, Shoji is from Japan where the government has invested heavily in hydrogen infrastructure and offers consumers large subsidies for fuel-cell-power cars. 

The two high-profile naysayers have no influence at other major automakers such as Toyota and BMW, both of which have introduced fuel-cell-powered cars.  Japan’s leading automaker Toyota introduced its first fuel cell car in San Francisco last month with the especially catchy name, FCV (Fuel Cell Vehicle).  The car, which is supposed to be in California dealerships by fall 2015, has a range of 300 miles and can be refueled in less than five minutes  -  assuming the car driver can find a hydrogen refueling station.    Toyota reportedly wants to have at least three fuel-cell powered cars on the road by 2025.  BMW’s i3 alternative fuel car was originally designed as an electric vehicle with lightweight carbon-fiber and aluminum components.  BMW has reportedly been trying to adapt Toyota’s fuel cell to the i3 chassis and plans to debut the car in 2015.  Honda’s FCX Clarity and Hyundai’s Tuscan are also expected to be launched in 2015.

Shoji and Musk have a good point about hydrogen fueling infrastructure.  All those cars will be hitting the U.S. market at a time when the hydrogen refueling infrastructure is patchy at best.  A map from H2 Stations at provides a glimpse of just how little has been accomplished.  Then again if you are a glass-half-full kind of investor the nearly blank map is just an illustration of a new, robust market opportunity.

One of the companies with that that stepped up to the fuel cell infrastructure plate is Linde, A.G. (LIN.DE:  XETRA).  Linde is worldwide provider of industrial gases and counts some the world’s largest steel and glass makers as it customers, not to mention food processors, electronics manufacturers, and oil and gas producers.  The company also provides oxygen, nitrogen, argon and other gases to the health care and research organizations.  The company has long been developing hydrogen technologies.  If any organization can handle the complexities of hydrogen distribution it would be an expert in the field of gases like Linde. 

Earlier this year, Linde announced production of fuel-cell car filling stations.  The company claims the stations require a $1 million capital investment.  Each fueling session has been estimated near $50, so the hefty price tag could be might not be too hard to recover.  Sorry, Shigero San.  Linde’s first order came from Japan’s Iwatani.  The first Linde hydrogen fueling station was opened near Osaka last summer.  Linde has its eyes on the U.S. as well.

An investment in Linde does not provide a pure play on fuel cells or hydrogen.  However, Linde offers something else quite valuable  - a hedge against failure of the fuel cell car.  Linde reported $1.3 billion in net profits on $16.7 billion in sales in the twelve months ending June 2014, sales and profits which were generated by a well established industrial gas business and proven engineering services.  Linde will be unfazed by any fuel cell industry failure.  

Linde stock trades near 22 times trailing earnings, which seems reasonable given the company’s growth prospects.  The stock offers a dividend yield of 1.5% that could be attractive for investors with long positions.

For investors are not comfortable investing in company not listed in the U.S., there is Air Products, Inc. (APD:  NYSE).  Air Products is also an industrial supplier of gas such as carbon dioxide, nitrogen, oxygen, and most importantly hydrogen.  The company is not as large as Linde, but this is no small-fry.  Air Products reported $1.0 billion in profits on $10.4 billion in total sales in the twelve months ending June 2014. 

Air Products started installing hydrogen fueling stations in California in 2013, and plans to have at least ten installed before the new fuel call cars hit the road in 2015.  The company has had a great deal of experience with dispensing hydrogen fuels for industrial applications. 

APD trades at about 20 times trailing earnings and offers a dividend yield of 3.1%.  Like Linde, the stock presents a high quality play on the future of fuel cells.  That said, a beta measure of 1.37 suggests the investor who is holding APD for a long period could experience a bit of volatility as the months go by.  Importantly, we note that APD looks oversold after a sell-off that began in early September 2014.  The pessimistic tone is not necessarily disappointment in the company’s products as much as it is the general loss of confidence in world growth rates.  The smart investor might wait awhile before beginning to accumulate a long position.  The stock formed what chartists call a double-bottom breakdown in early October that signals a decided bearish tone in trading.  We are concerned APD could retreat to a level near $118 or even $110, which would present a more tempting entry point.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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