Amid widespread recessionary alarms thanks to the need for the Fed to raise interest rates aggressively and the recent bank failures, industrials is one of the sectors that can stay afloat. However, given the fundamental weakness of FuelCell Energy, Inc. (FCEL), it may not be a good pick to capitalize on the sector tailwinds.
Before discussing why FCEL is best avoided now, let’s see what’s driving the market volatility.
It’s been one year since the Federal Reserve started its rate-hiking campaign. Since March of last year, there have been eight interest rate hikes. However, the Fed is still far from its 2% inflation target. Despite the recent banking crisis, this has raised expectations of a 25-basis-point rate increase in the FOMC meeting next week.
Goldman Sachs Group Inc.’s (GS) chief economist Jan Hatzius now sees a 35% probability of a recession, up from its previous forecast of 25%.
Penny stock FCEL manufactures and sells stationary fuel cell energy platforms that decarbonize power and produce hydrogen. The company recovered some of its losses in the first fiscal quarter (which ended January 31). However, the company is still sitting on a net loss of $21.09 million and a net loss per share of $0.05.
The stock has declined 50.2% over the past year and 23.1% over the past six months to close its last trading session at $3.09. It is trading lower than its 50-day moving average of $3.39 and 200-day moving average of $3.57, indicating a downtrend.
Here are the factors that could affect FCEL’s performance in the near term:
Stretched Valuation
In terms of its forward EV/Sales, FCEL is trading at 7.65x, 380% higher than the industry average of 1.59x. The stock’s forward Price/Sales multiple of 9.27 is 613.1% higher than the industry average of 1.30.
Bleak Profitability
FCEL’s trailing-12-month EBIT margin and net income margin of negative 88.77% and 88.92% compare to the industry averages of 9.62% and 6.53%, respectively. Its trailing-12-month levered FCF margin of negative 77.74% compares to the industry average of 3.85%.
Its trailing-12-month ROCE, ROTC, and ROTA of negative 19.51%, 9.34%, and 13.53% compare to the industry averages of 13.67%, 6.90%, and 5.23%.
Disappointing Bottom Line Estimates
Analysts expect FCEL’s EPS to come in at negative $0.08 for the current quarter (ending April 2023). The consensus revenue estimate for the next quarter of $33.65 million reflects a decline of 21.9% from the prior-year quarter.
Moreover, Street expects the company’s EPS to come in at negative $0.28 for the current year (fiscal 2023) and negative $0.26 for the next year (fiscal 2024).
POWR Ratings Reflect Bleak Prospects
FCEL’s POWR Ratings reflect a bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. FCEL has a Stability grade of F, in sync with its five-year beta of 3.72.
The stock also has an F grade for Quality, consistent with its poor profitability. The stock has a Value grade of D, justified by its higher-than-industry valuation.
In the 89-stock Industrial – Equipment industry, it is ranked #80.
Click here to see the additional POWR Ratings for FCEL (Growth, Momentum, and Sentiment).
View all the top stocks in the Industrial – Equipment industry here.
Bottom Line
Although FCEL has recovered some losses in the last reported quarter, its poor profitability is concerning. Moreover, given the stock’s downtrend and the uncertain economic backdrop, this penny stock might be best avoided now.
Stocks to consider instead of FuelCell Energy, Inc. (FCEL)
Unfortunately, the odds of FuelCell outperforming in the weeks and months ahead are greatly compromised. However, there are many penny stocks with impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) and B-rated (Buy) stocks instead:
Nokia Oyj (NOK)
Ambev S.A. (ABEV)
Data Storage Corporation (DTST)
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FCEL shares were trading at $2.97 per share on Friday morning, down $0.12 (-3.88%). Year-to-date, FCEL has gained 6.83%, versus a 2.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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