Hydrogen Developer on the Move

In a continuing series highlighting investment alternatives in emerging hydrogen fuel sector, this post turns to a selection of fuel production and equipment developers that have not yet achieved profitability.  Investors might still be interested in these early-stage developers for the disruptive new technologies they bring to the hydrogen market.  Market acceptance of those innovations could win meaningful market share and drive stock value.  The last post “Hydrogen Short-List” on September 17th introduced the group.

The key to a successful stake in early-stage companies is finding players that gained foothold in the market and show enough momentum to scale up operations to a profitable level.  Which one is the winner? 

The second table below displays the results of a novel analysis aimed at sussing out which of these companies may be well positioned to carve out a good-sized share of the hydrogen fuel market.  Our due diligence points are listed below:

·        First, we looked at partnerships, not just any relationship, but those that are lined up to help win new customers and sell hydrogen fuel products, equipment or services.  The more substantial the partner, the better.

·        Sales announcements were also scrutinized to provide a view on whether the company has built up some momentum in winning new customers.  The second and third columns in the table below indicate whether the company had at least one new customer announcement in the last year and then whether there was a more recent announcement in the last three months of yet another new customer.  Notably new partnerships or new development projects were not included as ‘customers.’

·        Forecasted sales growth rates as provided by analyst estimates offer additional insight into whether those who follow the company closely, anticipate sales growth in the next year.  Estimates for some of the companies based outside the U.S. are not readily available, if such estimates had been published.  Anticipated sales growth is an indicator that the company’s products are embraced by customers.  This action even in small numbers is likely to have a lubricating impact on future sales.

·        A profitable gross margin indicates whether the company has achieved adequate sales volume to cover fixed production costs with enough contribution to realize a gain.  Gross profits precede operating profits or positive cash flow.

·        Finally, the ability of the company to meet expectations is a signal the operation has achieved a level of predictability or at least that management has been able to communicate the company’s prospects to the investment community.  This line of communication could be critical in aiding investors as they await the much-anticipated report of first profits.

Based only on these criteria, the surprising winner is Norway’s Nel, ASA (NEL:  OL), which ticked more boxes on our novel due diligence exercise than any of the others.  Nel sells hydrogen fueling stations and electrolysers to convert water to hydrogen.  The company sells its renewable hydrogen solutions to across several industries and government energy projects.  Most recently Nel received a purchase order from Scotland’s SGN gas distributor which has also embarked on a project to become a provider of residential heating exclusively from hydrogen.  Nel will provide SGN with a 5-megawatt alkaline water electrolyser to begin the project.  Nel will be the preferred provider of a 20-megawatt hydrogen electrolizer facility for Spain’s electric utility Iberdrola.

Nel has several market relationships, the most recent of which is a framework agreement with energy service provider Aibel.  Aibel, which provides engineering, construction and maintenance services to oil, gas and offshore wind projects, will help in managing large scale, complex projects.

Although Nel does not appear to have reached a positive gross margin, the company has reported recent growth.  While we were not able to determine if the company had delivered on analysts estimates, those following the company and publishing estimates collectively see potential for 35% sales growth in the next year.

It is not surprising that a European-based player would do best in our due diligence effort.  Europe has been well ahead of renewable energy innovations for several decades, putting companies there in a better position to solve technical problems as well as perfect business models. 

Runner up in our exercise is FuelCell Energy, Inc. (FCEL:  Nasdaq), which lost out to Nel only because its market partnership with Korea’s POSCO Energy ended up in a courtroom.  FuelCell did prevail in the technology dispute with POSCO, but it is understandable that management may be a bit shy about partnerships going forward.  Instead, FuelCell focuses on large scale power projects and regards its customers as partners in the development process.  We might view this as a signal that FuelCell’s management team has reached a level of sophistication and technical expertise that makes it less dependent upon other parties to reach customers.

FuelCell has not announced any new sales in the most recent three months, but that might be understandable given that it typically sells into large projects that unfold over a period of several months.   For example, the company recently completed construction and began commercial operation at a 1.4-megawatt biofuels-to-hydrogen plant in cooperation with the City of San Bernadino.  An alternative explanation for absence of recent customer announcements is that the company’s engineering and sales teams are easily swamped with one or two projects and struggles to keep the business pipeline primed.

FuelCell has struggled with profitability and is still using cash resources to support operations.  However, the company was finally been able to beat analysts estimates in the most recently reported quarter ending June 2021.  The group expects the company to deliver as much as 9% growth the current year and another whopping 56% growth in 2022. The complex project sources methane from municipal wastewater treatment digesters and produces renewable hydrogen for electricity for the municipal water reclamation processes.

The hydrogen sector is finally coming into its own after having been considered too problematic in terms of safety and cost.  Hydrogen developers have demonstrated that solutions are available to resolve safety issues and the cost of renewable hydrogen has finally been brought to withing competitive range.  It is a sector that requires study before taking a significant stake.  Accordingly, it is not likely to be a stock targeted by the new breed of speculative buyers.  Besides answering the question of market penetration and momentum that was the focus of this brief due diligence effort, investors would do well to vet management’s talents and successes as well as the company’s balance sheet.  

 

SELECTED HYDROGEN FUEL AND EQUIPMENT COMPANIES
Company	SYM	Operations	Market Cap*
AFC Energy Plc	AFC.LN	Alkaline fuel cell systems, water electrolyzers	$513.8 M
Bloom Energy	BE	Solid-oxide fuel cells, including hydrogen	$3.2 B
Ballard Power Systems	BLDP	Proton exchange membrane fuel cells	$4.7 B
Ceres Power Holdings	CWR.LN	Solid-oxide fuel cells, including hydrogen	$3.0 B
Doosan	336260.KS	Power generation fuel cells, including hydrogen	$2.8 B
Fuel Cell Energy	FCEL	Fuel cell power plant operation, hydrogen distribution	$2.2 B
ITM Power, Plc	ITM.LN	Hydrogen energy storage, distribution systems	$3.0 B
Nel ASA	NEL.NO	Hydrogen production, storage, transport systems	$2.2 B
Plug Power	PLUG	Hydrogen fuel cell turn-key solutions	$14.5 B
*Foreign currency values converted to US dollars as of 9/20/21

 

 

SELECTED HYDROGEN FUEL AND EQUIPMENT COMPANIES
SYM	Market Partner	Sale News in Last Year	Sale News in Last 3 mos.	Forecast Growth Rate	Gross Margin	Meet/ Exceed Estimates
AFC.LN	Ricardo, ABB	na	No	200%	Neg	na
BE	Heliogen, BakerHughes	No	No	22%	Neg	Sometimes
BLDP	Quantron AG	Yes	Yes	Neg	Neg	Never
CWR.LN	Doosan, Bosch	na	na	na	Neg	na
336260.KS	Bosch	No	No	Neg	1.0%	na
FCEL	None	Yes	Yes	9%	Neg	Last Qtr Only
ITM.LN	Scottish Power	Yes	Yes	na	Neg	na
NEL.NO	First Solar, SFC Energy	Yes	Yes	35%	Neg	Never
PLUG	Westech Industrial	Yes	No	Neg	Neg	Never
*Foreign currency values converted to US dollars as of 9/20/21

 

 

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.