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Plug Power Slumps Despite Analyst Bullishness

Plug Power received a big thumbs up from analysts at Dougherty and Company today, who initiated coverage on the stock with a Buy rating and $3.70 per share price target. But that wasn’t the only bullish report on the hydrogen fuel cell system manufacturer this week.

Plug Power an attractive stock?

In a post on Seeking Alpha earlier this week, Sneha Shah also said Plug Power’s valuation is “attractive” because of the company’s low valuation. The analyst offered a few reasons for this view.

For example, Shah is bullish on the fuel cell industry as a whole. The analyst noted that while fuel cells offer clean energy, the market is still waiting for a major breakthrough. Plug Power makes fuel cell systems for forklifts, which are geared toward the material handling market, which is worth $4 billion just in North America.

Plug Power posts strong financials

Shah also pointed out that last year Plug Power improved its operational performance, raising sales for the full year to $21.5 million, a 168% increase from the previous year. The company also increased its gross margin from -39% in the fourth quarter to -8%, meaning it is on track to finally become profitable.

Plug Power also increased its bookings to over $250 million last year and improved its cash position from $5 million at the end of 2013 to $146 million at the end of last year. Management expects to sell more than $100 million in fuel cell systems this year and take bookings for more than $200 million worth of orders.

Plug Power products

The analyst also likes Plug Power’s product portfolio, which is entirely focused on the material handling industry. Shah does note that shipments of the GenDrive system almost doubled annually and that gross margins on the system rose from -7% to 18% this past year. The company expects to ship more than 3,300 units this year and is targeting a gross margin of 35% for the GenDrive systems.

Plug Power also introduced its GenKey and GenCare products, and 90% of its prior customers already ordered the GenKey system. GenCare is a maintenance program that will help the company create a recurring revenue stream.

The fuel cell system maker counts some big names among its customers, including Wal-Mart, Procter & Gamble, Kroger, Honda, Mercedes-Benz and more. Some of its biggest customers have placed additional orders, signaling confidence in the GenDrive system.

Shah also likes that Plug Power replaced its chief accounting officer recently, although the analyst is clearly in the minority on Wall Street on this issue because the company’s stock dipped after that announcement.

Potential problems for Plug Power

Every company faces challenges, and of course Plug Power is no different. The issues Shah names are the same bears have referenced, but they concern Shah less than they do the bears.

For one thing, fixing gross margins is a tall order, as Plug Power remains in the negative, but it is on its way to hitting breakeven, which Shah says it needs to do before the ITC tax credit expires in about two years. But while working on the gross margin, the company also needs to create more cost-effective fuel cell solutions, and if it can do that, then it stands a better chance at beating back competition like FuelCell Energy.

Shah points out that Plug Power trades close to its 52-week low right now, adding that its P/B multiple is 2.9 times, compared to Ballard Power’s multiple of 3.6 times and FuelCell’s multiple of 3.7 times. Because of these considerations, the analyst calls Plug Power a “speculative buy.”

As of this writing, shares of Plug Power were down 1.84% to $2.67 per share.