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Niche focus hoists Hydrogenics
In the once-hyped business of fuel cells, a shift to specialized markets is paying off
RICHARD BLACKWELL
September 26, 2007
Instead of waiting for the "hydrogen economy" to arrive under the hood of a fleet of automobiles, Canadian fuel cell manufacturer Hydrogenics Corp. is tackling niche markets where the technology is already competitive.
By designing its fuel cells for specific markets such as forklift trucks and backup power supplies for computer rooms, the company has managed to generate a substantial revenue stream
Still, like every other fuel cell company, Hydrogenics is a long way from breaking even, and its stock price has been in the doldrums for many months. Less than four years ago it was trading at more than $8 a share, but it has languished below $2 for the past 12 months.
Chief executive officer Daryl Wilson acknowledges that the hype that once surrounded hydrogen fuel systems - enthralling investors with the prospect of hydrogen-based cars - has largely dissipated.
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"When the automotive dream was there, everybody locked on to that," he said. Now there's a more pragmatic view that some companies can do well, but only if they choose the right markets.
Hydrogenics' fuel cells provide power to forklift trucks at a comparable cost to batteries and diesel motors, but without the emissions or need for recharging. Hydrogen-based backup power units have similar benefits in computer rooms or cellphone towers.
The company also makes devices that produce hydrogen - usually installed in industrial settings where hydrogen is a feedstock. And it builds fuel cell test equipment for other companies that are doing research and development on the technology.
"Backup power and forklifts are kind of humble beginnings for us, but that's back to reality [when it comes to] commercializing an emerging technology," Mr. Wilson said.
The key is to sell systems that can be competitively priced with traditional technology, he said. To do that, Mr. Wilson worked diligently to cut costs since taking over the CEO job from Hydrogenics founder Pierre Rivard last year.
Marvin Wolff, an analyst at Paradigm Capital Inc. in Toronto, describes Mr. Wilson as a "very impressive" manager who has worked hard to commercialize Hydrogenics' products, while trimming expenses. "Pierre Rivard was a research guy and he was right for the company at a certain phase, but now they're moving into the commerciality phase."
Mr. Wolff rates the company as a "buy" and has a 12-month price target of $3 on the stock. Still, he cautions patience. "It won't be an overnight win in your portfolio, but for anybody who wants exposure to alternative energy plays, you're getting it at a reasonable price and at a reasonable point in its evolution where there's lots of upside."
Analyst Jon Hykawy of Research Capital Corp. in Toronto said investors have now gone too far in yanking their money out of fuel cell stocks.
"There was such hype surrounding the fuel cell companies a few years ago, [but] now we've run into an era of irrational pessimism," he said. "The technology certainly works. It's a matter of dovetailing it with the appropriate industries. You want to see fuel cells competing against technologies that have relatively similar price points ... such as batteries."
Mr. Hykawy, who has a $3.25 target price on Hydrogenics stock, praised Mr. Wilson's efforts to get the company's fuel cells built into name brand forklifts made by big players such as Toyota and Hyster.
Mr. Hykawy said he thinks Hydrogenics could break even before the end of 2008. The company, with about $44-million in cash at the end of its second quarter, easily has enough resources to stay afloat until then, he said.
Mr. Wilson, however, is cautious about predicting a timeline to profitability. He says he has a plan for hitting that benchmark, but won't reveal it publicly for fear of disappointing investors. "This is an area where there's been a lot of overpromising and underdelivering, especially by fuel cell companies."
Indeed, a survey of 26 publicly traded fuel cell companies around the globe, released by PricewaterhouseCoopers yesterday, showed that not a single one is yet profitable. While overall revenue rose 59 per cent in the sector between 2005 and 2006, losses ballooned by 74 per cent.
General Motors is Hydrogenics' biggest shareholder - GM picked up its stake six years ago in an intellectual property exchange deal - but the firm's managers and directors still hold a big chunk of stock, along with a wide range of mutual funds and money managers.
About 1.3 million shares are held in an alternative energy fund run by British-American investment firm Guinness-Atkinson Funds. Co-manager Edward Guinness said his fund is far less enthusiastic about fuel cell firms than solar, wind and hydro companies, but it has kept a handful of hydrogen investments including Hydrogenics.
"We prefer companies that are at or very close to profitability," Mr. Guinness said. His firm likes Hydrogenics because it is "at the forefront of getting commercial products out there, they do have existing revenues and they weren't too expensive," he said.
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By the numbers
2006 revenue$30.1-million (U.S.)
2006 loss$130.8-million
2007 2Q revenue $9.5-million
2007 2Q loss$3.8-million
Market cap$121-million (CDN)
Employees265
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Quick facts
Headquarters: Mississauga, with operations in Burnaby, B.C., Belgium, Germany, Japan
Boss: CEO Daryl Wilson
Founder: Pierre Rivard, a former aerospace engineer, led the company from its start in fuel cells in 1995 until 2006.
Biggest shareholder: General Motors, with 12 per cent.
Key customer: American Power Conversion Corp., which uses Hydrogenics fuel cells in its backup power products.
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