Connecticut-based fuel cell company FuelCell Energy, Inc. (FCEL - Get Rating) is a global leader in the manufacture, installation, operation, and service of stationary fuel cell power plants. Shares of FCEL have gained 17.4% in price over the past five days, thanks to the company’s better-than-expected third-quarter earnings report. 

The company’s service agreements and license revenues rose 102% year-over-year to $14.3 million in the quarter. Moreover, its net loss came in at $12 million compared to $15.3 million in the year-ago quarter, due primarily to a higher gross margin and lower interest expenses.

However, the stock has declined 58.3% over the past six months and 41.4% year-to-date. FCEL’s declining backlog and the stock’s lofty valuation remain concerns. Although its increased investments in distributed hydrogen and long-duration energy storage should expand its portfolio of solutions, the company has been burning cash when its losses and expenses are already significantly high.

Here’s what could influence FCEL’s performance in the upcoming months:

Declining Backlog Could be a Disadvantage

As of July 31, 2021, FCEL’s total order backlog declined 2.2% from its  year-ago value to $1.30 billion. Its Advanced Technologies backlog fell 23% from $51.89 million on July 31, 2020, to $40.03 million as of July 31, 2021. This can be attributed primarily to a decrease in fuel pricing, which has reduced its estimated fuel revenue. A declining backlog suggests that the company is not gaining new contracts. Bleak Financials

Although FCEL’s revenue rose 43% year-over-year to $26.8 million in the third quarter ended July 31, 2021, its adjusted EBITDA came in at a negative $5.17 million. The company’s operating loss was  $10.59 million for the quarter, while its loss per share amounted to $0.04. Also, FCEL reported $11.69 million in total costs and expenses, up 53.1% from the prior-year period. Its advanced technologies revenue declined 9.4% year-over-year to $6.25 million.

The company’s ROE, ROA, and ROTC are negative 26%, 10.9%, and 6.4%, respectively. Also, FCEL’s net income margin and EBITDA margin are negative 131.8% and 53.5%, respectively. In addition,  its 0.1% trailing-12-month asset turnover ratio is 85.8% lower than the 0.8% industry average.

Tax Equity Financing

Last month, FCEL closed on a tax equity financing transaction with East West Bank for its 7.4 megawatts U.S. Navy Submarine Base fuel cell project. The $15 million tax equity commitment should enable FCEL to create a structure to facilitate additional capital opportunities.

Also, last month, FCEL closed on a tax equity sale-leaseback financing transaction with Crestmark Equipment Finance for its  1.4 megawatts SureSource 1500 biofuels fuel cell project. The company sold the San Bernardino fuel cell power plant for $10.2 million and then leased the plant back from Crestmark. However, sale-leaseback financing could lead to loss of operational flexibility and inability to leverage any depreciation benefits.

Stretched Valuation

In terms of forward EV/Sales, FCEL is currently trading at 27.14x, which is 1,361.9% higher than the 1.86x industry average. In addition, its 31.29x  trailing-12-month Price/Sales ratio of is 1,968.3% higher than the 1.51 industry average. Also, FCEL’s 9.92 forward Price/Book multiple  compares with the industry average of 3.07.

POWR Ratings Reflect Bleak Prospects

FCEL has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. FCEL has an F grade for Quality. The stock’s 135.4% trailing-12-month negative levered free cash flow margin  is in sync with this grade.

The company has an F Stability grade, which is  consistent with its relatively high 4.98 beta. In terms of Value Grade, FCEL has an F. The stock’s higher-than-industry Price/Sales ratio is consistent with the grade.

In addition to the grades I’ve highlighted, one can check out additional FCEL ratings for Growth, Momentum, and Sentiment here. FCEL is ranked #85 of 91 stocks in the B-rated Industrial – Equipment industry.

Click here to check out our Industrial Sector Report for 2021

Bottom Line

A narrower-than-estimated third-quarter net loss and improved total revenue have caused FCEL’s shares to soar in price over the past five days. However, its premium valuation and negative profit margin could make investors nervous about the stock’s prospects. Furthermore, its falling backlog could be a sign of lagging demand, which could eventually decline its revenues. Thus, we think FCEL is best avoided now.

How Does FuelCell Energy (FCEL) Stack Up Against its Peers?

While FCEL has an overall F Rating, one might want to consider looking at its industry peers, Finning International Inc. (FINGF - Get Rating), Hitachi Ltd. (HTHIY - Get Rating), and Lawson Products, Inc. (LAWS - Get Rating), which have an overall A (Strong Buy) rating.

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