Don't get Fueled Again

http://money.cnn.com/2004/05/24/markets/fu...dex.htm?cnn=yes

(There are Graphs in the Linked Article)

Don't get fueled again

Despite rising oil and gas prices, analysts urge investors to steer clear of hyped fuel cell stocks.

May 24, 2004: 6:20 PM EDT
By Paul R. La Monica, CNN/Money senior writer
NEW YORK (CNN/Money) -

Everybody's talking about the high cost of oil and gas.

You know what that means. It's time for a serious discussion of alternative energy sources, a way for the United States to lessen its dependence on petroleum products.

This usually means sharp rises in the stocks of companies like Fuelcell Energy (FCEL: Research, Estimates), Plug Power (PLUG: Research, Estimates) and Ballard Power Systems (BLDP: Research, Estimates), which are all working on fuel cell technology. And lo and behold, shares of Fuelcell and Plug were up more than 6 percent Monday while Ballard was up a more modest 2 percent.

But analysts say investors should be extremely cautious of these firms.

"There's probably going to be the normal political stumping about alternative energy but at the end of the day, the long-term investors should focus on the true fundamentals of these companies," says David Kurzman, an analyst with Needham & Company.

Sure, all three stocks are trading well off their all-time highs. Alternative energy stocks were a big fad right around the time that most technology stocks peaked in 2000. So there may be the temptation to say that these stocks are now "cheap" or "attractive."

But all three companies are still relatively small and unprofitable. Ballard, the largest, has a market value of about $1 billion and is expected to post sales of $82 million this year. So it's trading at more than 12 times sales. Fuelcell is trading at about 13.5 times 2004 revenue estimates while Plug is valued at nearly 38 times sales.

Still, even though Ballard is the least expensive, it might be the most speculative of all three because it is focusing on developing fuel cells for the automotive market.

Walter Nasdeo, an analyst with Ardour Capital Investments, thinks that a commercially viable car running on fuel cells probably won't be available until the latter half of next decade at the earliest.

That's why Nasdeo thinks that Fuelcell and Plug Power are less risky long-term bets for investors. Both companies are working on broader applications for fuel cell technology, such as energy for the home and emergency power back up systems. For that reason, these stocks also were actively traded shortly after last summer's blackout.

Still, Nasdeo said investors should not be looking to make a quick killing in any of these stocks. "Obviously, you need to be a little skeptical," Nasdeo said. " There are some opportunities, but not in the near-term. Investors need to go into the stocks with the idea that you hold on to them for a long time."

To be sure, if the price of oil remains above $40 for a sustained period of time, that will probably lead to more talk from the government about spending more on alternative energy research. But that won't substantially change the fundamentals of companies like Plug Power, Fuelcell or Ballard any time soon.

"High energy prices should encourage the administration to support alternative energy so that the commercialization of these products becomes more realistic. But you're not going to see a near-term impact in revenues or earnings for these companies," said Chris Kwan, an analyst with TD Newcrest.

Given the premium valuations, investing in these companies is at best, a crapshoot considering that companies are still not likely to have mass market products, not to mention profits, anytime soon.

"I don't care how high oil prices go," said Kurzman. "The issue is do any of these companies have an alternative energy product that is economically viable?"

Kwan owns shares of Fuelcell and his firm has had an investment banking relationship with Ballard but other analysts quoted in this piece do not own shares of companies mentioned and their firms have not done investment banking for these companies.