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Feature
Story:
Partner
Conversation:
The Experts' View on Micro-Fuel Cells
OK, so the first fuel cells will be commercially available soon.
What does that mean for investors?
We
asked several seasoned analysts to discuss this question with us:
Walter
Nasdeo, Managing Director & Head of Energy Technology Group,
Ardour Capital. Ardour is an investment bank for emerging energy
technologies, offering research, brokerage and advisory services.
Eric
Prouty, Principle & Senior Technology Analyst, Adams, Harkness
& Hill. AHH is an institutional investment bank focused
on emerging growth companies in technology, healthcare and consumer
sectors. The Energy Technology Team covers growth businesses from
distributed generation to next generation vehicles.
Atakan
Ozbek, Director of Energy Research, Allied Business Intelligence
(ABI Research), a market research firm that covers fuel cells
and other technologies.
Progressive Investor (PI): What is your impression
of the micro-fuel cell area as a whole?
Walter
Nasdeo, Ardour Capital
Most people don't realize what a HUGE area this is. This is how
I think about it. If I'm manager at a factory and someone comes
along saying, "I want you to take your factory off the grid
and use this fuel cell to get all your power. Don't worry, it's
going to be fine!" My response would be: "I'm not going
to be the guinea pig - let me know when you have 100 of these up
and running for 20,000 hours."
But
if I'm sitting on an airplane using my notebook and an hour into
the flight my battery dies, I don't have to be convinced there needs
to be a better form of power. Everyone knows battery life isn't
good, and the batteries are heavy. There are also disposal issues
- if a battery isn't nickel hydride it has to be sent to a hazardous
waste landfill. You don't have to convince people there is a real
market. All you have to do is be one of the first ones out with
a product that works.
What's
so exciting is the fact that fuel cells resolve many of the drawbacks
of batteries. When you look at the different markets - notebooks,
PDAs, cell phones, power tools - 60-70% of the weight is the battery.
With fuel cells, you have a lighter, longer-lived product with similar
energy output - they stack up very well.
Eric
Prouty, AHH
It's certainly a market where there is a tremendous amount of pull
for the product. When you think of laptops, cell phones, advanced
devices - what's the number one complaint of users? Run time. The
lithium technologies are starting to hit their limits so people
are looking for silver bullets. Another area where we see lots of
interest is the U.S. military, primarily for communications and
GPS (global positioning) -type devices.
Atakan
Ozbek, ABI Research
Yes, this is a very exciting market and a huge opportunity. Let's
remember though that there are still technological issues that need
to be addressed before widespread use can occur, such as the size,
energy density, and complete packaging. Also, I think micro fuel
cell success will be realistically achieved in the near term in
high end products with ample space, such as laptops, and in specific
niche markets, such as industrial mobile computing.
One
area that people don't talk much about, but that is important, is
the complexity of possible government regulations. For example,
it may take anywhere from 6 months to 2 years to get codes and standards
for using commercial products with methanol on-board aircraft.
PI: Do the little guys have a chance with
all the brand names like Samsung, Motorola, Toshiba, Casio, Fujitsu,
Hitachi, NEC, SONY involved?
Walter
Nasdeo, Ardour Capital
This is where the race is. One of these companies will either be
wildly successful or just keep plugging along. The company that
gets into the market first with a working product can go to a couple
of the large companies and say, "We've got a product that works
and has been tested in the field. We'll make the fuel cell for your
cell phone or laptop, so you don't have to keep funding your fuel
cell development program." You don't need many big companies
to sign on for a small company to be extremely successful.
Look
at General Electric. They sign contracts with just about anyone
that walks in the door because they don't want to be left out. They
work with small companies in batteries, fuel cells, solar, wind
- just in case someone hits big. The big electronics companies will
also do that. They will develop fuel cells internally but they will
also spread around R&D dollars. Spending $5 million for a contract
means little to them, but it can be life or death for an emerging
company. They can fund their work for several years on that money.
But once it becomes clear who the big winner is the big guys will
pull the plug on the rest.
Eric
Prouty, AHH
The issue for investors is that beyond what might be thought of
as the public pure plays in this area, the big battery and electronics
guys are looking seriously at the industry. Some are partnering
up and some are going it on their own. That will make for some tough
competition. They have a significant amount of resources and the
brand names. Most have kept their programs pretty quiet so it is
difficult to know what they have going on behind the scenes.
Also,
fuel cells are competing against an incumbent technology - lithium-based
battery technologies - where costs have been driven down significantly
and performance is pretty good. This will be a formidable foe to
overcome. There are billions of them manufactured every year; they
are well known and understood and are well established in the market.
No
one can say there isn't a need for these products. But like many
emerging areas there is great promise and great risk.
Atakan
Ozbek, ABI Research
Yes, it is hard to ascertain the true status of companies' R&D
progress because they are keeping it quiet. Toshiba and NEC announced
they will introduce micro fuel cells in 2004, but we have not seen
major developments by certain bellwether companies yet.
Micro-fuel
cell technology is still in the development stage. Starting now
and over the next year or two I think we will see many prototypes
and limited production runs being made. The additional run time
is great, but people aren't willing to sacrifice much - they want
a product that is convenient, small, and that performs better than
what they are used to.
PI:
Are there interesting companies that may emerge on the private side?
