2023-05-01 15:04:58 ET
Summary
- FuelCell Energy was nearly 20% higher for a time on Monday following a company press release that it landed an order from Exxon Mobil.
- There's little in the way of details on the size and cash flow timing, however. High short interest is likely driving shares up today.
- With steep per-share losses, I see risks fundamentally with the firm despite high anticipated sales growth.
- I outline key price levels to watch on the technical chart.
Some of the most shorted stocks had strong starts to the year, but have since endured big relative losses, as evidenced by the Goldman Sachs Short Positions performance chart below.
I am a hold on FuelCell Energy ( FCEL ) despite encouraging news today that it inked an order from a major Energy sector company. With few details on the deal and major earnings losses ongoing, I would like to see better profitability signs with the firm, though its valuation appears cheap to its history.
Highly-Shorted Equities Out Of Favor
According to CFRA Research, FCEL, together with its subsidiaries, manufactures and sells stationary fuel cell energy platforms that decarbonize power and produce hydrogen. The company also provides SureSource platform in various configurations and applications, including on-site power, utility grid support, and microgrid, as well as distributed hydrogen; solutions for long-duration hydrogen-based energy storage and electrolysis technology; and carbon capture, separation, and utilization systems.
The Connecticut-based $763 million market cap Electrical Equipment industry company within the Industrial sector has negative trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal. The stock has an extremely high 17.8% short float.
Shares surged following a bottom-line beat in March. EPS was barely in the black while revenues easily topped analysts' expectations. Also, FCEL's backlog of orders dipped. Shares spiked above $4 for a time, but the stock was cut in half from there by April, reaching dramatically oversold levels.
The big news today is a key carbon capture technology order from energy-giant Exxon Mobil ( XOM ). The S&P 500's largest oil & gas company will use FuelCell's long-lead fuel stack module equipment for one of its energy facilities. While no final decision has been made, the order would also include services from FCEL.
It's more evidence that FuelCell's large-scale commercialization of carbonate technology may be making inroads. Shares were 18% higher on Monday at one point. I do not see specifics of the deal, so it is hard to assess with confidence how it will alter the firm's equity value from here. We might learn more at the company's annual shareholder meeting on May 22 (if not before then).
On valuation, figures from CFRA Research suggest more losses are in store for this embattled stock. Per-share profits are seen as continuing in the red both in the upcoming quarter to be reported and in 2023 as well as the out year. Revenues, meanwhile, are forecast to have risen by a strong 63% YoY in Q2 '23 while total annual net sales are expected to rise just modestly this year. In 2024, though, the consensus calls for a high 47% top-line growth rate.
The hope by the bulls is that profitability ratios improve with better sales, but its operating leverage remains a question mark given the steeply negative free cash flow right now. The stock is cheap relative to its history considering its forward EV/sales ratio is near 4.0 versus a 5-year average of 15. On a price-to-sales basis, the multiple is 5.6 compared to a long-term norm of 14.5. It also trades cheap versus book value at just 1.17. But we have to see evidence of improved profitability before we can realistically determine an equity value rebound.
FuelCell Energy: Negative Earnings Expected, Poor Profitability
FCEL: Relatively Low EV/Sales And P/S Ratios
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, June 8. Before that, its shareholder meeting takes place on May 22.
Corporate Event Risk Calendar
The Options Angle
Data from Option Research & Technology Services (ORATS) show high implied volatility (IV) on FCEL. IV jumped to 96% today, implying an average daily stock price swing of more than 6%. With earnings still more than a month away, the implied move is more than 12% with another quarterly loss anticipated.
The company has a poor earnings beat rate history, so there may be more negative headline risk around the June 8 announcement. FCEL has traded lower-post earnings in seven of the past 11 earnings reports.
FCEL: Extreme Implied Volatility, Keep Position Size In Mind
The Technical Take
With good news today and a high short interest, the stock price jolt is not a shock. But where do we go from here? I see resistance on the chart starting at the December low just shy of $2.50. Also take note of the downtrend line that had been supporting on a handful of occasions.
After breaking down through it, the low $2s may bring about sellers. The pop today comes after FCEL reached extreme oversold conditions, but I would really like to see shares rally above $2.50 before we can feel more confident in further upside. $1.77 is obvious support but be careful placing stops right under that level as every trader clearly sees it. Perhaps buying on a gap-fill to $1.90 is a better play with a trailing stop.
FCEL: Shares Break Down Through Downtrend Support, Bears In Control
The Bottom Line
I am a hold on FCEL. While sales growth is expected to be strong over the coming quarters and shares trade cheap versus history, the downtrend is pronounced and there are few details about this apparently important Exxon Mobil order. I look forward to learning more during next month's shareholder event.
For further details see:
FuelCell Energy: Shares Surge On News Of A Major Exxon Mobil Order, But Caution Warranted