Plug Power’s (NASDAQ:PLUG) truck business looks poised to generate meaningful revenue for the company this year and the growth of the business should accelerate rapidly over the longer term. Meanwhile, the company’s margins should climb significantly.
Given these trends, Plug Power’s profitability should improve a great deal in 2020, making PLUG stock very attractive over the medium and long terms.
In my column on Plug Power that was published on March 2, I wrote that “Plug Power’s new (hydrogen fuel cell) truck business has tremendous potential” and added that “there’s a great deal of evidence to suggest that the demand for such trucks will be meaningful.”
After reviewing the transcript of the company’s fourth-quarter earnings conference call, held on March 5, I’m much more bullish on its truck business. That’s because Plug’s CEO Andy Marsh indicated that the company was partnering with more than one of its “pedestal customers” on hydrogen fuel-cell trucks. Specifically, he stated that, “we have a number of pedestal customers and … we’re working with them to put some (trucks) on the road in the coming half year.” Marsh clarified that Plug Power, together with its partner, Lightning Systems, would provide the engine, the fuel, and the fueling systems for the trucks.
Pedestal Customers Getting Greener
Plug Power says it has three pedestal customers. Its two known pedestal customers are Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN), and there has been a great deal of speculation that the third is Home Depot (NYSE:HD). Of course, all three of those huge companies use thousands of trucks and could easily order hundreds of hydrogen fuel-cell truck engines, hydrogen, and fueling systems from Plug Power and Lightning Systems.
I believe that Walmart and Amazon will both likely look to buy those products from Plug Power and its partner. I hold that view primarily because I believe that both giant retailers want to impress the young, environmentally conscious consumers who make up a high percentage of e-commerce customers. But as I’ve pointed out in the past, another selling point is that hydrogen fuel cell vehicles are easier to fuel during weather emergencies than either electric battery-powered vehicles or vehicles powered by gasoline.
Further, I think that both retailers will want to put significantly more green trucks on the road than the 800 green trucks that Anheuser-Busch InBev (NYSE:BUD) has ordered.
Assuming that Walmart and Amazon will each launch at least 1,000 fuel-cell trucks this year, I estimate that, conservatively, each vehicle will generate $10,000 of revenue for Plug Power. Assuming that’s correct, the deals will generate $20 million of revenue for Plug Power this year, versus the $236.8 million of gross billings that the company reported for 2019. If Plug Power’s gross margin on the truck deals is 40%, the deals could increase the company’s operating income by $8 million after it reported an operating loss of $7.5 million for 2019.
Of course, Amazon and Walmart are both quite well-known and closely followed by other retailers. Therefore, I think that if their trucks, powered by Plug Power’s engine and fuel system, perform well then other large retailers will look to make similar deals with Plug Power. And, again assuming the trucks powered by Plug Power perform well, Walmart and Amazon, in an effort to further improve their green credentials, will likely order components for another 1,000 trucks from Plug Power and its partner.
Further, Marsh noted that Plug Power sells hydrogen and provides aftermarket service to its customers. So as the company’s truck business expands, its revenue and profits from those sources will also expand.
Margins Are Poised to Expand
In the wake of Marsh’s statements during the Q4 earnings conference call, Oppenheimer analyst Colin Rusch boosted his price target on PLUG stock to $6 from $3 and maintained an outperform rating on the shares. The analyst thinks that the company’s borrowing costs will drop as its material-handling and truck businesses expand. Further, the analyst believes that new technologies adopted by the company, along with its growth, will enable it to reduce overall costs. Finally, Rusch believes that the company’s growth is causing the cost of hydrogen fuel to drop, and he thinks that trend will also boost Plug Power’s margins.
Bottom Line on PLUG Stock
Plug’s truck business will meaningfully lift the company’s financial results in 2020 and 2021, helping it to easily beat analysts’ average estimates. As a result PLUG stock looks poised to climb tremendously over the next 12-18 months.
However, with the concerns over the coronavirus still extremely high and oil prices plunging — due to Russia’s failure to support an output cut and the subsequent retaliation by Saudi Arabia — I think investors will be able to buy Plug Power’s shares at a cheaper price in a week or two. Alternatively, if the stock falls below $3.50 per share before a week or two from now, I would pull the trigger at that point.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
