FuelCell (NASDAQ:FCEL) recovered from much of its post-earnings drop ever since the company released results on Jan. 22. The company posted fourth-quarter revenues falling 38%. The total contract backlog of $1.3 billion is lower than the expected $2 billion. Why are investors buying the stock again despite the disappointing results?
FCEL stock hit a peak at $2.88 on Jan. 21 and then bottomed around $1.50. Speculators accumulated the stock in recent weeks, probably after they realized the company is shifting from product sales to utility-scale power contracts.
On its press release, the company’s CEO, Jason Few, said that Q4 and full-year 2019 “reflect our focused execution on right-sizing FuelCell Energy, exiting opportunities that did not meet our margin objectives, and positioning the Company for growth in 2020 and beyond.”
By cutting costs and improving its balance sheet, FuelCell is in a better position to fulfill customer orders. Its total project backlog rose by 17% in 2019, to $1.3 billion. Its generation unit backlog grew by 33% to $1.1 billion while the services unit backlog fell by 33% to $169.4 million.
Q4 Highlights
FuelCell Energy secured funding to minimize any risks of its liquidity freezing up.
The company also completed the construction and started commercial operations for its 2.8-megawatt fuel cell bio project at the Tulare, California wastewater treatment facility. The building of its 7.4-megawatt fuel cell plant progressed in Q4, too. Looking ahead, its focus on power purchase agreements (PPA) will strengthen its generation portfolio. Instead of selling its projects outright, FuelCell shareholders should expect steady revenue throughout several quarters. This should also reduce the volatility of FCEL stock in 2020.
The company incurred legal and consulting costs in 2019 but it also reduced expenses by over $15 million. Lower research and development expenses of $1.4 million, compared to $7.4 million in the same quarter in 2018, should lead to smaller losses. For now, the higher share count and slow revenue growth will delay the company from reporting a profitable quarter.
Positive Catalysts Ahead
FuelCell has a large energy market opportunity ahead. The generation of distributed power, distributed hydrogen, storage and carbon capture is worth $174 billion globally. That breaks down to $70 billion in the equipment market and $104 billion in the services market. With a market capitalization of around $500 million, FuelCell Energy stock is a risky speculation that may pay off.
FuelCell had $39.8 million in cash as of Oct. 31. Its Orion financing adds $65.5 million in additional cash that it will use to pay back the short-term debt. More importantly, Orion Energy Partners is funding $80 million of the $200 million credit facility. As long as FuelCell’s cash flow from its generation grows over time, it will have no problem managing its debt. In the near term, the company is poised to deliver on its existing backlog of projects.
With Exxon Mobil (NYSE:XOM) as a joint development partner, FuelCell has a low operating expense structure. This reduces its operational risks significantly.
Having completed the first phase of its turnaround, FuelCell is in a position to strengthen the business. Phase three of its plan centers on product sales growth. So, with recurring revenue estimated to grow threefold by 2023, betting on FCEL stock may pay off.
Valuation and My Takeaway on FCEL Stock
According to analysts, FCEL stock is worth just $1.75. Similarly, at a 12% discount rate, the stock has some downside risks ahead.
Watch the stock for now. If the company reports a growing backlog next quarter and strong revenue growth, initiate a position.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, the author did not hold a position in any of the aforementioned securities.