Walter
Nasdeo, Ardour Capital
Yes, there are very advanced technologies in the wings, but they
don't have access to the kind of financing the public companies
can get. Millenium Cell recently announced a $10 million capital
raise and Mechanical got about $36 million.
I
think in the next 12-18 months we are going to hear a significant
announcement and a company will begin distributing a commercial
product. I think it's going to be Mechanical - their product is
pretty close, and they have good partners and customers. If it isn't
one of the pure play public companies, I think it will be one of
the big companies. It comes back to how much money you have - how
much time commitment can you devote to it and how many great scientists
you can pay to put on the project.
PI:
How do you compare the three pure play companies?
Walter
Nasdeo, Ardour Capital
My favorite of the group is MTI Micro, the fuel cell subsidiary
of Mechanical Technology (MKTY); in fact they are one of the few
energy companies I cover right now that I have a "BUY"
rating on. I like their product because of its simplicity. Their
Head of Technology is brilliant. Theoretically, a fuel cell isn't
very complex, but in practice it is. Where does the water byproduct
go, for example? They simplified the fuel cell design so it can
be operated at any angle - upside down, backwards - and it works.
MTI
Micro has a strategic distribution agreement with Duracell - their
products are guaranteed shelf space. That's a huge advantage! Duracell
and Eveready basically have retailers locked up, so an agreement
with one of them means you have scaled a high hurdle.
Medis
has a similar product they plan to launch this year. I don't cover
Medis because their lab and factory is in Israel, and I can't cover
them from the U.S. They recently announced their first product would
be a disposable power pack fuel cell product. The fact that it is
disposable is a problem, in my opinion.
Mechanical
(MKTY) has been around a long time, is furthest ahead and has another
division that generates revenue. Its stock is cheaper than Medis
and has higher volume. MKTY is trading at 6.32 with about 120,000
shares traded a day. Medis trades at $14 with an average volume
of 47,000 shares a day. MKTY is small, by Medis is barely liquid!
If you are buying a couple hundred shares it's not a problem, but
if you are buying several hundred thousand shares, you may not be
able to get out if you need to.
Millenium
Cell makes the fuel, not the whole fuel cell - they are a component
supplier. They have a strong management team - I know them well.
But I just lowered my rating on Millenium Cell from "Accumulate"
to "Reduce" because they missed their revenue projections.
I'd really like to see commercial revenue but I haven't even seen
much revenue from contracts.
The
stock trades 240,000 shares a day and at $2.74 is down 11 cents.
Is this a buying opportunity? We base our rating on the progress
the company is making, so from that viewpoint it is not the time
to buy. But it depends on your time horizon - are you willing to
wait a few years? Buy it and put it away. Of course, if you are
a trader, you can buy and sell on the bumps along the road.
The
energy tech space has a whole has been experiencing an upgrade in
the quality of management over the past few years. Strong managers
from other sectors are attracted to this space and are taking it
to the next level, where the founder/ engineer/ scientists can't.
I
think these companies will either be very successful or be bought
out. I don't expect any of them to go out of business. The question
isn't whether their technologies are valid, but whether they have
the business acumen to commercialize them successfully. Many single
product companies just aren't capable of delivering results in that
way.
And
I think these companies - and some of the private ones too - will
provide investors with good returns. All the focus on the automobile
area for fuel cells almost does a disservice to the space; everyone
gets excited until they find out it is still 8 or 10 years away.
People don't realize the micro-fuel cell market is much closer.
It's actually going to happen soon and that is exciting.
PI:
How long a time horizon would an investor need to invest in this
space?
Walter
Nasdeo, Ardour Capital
I'd say at least until 2007 for these companies to achieve positive
earnings. We will begin seeing commercial revenues from some of
these companies early - mid next year. Then there will be some churning
around, and then more of a sustainable revenue line.
Patience
is required. But the companies also trade on news and events. If
one of them makes a positive announcement, the group runs up, in
some cases over a dollar in a day. Then they always seem to pull
back again.
Eric
Prouty, AHH
We're in a key time period now. The companies are moving out of
the pure R&D phase and are starting to concentrate on how they
will mass manufacture and market the products, and what the distribution
channels will be.
As
an investor you have to understand that commercialization always
takes longer than expected, but that's to be expected. Adoption
of new technology is never as rapid as people think. And they have
a formidable market to enter - the battery market. Even if it starts
taking off, investors need to be aware that the industry, because
it is so promising, is attracting a lot of deep pocket competition
here and abroad. All of the pure play public companies are partnering
with some deep pocket partners, which is important.
Atakan
Ozbek, ABI Research
Remember, when we say "commercialization," you are not
going to go to your neighborhood store and be able to buy these
products immediately. The first fuel cells in laptops will probably
be in about 5000 of them. We expect global shipments of micro-fuel
cell products to reach 200 million units in 2011. The important
issue in the near term is for the fuel cell companies to start delivering
working products to the companies that make the cell phones and
notebooks (OEMs).
We
will see announcements over the next year to eighteen months from
the public pure plays. They have all set milestones and we will
be watching to see them meet them. Things will start heating up.
++++
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keep the first product as simple and inexpensive as possible, the
first iteration is a disposable charger. About the size of a cigarette
pack, it will sell at a suggested retail price of $14.99. Flip the
switch and it recharges a cell phone in seconds, providing about
15 hours (900 minutes) of talk time. Unlike other cell phone chargers,
the Power Pack can also charge digital cameras and other portable
devices.