FuelCell Energy: Reasons to Buy
FuelCell Energy (FCEL) reported its third quarter (ended July 31) 2016 results on 7th September. FuelCell Energy reported total revenues of $21.7 million for Q3 2016 compared to $41.4 million for the same quarter of last year. The revenue suffered due to lower engineering procurement and construction, or EPC revenue, and the absence of module sales to Asia.
A weak performance
There was an even more serious decline in gross profit and gross margin this time at FuelCell Energy.
In fact, the gross margin of FuelCell Energy could have very well diminished further if the support from stronger Advanced Technology margins would not have come. Advanced Technologies contract revenues totalled $3.5 million for the current period compared to $3.2 million for the comparable prior year period.
But then, the Advanced Technology segment is the smallest segment that FuelCell Energy operates through. The largest of its three segments is the Products segment which has failed miserably last quarter. It could garner only $13.7 million of revenue for the May to July 2016 period compared to $31.1 million for the same period last year. That decrease was attributed to comparatively lower equipment, procurement and construction (EPC) revenue and lower Asian sales compared to the year ago period.
The Service segment didn’t disappoint as much as the Products segment. Still, its revenue did decline from $7.0 million of Q3 2015 to $4.5 million of Q3 2016. And the reason behind that is understandable since there were not as many service module replacements in the second quarter this year as there were last year. This factor largely benefited the service revenue and gross profit in the prior year and the lack of that same factor proved to be a disadvantage this year.
Projects and Backlog:
FuelCell Energy has nonetheless bagged enough projects to be looked at as a potential contender for a comeback in the long term.
Among the long term projects assets is the Riverside project which is a project financed by the PNC Energy Capital under an existing financing facility. The Power Purchase Agreement has been retained by Fuel Cell Energy.
Then there is another project to be financed under the PNC facility in California which will be over in the fourth quarter of this year. And again, the Power Purchase Agreement is retained so that the company will receive electricity revenue monthly from the sales of power to its customers.
Among the short term projects comes the 5.6 megawatt Pfizer project, which is under construction and expected to start commercial operations in the fourth fiscal quarter of the company. Another one is the 20 MW fuel cell park which is being constructed by POSCO energy, a partner of FuelCell Energy in South Korea. Further, there are several on-site projects equivalent to as many as 40 megawatts at Long Island.
All in all, FuelCell Energy has its hands full with enough backlogs to work on. The total backlog of FuelCell Energy at the end of the third quarter was $392 million up 16% from $338.3 million as of 31st July 2015. This includes a service backlog of $299 million, a product backlog off $35 million (equivalent to 16 MW) and an Advanced Technologies contract backlog of $58 million. And then there are other projects like the 63 MW Beacon Falls Energy Park project that are still in the process of proposal, evaluation and approval.
So Fuel Cell Energy has not yet run out of gas.
The latest high efficiency solution:
Another positive development apart from the increased backlog was the recently introduced 3.7 megawatt plant which is capable of delivering approximately 60% electrical efficiency. This breakthrough solution is completely owned, being developed and built by FuelCell Energy which will begin its construction in the fall of 2016. It is best suited for utilities, large industrial users, and the growing data centre market.
What’s more, it can also be scaled up to 100 MW giving them an upper hand over remote central generation power plants by virtue of lower land requirements, lower emissions and lower transmission losses.
This technology could boost the number of contracts finding their way to FuelCell Energy.
FuelCell Energy’s revenue as well as margins have declined seriously compared to the year ago quarter. But there is a lot of promise shown by the in-progress projects and the increased backlogs that the company has bagged. Especially, the higher the services backlog, the fatter the margins would be. Also, that high efficiency solution could really lead to a turnaround in the fortunes of the company. So, after remaining relatively flat for almost 10 months now, FuelCell Energy could just work wonders in the fourth quarter if whatever is promised is delivered by the company.