FuelCell Energy: Consider Potential Q2 Results Miss And Korean Market Opportunities
Contributor since 2012 / 12057 Followers
Summary:
- FuelCell Energy’s Q2 FY 2024 results are predicted to miss expectations based on the company’s track record and the recent performance of its peers.
- On the other hand, the South Korean market could provide new growth opportunities for FuelCell Energy, and its shares don’t seem to be overvalued.
- I choose to rate FCEL stock as a Hold after previewing its second quarter results and assessing its latest contract win.
Andrei Akushevich/iStock via Getty Images
Elevator Pitch
FuelCell Energy, Inc. (NASDAQ:FCEL) shares are awarded a Hold rating.
My earlier December 15, 2023 article touched on the factors influencing FuelCell Energy’s Q4 FY 2023 (YE October 31) results. In the latest write-up, I determine whether FCEL is likely to beat or miss Wall Street’s expectations with its financial performance for the second quarter of fiscal 2024.
On one hand, my bet is on a potential Q2 FY 2024 results miss for FCEL, taking into consideration the company’s track record, its peers’ recent performances, and the management’s comments. On the other hand, FuelCell Energy’s valuations are undemanding and there is untapped growth potential for the company in the South Korean market, as evidenced by a new $160 million contract. I assign a Hold rating to FCEL, in view of these above-mentioned factors.
The Consensus Second Quarter Financial Estimates For FuelCell Energy
FCEL will reveal its actual Q2 FY 2024 financial performance on June 10 as disclosed by the company in late-May. The market anticipates that FuelCell Energy will deliver an improved set of results for the second quarter of the current fiscal year.
With respect to the top line, FuelCell Energy’s revenue is projected to fall by -45.3% YoY to $21.0 million for the second quarter of this fiscal year, as per consensus forecasts. In comparison, the company’s Q1 FY 2024 sales contracted by a more significant -55.0% YoY. Also, the current consensus estimate translates into an expected +25.8% QoQ increase in FCEL’s top line for Q2.
In terms of operating losses, the Wall Street analysts see FCEL’s normalized EBITDA loss narrowing from -$26.0 million for Q2 FY 2023 and -$29.1 million for Q1 FY 2024 to -$20.5 million (source: S&P Capital IQ) in Q2 FY 2024.
To sum things up, the sell side thinks that FuelCell Energy can register top line expansion on a sequential basis and report a narrower non-GAAP adjusted EBITDA loss for the upcoming results announcement.
My Prediction Is That FCEL’s Q2 Results Will Miss Expectations
I hold the view that FuelCell Energy’s key financial metrics for the second quarter of the current fiscal year will be below the analysts’ consensus forecasts for the following reasons.
Firstly, FCEL’s track record of quarterly results surprises has been poor, especially in recent times.
The company’s revenue fell short of the consensus projection for three consecutive quarters between Q3 FY 2023 and Q1 FY 2024. In the past eight quarters starting in Q2 FY 2022, FuelCell Energy has recorded lower-than-expected top line in five of these quarters, which is equivalent to a pretty high revenue miss percentage of 63%. Below-expectations revenue also tends to translate into larger-than-expected EBITDA losses and net losses due to the negative effects of operating leverage.
Secondly, the market appears to have been overly optimistic about the financial outlook for FuelCell Energy and its peers.
Plug Power (PLUG) and Bloom Energy (BE) are FCEL’s key peers, which reported their most recent quarterly results in May.
The latest quarterly revenue for PLUG and BE came in below the consensus top line estimates by -23.7% and -5.6%, respectively. Similarly, Plug Power’s and Bloom Energy’s recent quarterly EBITDA loss margin (EBITDA loss divided by revenue) missed the consensus forecasts by -9,040 basis points and -760 basis points, respectively as per S&P Capital IQ data.
Notably, FuelCell Energy’s consensus Q2 FY 2024 top line projection was lowered by a modest -4% in the past one month, even though its key peers’ recent quarterly results disclosures in May were way below expectations.
Thirdly, the company’s management commentary at the prior Q1 FY 2024 analyst briefing in early-March sends mixed signals about its short-term outlook.
At the first quarter earnings call, FCEL guided for “a full quarter of (generation revenue) contribution” from “the Toyota project and the two new projects in Derby, Connecticut” in Q2 FY 2024. But the company also cautioned at the latest quarterly results briefing that it is anticipating “lower service revenues” on a YoY basis in the current fiscal year as it is “entering a lighter module replacement cycle.” In other words, the revenue outlook is murky.
With regards to costs and operating profitability, FuelCell Energy noted at the recent quarterly analyst call that it “couldn’t expect to see a material increase” in research & development or R&D costs vis-a-vis its full-year FY 2024 expectations of around $60-$70 million. As a reference, FCEL’s actual FY 2023 R&D expenses were $61.0 million, which represented a +77% jump as compared to FY 2022.
It is possible to infer from FuelCell Energy’s comments that the company’s R&D costs will likely remain elevated and be on par with its actual FY 2023 R&D expenses. As such, it won’t be realistic to think that lower-than-expected R&D costs could support a potential beat at the EBITDA loss or net loss level.
In a nutshell, I am predicting a Q2 FY 2024 results miss for FCEL.
Korean Market Growth Opportunities And Stock Valuations In The Spotlight
My opinion is that FCEL isn’t deserving of a Sell rating, although the company could possibly register below-expectations second quarter results.
One factor to consider is the company’s growth potential in South Korea.
At its Q1 FY 2024 earnings briefing, FuelCell Energy referred to South Korea as “the largest fuel cell market in the world today” and drew attention to “opportunities in Korea to transition customers to new repowering agreements” which will boost its “long-term service revenue.”
On May 28, 2024 at around noon time, FCEL issued a press release disclosing that it signed a “new seven-year service agreement” with Korean company “Gyeonggi Green Energy” to “service the fuel cell modules” for “Hwaseong Baran Industrial Complex” in Korea. FuelCell Energy anticipates that it can earn a total of $160 million in service revenue from this deal in the coming years. As a comparison, FCEL’s trailing twelve months’ top line was $103 million. This new contract win validates FuelCell Energy’s earlier view that the South Korean market could be a significant growth engine for the company.
Therefore, there is upside associated with FuelCell Energy’s future revenue if it can capitalize on growth opportunities for the South Korean market, notwithstanding a potential Q2 results miss.
The other factor to note is that FuelCell Energy’s valuations are roughly on par with its peers, and undemanding relative to its growth outlook.
FuelCell Energy is now valued by the market at a consensus next twelve months’ Enterprise Value-to-Sales ratio of 2.7 times (source: S&P Capital IQ). Bloom Energy and Plug Power’s consensus next twelve months’ Enterprise Value-to-Revenue multiples are reasonably close at 2.8 times and 3.0 times, respectively, as per S&P Capital IQ data.
Separately, FCEL’s growth-adjusted Enterprise Value-to-Revenue metric is just 0.10 times (2.7/26.1) based on its Enterprise Value-to-Revenue multiple of 2.7 times and the consensus FY 2023-2026 top line CAGR forecast of +26.1%.
In summary, FuelCell Energy doesn’t seem to be overvalued, considering peer valuations and its top line growth outlook. In addition, FCEL’s future revenue might surpass expectations if it seizes growth opportunities in Korea like the latest $160 million deal.
Final Thoughts
I have a Neutral view of FCEL. My view of FuelCell Energy’s expected Q2 FY 2024 performance is negative, but I have a positive opinion of the company’s new service revenue opportunities for the Korean market.
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