On the Wings of Power

Early Positions in Fuel-Cell Makers May Be Cheap, but Risky

The Wind -- and Water -- Beneath Power's Wings

Fuel Cells' Technology, Economics Shape Coming Market

Rushing to Get Off the Grid -- and Make Some Money

The fuel-cell business is undeniably exciting, and looks to be a huge play someday. But someday soon? The holders who've gotten beaten up in fuel cells so far might fairly ask how many times they have to go through this before the big payday.

Right now, the fuel-cell investment landscape consists of two small and incredibly hyped companies, Plug Power (PLUG:Nasdaq - news - boards) and Ballard Power Systems (BLDP:Nasdaq - news - boards); one smaller still but still public company pursuing an exotic and difficult technology, FuelCell Energy (FCEL:Nasdaq - news - boards); and the sleeping giant, International Fuel Cells -- still hidden away in United Technologies (UTX:NYSE - news - boards) -- which has more real-world experience than all of its competitors combined.

So stock-picking gets, shall we say, tough.

To make things even more exciting, there's also the maybe-coming-soon spinout of IFC by UTX, later this year; and a small, aggressive, still-private company, Avista Labs, partly owned by Bill Gates, which says it, too, just may go public later in 2001.

Don't Pull the Plug

Plug Power, known as the cowboy of this industry for its impetuousness and bold claims, is making the big bet on proton-exchange membrane, or PEM, technology, and because I think PEM is the best bet in fuel cells, I have an inescapable tilt toward Plug. But Plug has been, forgive me, shamelessly ... plugged.

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Its IPO, in late 1999, came to market flying the flags of Goldman Sachs, Merrill Lynch and Hambrecht & Quist. Merrill Lynch memorably called Plug "the poster child" for alternative energy. And it has since crashed, dazzlingly, down from the $150s a year ago to Wednesday's puny close at $14.50.

Last month Plug announced that it had missed the First Call/Thomson Financial consensus, posting a loss for its fourth quarter of $22.3 million, or 51 cents, vs. the consensus 49 cents. Total revenues were just $1.5 million, down from $4.3 million in the same quarter a year ago.

It gets worse. Plug's CFO, Bill Largent, announced last week that he's stepping down for family reasons -- in this case, a legitimate claim, but still a worrying change. And Erin Crotty, Plug's chief lobbyist -- oops, its "Director of State and Local Development Relations" -- is leaving to become the New York state director of Environmental Conservation.

More: The key to Plug's market success was supposed to be that its residential fuel cell systems -- nice 7 kilowatt PEM systems -- were to come to market bearing the label of Plug part-owner General Electric (GE:NYSE - news - boards). And that was going to happen in 2000.

But then GE rejected the first run of Plug's PEM systems, because they didn't meet specs. GE says it's still eager to become a major, early player in distributed-power fuel-cell generating systems, but you can't buy a Plug/GE PEM system today. Tomorrow?

Plug's an alluring but undeniably risky investment.

UBS Warburg just added coverage of Plug Power as buy, but it also has been downgraded by Goldman, Bear Stearns and Merrill. Of the 11 firms covering Plug, six currently rate it as just hold. With a market cap of slightly more than $600 million, Plug would be an easy acquisition for any number of electrical-generating-industry players ... but most would prefer, at least for now, to hold relationships with it at arm's length.

Me, too. I wouldn't touch Plug today. In six months or a year ... maybe.

The Canadian Play

Vancouver's Ballard Power is the other high-profile public company in fuel-cell energy. It's been around since June 1993. Founder Geoffrey Ballard, now retired, refocused the company on the automotive market over the past few years, though it also says it wants to be in the residential-power marketplace.

Ballard's shareholders have had a bumpy ride, too, though not through such violent oscillations as Plug holders. Ballard is now trading in the mid-40s, down two-thirds from its 52-week high. An alliance with DaimlerChrysler plans to put 36 buses on the street in 12 cities next year ... but Ballard warns that it hasn't yet received formal purchase orders for the power units for those buses.

It is also experimenting with very small, 1Kw generating units in the Japanese market, where low-power residential units have stirred interest.

Like Plug Power, Ballard may well someday be the power it had been trying to become for almost a decade. With a current market cap of almost $4 billion, it's certainly the largest financial engine in the fuel-cell business. But profits still seem far off. And investments, dead money for some time to come.

Big But Still Hidden

International Fuel Cells has been in the business since the '60s, when it started building alkaline-technology fuel-cell units for the U.S. space program. Those contracts continue; its units are installed in the space shuttle today. Alone among fuel-cell makers, IFC lately has been nearly breaking even, with revenue for the year ended Dec. 31, 2000, of about $55 million, matched almost exactly by its expenses.

A broad focus on residential, commercial and automotive markets gives IFC a foot in each potentially important market ... but also brings worries about focus. Similarly, IFC is a player in alkaline, phosphoric acid and PEM technologies, as well as in the new, experimental direct-methanol area, which give it a variety of choices for its products, but may mean it's spreading its resources too thin.

For now, IFC remains a captive business, hidden away within United Technologies. But it has been quietly talking for almost a year about a late-2001 spin-out IPO.

I think investors should watch for that IPO -- hello, Ben Holmes ...? -- and seriously consider investing. I'll be watching, and will let you know about timing and pricing ... if it happens.

The Rest of the Pack

FuelCell Energy is a tiny Connecticut company with a market cap of about $700 million, working in one of the exotic fuel-cell technologies, molten carbonates. It's been working the seams in the fuel-cell business, selling units to Mercedes-Benz, the Los Angeles Department of Water and Power, the Navy, and others.

FuelCell has fallen from $115 in October to $47 today, but gets positive analyst coverage from Bank of America, J.P. Morgan/Hambrecht & Quist, Robertson Stephens, ABN Amro, Lehman Brothers and Credit Suisse First Boston. And in a rare move in this season of earnings disappointments, it posted at the end of February better-than-expected results for its first quarter: revenue up almost 50% to $5.3 million from the same period a year ago, and a loss of only $2.8 million, or 18 cents a share. The First Call/Thomson Financial analyst consensus was a 26 cents a share loss.

FCEL is a small player but an aggressive one, and worth watching. It's still not near profitability, but I think it may be the smartest toe-in-the-water investment today in a fuel-cell future.

Siemens Westinghouse Power, Motorola (MOT:NYSE - news - boards), and a handful of other big outfits have small initiatives in fuel cells, but none yet have operations of material size.

Investing in the future of fuel cells is today just that -- a future bet. And this isn't a cheap game to jump into, with FuelCell Energy, for example, pushing $50 a share. But once the fuel-cell business comes to life, it's likely to be a bottle rocket.

Almost every market influence today, from the California crisis to aging generation facilities to an overburdened distribution system to worries about power quality and reliability, affects fuel cell work and prospects positively.