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May232013

Plug Power Investment Thesis

This is how we think about Plug Power ($PLUG). Most of the descriptive material has been sourced at plugpower.com.  

$PLUG is a company with real business products, revenues, and customer relationships.  In addition, $PLUG is a technology company with huge potential future applications.  While cash is an issue near-term, the revenues and growth are real and tangible.  The current price looks cheap even for the revenue stream, and if you assign any value to the potential future applications, the stock looks like a great deal.

 1. The Business

Plug Power is the Premier system integrator in rapidly emerging Proton Exchange Membrane (PEM) based fuel cell market.  PEM fuel cells use hydrogen to produce energy in a clean manner, with water and heat the only emissions.  Potential PEM fuel cell applications are broad, and could one day power cars and trucks.  However, without infrastructure in place (hydrogen fueling stations), it is not yet a viable fuel for today's cars and trucks.

In the meantime, Plug Power has developed a commercial application for PEM fuel cells that is viable today.  Forklifts in our nations warehouses and distribution centers use power constantly to move merchandise and load trucks.  Most forklifts are powered by batteries, but Plug Power has created a PEM power alternative called GenDrive.  Plug Power customers buy GenDrive to increase productivity, to lower costs, to implement green solutions, and for increased performance.  Refueling stations within the distribution centers allow the trucks to minimize downtime and cut costs.  $PLUG has to date deployed approximately 4,000 GenDrive units to some of the largest companies in the nation.  

2. The Market

The company has a current addressable market of $4.0 billion in the U.S.A. and $4.0 billion in Europe, just in forklift truck applications. The company's solution provides about 95% of the hydrogen powered forklift trucks in the USA annually. PLUG is the dominant player in this market.

In addition, the company is working on potential new applications that could come online in the next few years.

3. The Strategy

Plug Power is focused on the fork lift market because it is a market they can make money at it NOW. PLUG's intention is to conquer new markets horizontally, as new markets emerge for PEM based power solution. For example, in early 2014 Plug will be demonstrating 15 ground support units (flat trucks pulling containers on a tarmac) powered by fuel cell with Federal Express at the facility in Memphis. There are over 1,300 of these units at the Federal Express's Memphis facility alone. This strategy allows the company to grow horizontally into new markets with minimal capital expenditures.

 4. Clients

Here is a list of some of PLUG's customers. 

 

5. The Model

The company expects to be EBITDA breakeven around mid 2014 on an annual run rate of $55 million in revenues.

The cost of good sold are expected to be at 67% of revenues and SG&A at 12% to 15% (minimum of $12.5 million). The cost of good sold could be as low as 55% in our estimate.

The company had $26.1 million of revenues in 2012 and grew unit sold from 1,024 in 2011 to 1,391 in 2012, an increase of 36%.

The company needs an additonal $5 to $10 million of funding to get to EBITDA breakeven.

The company's current manufacturing capacity is $200mm.

6. What went wrong?

The company has had its fair share of problems over a span of fifteen years. The situation has been going to zero fast. Investors have been attracted to this situation based on the promise of its technology but each time the company has been nearing the finish line, it has been pushed back.

In February 2013, the company raised money and the stock plunged on a botched financing attempt. The stock dropped to $.12.

The lead batteries manufacturers used this situation to point out to PLUG's customers that the company was toast.

Customers decided to pull out their orders and demand for GenDrive dried up.

7. Catalyst.

On May 8, Air Liquide came to the rescue and invested $6.5 million in PLUG. We view the Air Liquide investment as the catalyst needed to reassure customers and bring back PLUG to its recent success track.  The strategic investment from the worldwide producer of liquid hydrogen restored customer confidence in Plug.

Plug Power is currently trading at a market capitalization of $13 million. Never in my life have I seen a company with such a proven technology, a customer list that includes the best and biggest companies in the world, with an addressable market that will easily surpass $10 billion in 5 years from now, and with a dominant position in the emerging power business. If you gave me $200 million, I could not build a Plug Power.

Let us know what you think.

Additional posts we wrote about Plug Power: Plug Power Ignition and The Boulevard of Broken Dreams.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold about 3% of Plug Power. We intend to increase our position if the company's results track our benchmark.

Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. 

Written by Michael Bigger. Follow me on Twitter and StockTwits

and by Jennifer Galperin.  Follow me on Twitter and StockTwits.

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Reader Comments (6)

nice post. what's your assessment of management - their track record in the past, capital allocation, etc.? any activists on the board to look after shareholder interests?

May 23, 2013 | Unregistered Commenterjonas

Jonas, thank you for your comments.

Management is doing the right things and they admit candidly to their failures. I met with them a few days ago. Air and Roth are on the board, so our interest are aligned. My biggest concern with this situation is an acquisition at this low of a price. If this happens, we are going to go to war to protect our interest.

May 23, 2013 | Registered CommenterMichael Bigger

Are you concerned about further dilution?

Do you think, after the AirLiquide deal, there's sufficient cash to make it the end of the year without seeking the additional 5-10 million they believe they need to get breakeven EBITDA?

May 24, 2013 | Unregistered CommenterRoss

Raising 5 to 10 million will create dilution. My bet is they will raise it since it is a small amount and they will need it before year end....but that also depends on the order flow. Let's see what happens in the next couple of months in terms of deal flow.

Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal.

May 24, 2013 | Registered CommenterMichael Bigger

Ross,

Read the post below about Select Comfort and Sterling partners. Might shed some light on the dilution issue.

May 24, 2013 | Registered CommenterMichael Bigger

Hi Michael,

I was very curious about your current feeling of Plug. It has been 7 months since your blog post above. Any thoughts now?

Thanks,
Steve

December 20, 2013 | Unregistered CommenterSteve

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