Like most stocks
in the U.S. equity market, shares of hydrogen fuel cell developer Plug Power
(PLUG: Nasdaq) was
trounced in early March 2020 as investors registered deep worries over the coronovirus
threat. After clawing the way back
higher, the shares had been muddling along a line of volume-related price
support-resistance at the $4.25 price level.
Then the stock surged 30% higher, bringing the shares back to a
pre-pandemic high.
Previously in mid-May 2020, Plug Power had announced the successful pricing and distribution of $200 million in convertible senior notes with a coupon of 3.75%. The bonds convert at 198.6 shares of Plug Power’s common stock per $1,000 in bond principal. The bond offering closed at a small discount and after expenses captured $193.4 million in new capital for the company. Plug Power’s bond was the first ever ‘green bond’ offering in the U.S., possibly lending to the success of the transaction. Proceeds of green bonds must be earmarked for environmental or climate-positive projects.
It was not until
a major investment bank took notice of Plug Power that the shares took
off. In early June 2020, Baclays Capital
initiated coverage with a positive rating and a $7.00 price target. Perhaps the bank’s analysts were attracted to
the potential in Plug Power now that it is well fortified with new
capital. Alternatively, the stock had
appeared deeply undervalued, making a bullish call well timed.
Plug Power’s
potential in the market for hydrogen fuel cells has been significantly expanded
through a distribution arrangement with ENGIE (ENGQF: OTC),
a clean energy solution provider based in France. ENGIE has interests in electricity and
natural gas distribution as well as other energy services. Plug Power’s portfolio of products and
services fit well with ENGIE’s market approach.
In addition to its flagship hydrogen fuel cell system for electric
vehicles, Plug Power offers a stationary hydrogen fuel cell solution for backup
power for remote locations. To begin
Plug Power will provide a custom refueling system for one of ENGIE’s mining
industry customers, Anglo American. The
refueling solution will support new hydrogen power mine haul vehicles in use at
one of Anglo American’s platinum mines in South Africa.
At end of March
2020, Plug Power had $74.3 million in cash on its balance sheet. That may seem like plenty of dough, but the
company had burned a $60.0 million in cash to support operations in the first
three months of 2020. The company
realized a dramatic increase in sales in the quarter to $40.8 million compared
to $21.6 million in the same period a year ago.
Even with the boost in scale, the cost of production still exceeded
revenue, resulting in negative gross profit margin. Management had also amped up research,
development and marketing activities in the quarter, increasing operations
expenses by 28% year-over-year.
Subsequent to
the bond offering and with unchanged cash burn, we estimate the company’s cash
balance is now near $250.0 million. This
cash kitty should give Plug Power the working capital it needs to support its
ENGIE relationship as well as move more aggressively in its markets. Plug Power can already announced interest in
acquiring United Hydrogen Group and an electrolyzer technology platform for
hydrogen production. If completed the
deals could significantly advance Plug Power’s ability to deliver hydrogen to
customers using its fuel cells.
Sporting a
negative price-earnings multiple Plug Power may not seem appealing to many
investors who are looking for profitable operations. Price-to-sales and price-to-book value are
not much more appealing. That said, Plug
Power appears to be well positioned in an industry that is just at the
beginning of expansion. The company is
well recognized as a technology leader in hydrogen fuel solutions, which bodes
well for capturing market share.
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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