Plug Power's Insanely Bullish Story with Catastrophic Risk of Failure
##Symbol##PLUG
Plug Power (PLUG) is a fascinating company with a fascinating history and a rather fascinating CEO.
PLUG is in the fuel systems and storage business. It hit the mainstream news rounds when the stock rose literally from pennies to about $12 in stock price. Since then, the stock has fallen back down over 80%. The run up was a bit of bad money chasing overblown momentum, but the fundamentals surrounding the firm did drastically change for the better. All of a sudden the company is signing multi-million dollar contracts and to date, those contracts have come in. Either you believe the growth story and ignore the current fundamentals, or you ignore the growth story and believe the current fundamentals.
The stock hit a 52 week low on July 6th, and it snapped back hard the next day as its very camera comfortable CEO released some bullish news about the quarter about to be released. Earnings are officially due out on August 6th, but we just got a chunk of information.
We learned that its GenDrive saw shipments more than double in the quarter and the company said that would unambiguously drive the company to record revenue. The GenDrive sales hit 888 units, up from 419 in the first quarter, and even more impressive, the company re-asserted its guidance that 3,300 GenDrive units would be delivered in 2015 a long with 15 genFuel systems (Source: The Motley Fool. Those sales altogether are expected to drive $200 million in revenue. As a point of reference, in the trailing twelve months (TTM), PLUG has generated $68 million in revenue.
There are a few misconceptions about his firm that I think need to be cleared up. First, this is not a new firm, it has been public for more than 15-years, it's simply "newly interesting." Also, regardless of the low stock price, its market cap as of this writing is over $440 million.
This is not a micro cap. For a company with no profit, no expected profit and sales below $100 million right now, we can't just wildly say it's undervalued. But, there is an argument that it will be undervalued if it delivers on what appears to be continued promising news. There is also an argument that it's overvalued. We will look at both in an unbiased and objective way, just as Wall Street would, but Main Street has been unable to, until now from CMLviz.com.
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Technicals | Support: 2.32 | Resistance: 2.82
Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.
PLUG has a three bull (stock is range bound) technical rating because its trading above its 10- and 50-day moving averages, but below its 200- day moving average. The stock is up on the day but the 10-day MA is below the 50 day MA ("swing death cross").
Let's look at the core elements that drive the company's fundamental rating.
Fundamentals Rating Summary
METRIC CURRENT 1YR AGO 2YR AGO DIRECTION Revenue (TTM US$ Millions) 68 26 25 RISING
Operating Margin (QTR) 0.425 0.43 0.50 FALLING
Net Income (TTM US$ Millions) -24 -130 -34 RISING
Levered Free Cash Flow (TTM US$ Millions) -32 -19 -12 FALLING
Capital Expenditures (TTM US$ Millions) 1 0 0 RISING
PLUG is up +0.2% over the last three months and down -4.6% over the last six months. The stock has returned -53.0% over the last year.
Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.
METRIC CURRENT 1YR AGO 2YR AGO DIRECTION Revenue (TTM US$ Millions) 682625RISING
When a company grows revenue 165% year-over-year, we must recognize the added importance of top-line growth, perhaps even above and beyond earnings, free cash flow and margins. Regardless of the low 1.5 fundamental (star) rating, if revenues continue to explode, everything could follow suit for PLUG. And we do have strong circumstantial, if not empirical evidence that revenues are about to absolutely explode.
What do all these numbers mean?
PLUG's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Let's look at Revenue (TTM US$ Millions) in the chart below. That green bar represents the all-time high and sits at $68 million. We have news that it could hit $200 million in the relatively near-future. This is the bullish narrative and it is powerful.
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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION Operating Revenues/Operating Expense 0.4250.430.50FALLING
This ratio (which simply represents how much revenue is generated per one dollar of expense) must be at a minimum above 1.0 in order for a company to turn an operating profit. PLUG generates $0.42 in revenue for every $1 in expense, which is extremely poor and substantially below the sector average of $1.00. Look, there is a bullish thesis, no doubt, but if a company spends $1 to make $0.42, it can't just make it up on volume unless it realizes substantial economies of scale.
I do note that the entire sector is barely breaking even with companies like FuelCell Energy (FCEL) haemorrhaging losses, and a top performer like PowerSecure (POWR) (which is up 55% in the last year) still showing a $3 million loss. PLUG is funding operations by selling stock and there is a non-trivial chance of failure here.
What do all these numbers mean?
One year ago Operating Revenues/Operating Expense was 0.43. In the last year we can see operating margins are decreasing and less than 1.0 for the most recent quarter (below the critical level).
PLUG's fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was negative (lowers the rating).
Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.
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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION Net Income (TTM US$ Millions) -24-130-34RISING
Net Income (after tax profit) over the trailing twelve months (TTM) for PLUG is rising but substantially negative and has been for more than 15 consecutive years. For the most recent trailing-twelve-months (TTM) the company reported net income of -$24 (million). Obviously, with an operating margin of 0.42, more revenue isn't going to result in earnings, but, that bottom line is getting a little better.
In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.
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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION Levered Free Cash Flow (TTM US$ Millions) -32-19-12FALLING
Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For PLUG the metric is falling, and it has been negative forever. Enough said.
For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.
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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION Capital Expenditures (TTM US$ Millions) 100RISING
This is a fascinating and crucial metric to follow for PLUG. While on one hand Capital Expenditures (CapEx) (TTM US$ Millions) has collapsed from its levels in 2000 (~$12 million) down to $1 million in the most recent year, the company has disclosed that its current manufacturing capacity to deliver all of the contracts it has in place and several more it anticipates. This may actually not be a case where the firm is suffocating itself by cutting CapEx, but rather a firm that is ready to deliver on huge growth.
In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars.
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Summary
Power Plug (PLUG) seems to announce good news just as the stock plummets rather often. It's a little curios, yes, but if it's true, then who cares. So far it does appear that management has been a bit over zealous and optimistic if we really focus myopically, but in general, revenue has exploded and is exploding. They have manufacturing capacity to fulfill orders and therefore have cut CapeX as revenues rise. The company isn't expected to turn a profit, so there's a sort of mulligan there if the company loses money, and some upside potential if it surprises with increasing margins and a profit.
You either believe in the growth story (with valuation in mind) and get a bullish itch for this company, or you look at its operational history and see rising revenue would actually mean larger losses. An operating margin of $0.42 is a disaster and the company is selling stock to fund operations. There is a non-trivial chance of failure here. It's an easy story to tell up to now. The end of the story is not easy to tell at all.
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