Despite the progress in bringing inflation down from last year’s peak of 9.1%, it remains above the Federal Reserve’s long-term target. The Fed will likely keep raising interest rates which could tip the economy into a recession later this year.
A recession usually affects the profitability of various sectors, and equipment companies are no exception. Given the high likelihood of a recession this year, it could be wise to avoid fundamentally weak equipment stocks FuelCell Energy, Inc. (FCEL), Solid Power, Inc. (SLDP), and Advent Technologies Holdings, Inc. (ADN).
Let me explain why a recession this year could put enormous pressure on equipment companies.
The Federal Reserve economists believe the recent banking turmoil will trigger a mild recession later this year.
The U.S. industrial production, which comprises manufacturing, mining, and utility output, rose 0.4% in March sequentially. Industrial production rose higher than expected due to colder weather propelling the utility sector’s heating demand. However, the manufacturing output, the biggest component of industrial production, declined 0.5% sequentially in March.
Personal spending has slowed down, as was evident in March’s 0.2% rise, compared to February’s revised 2% increase. Personal spending in March came below estimates of a 0.3% growth.
Consumer spending is likely to take a bigger blow during the anticipated recession. With the decrease in demand for goods and services, industrial equipment manufacturers' revenues and profit margins are likely to fall.
Businesses may postpone or forego new equipment acquisitions during a recession as they prioritize cash preservation and cost-cutting. Furthermore, in a rising interest rate environment, borrowing may become expensive, making it challenging for businesses to obtain financing for acquiring new equipment or restructuring existing debt.
Amid this backdrop, avoiding the above-mentioned equipment names could be wise as they are unlikely to recover from a pending recession.
FuelCell Energy, Inc. (FCEL)
FCEL manufactures fuel cell technology platforms and offers sustainable goods and solutions. Its customers include utility companies, municipalities, universities, hospitals, government entities/military bases, and a wide range of industrial and commercial firms.
FCEL’s trailing-12-month gross profit margin is negative 15.19% compared to the 29.75% industry average. Its trailing-12-month net income margin is negative 88.92% compared to the 6.67% industry average. Furthermore, the stock’s 0.16x trailing-12-month asset turnover ratio is 80.6% lower than the industry average of 0.80x.
FCEL’s loss from operations for the first quarter ended January 31, 2023, narrowed 49.9% year-over-year to $22.46 million. Its net loss attributable to common stockholders narrowed 53.1% year-over-year to $19.42 million.
The company’s loss per share narrowed 54.5% over the prior-year quarter to $0.05. In addition, its adjusted EBITDA loss widened 6% year-over-year to $14.41 million.
Analysts expect FCEL’s EPS for the quarter ending April 30, 2023, to remain negative. Its revenue for the quarter ending July 31, 2023, to decline 23.8% year-over-year to $32.83 million. It failed to surpass the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 54.2% to close the last trading session at $2.02.
FCEL’s weak fundamentals are reflected in its POWR Ratings. 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, with each factor weighted to an optimal degree.
It is ranked #81 out of 90 stocks in the Industrial – Equipment industry. It has an F grade for Stability and Quality and a D for Value and Sentiment. To see the other ratings of FCEL for Growth and Momentum, click here.
Solid Power, Inc. (SLDP)
SLDP develops solid-state battery technologies for electric vehicles (EVs) and other markets. The company sells its sulfide-based solid electrolyte and licenses its solid-state cell designs and manufacturing processes. It also produces and sells 0.2,2, 20 ampere-hour (Ah), and EV cells.
SLDP’s 18.64% trailing-12-month gross profit margin is 46.9% lower than the 35.11% industry average. Its trailing-12-month net income margin is negative 81.05% compared to the 4.43% industry average. Furthermore, the stock’s 0.02x trailing-12-month asset turnover ratio is 98.1% lower than the industry average of 1.04x.
For the fiscal year ended December 31, 2022, SLDP’s total operating expenses increased 142.4% year-over-year to $70.91 million. Its operating loss widened 122.7% over the prior-year period to $59.12 million.
The company’s net loss came in at $9.56 million, compared to a net income of $18.09 million in the prior-year period. In addition, its loss per share came in at $0.05, compared to an EPS of $0.11 in the year-ago period.
For the quarter that ended March 31, 2023, SLDP’s EPS is expected to remain negative. Over the past year, the stock has declined 70.7% to close the last trading session at $2.32.
SLDP’s weak prospects are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.
It is ranked #80 in the same industry. It has an F grade for Stability and a D for Growth, Value, and Quality. Click here to see the other ratings of SLDP for Momentum and Sentiment.
Advent Technologies Holdings, Inc. (ADN)
ADN, an advanced materials and technology development company, operates in the fuel cell and hydrogen technology markets. It develops, manufactures, and assembles fuel cell systems and critical components that determine the performance of hydrogen fuel cells and other energy systems.
ADN’s trailing-12-month gross profit margin is negative 9.49% compared to the 29.75% industry average. Its trailing-12-month Return on Common Equity is negative 76.50% compared to the 13.86% industry average. Furthermore, the stock’s 0.06x trailing-12-month asset turnover ratio is 92.3% lower than the industry average of 0.80x.
ADN’s net revenue declined 32.6% year-over-year to $1.96 million in the fiscal fourth quarter that ended December 31, 2022. Its gross loss came in at $498 thousand, compared to the gross profit of $159 thousand in the year-ago quarter.
The company’s operating loss widened 200.6% year-over-year to $50.08 million. In addition, its net loss widened 428.8% year-over-year to $47.63 million. Its loss per share rose 411.1% over the prior-year quarter to $0.92.
For fiscal 2023, ADN’s EPS is expected to remain negative. It failed to surpass the Street EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has declined 73.3% to close the last trading session at $0.77.
ADN’s POWR Ratings reflect this weak outlook. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It is ranked #78 in the Industrial – Equipment industry. It has an F grade for Stability and Quality and a D for Growth. To see the other ratings of ADN for Value, Momentum, and Sentiment, click here.
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FCEL shares fell $0.04 (-1.98%) in premarket trading Tuesday. Year-to-date, FCEL has declined -27.34%, versus a 8.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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