The industrial sector remains well-equipped to uphold its resilience due to the continued advancement of technology. However, FuelCell Energy, Inc.’s (FCEL) lackluster performance in the fiscal third quarter has sparked apprehensions regarding its capacity to turn profitable in the foreseeable future.

This article delves into a comprehensive analysis, evaluating why FCEL could be best avoided now.

The industrial sector has suffered setbacks due to geopolitical unrest, evolving consumer preferences, and the Fed’s incessant rate hikes. Despite these hurdles, the industry demonstrated immense resilience and is primed for robust recovery and fortification, underpinned by burgeoning global demand, government investments, persistent technological innovations, and escalating investment in automation. In July, total industrial production surged 1%.

The global industrial machinery market is anticipated to increase by $1.04 trillion by 2032, growing at a 5.3% CAGR. Yet, it is essential to note that not all players in the industry could benefit from such upward trends. FCEL represents one such company.

FCEL manufactures and sells stationary fuel cell energy platforms that decarbonize power and produce hydrogen. Reputed global entities such as ExxonMobil and Toyota deem FCEL a credible ally in pursuing clean energy goals. However, after FCEL’s bleak financials in the fiscal third quarter that ended July 31, 2023, investor sentiment is not expected to be favorable.

Indeed, the financial soundness of FCEL appears dubious as it noted an accumulated deficit of $1.49 billion as of July 31, 2023, compared to $1.41 billion as of October 31, 2022, indicating the company's brewing need for additional fund inflow to sustain.

Historically, FCEL has relied on equity markets to procure capital and fund its operations. However, the limited availability of issued shares of common stock may constrain its capital-raising capabilities.

Recent stock sell-offs further highlight the wavering confidence in FCEL's financial standing, consequently triggering a depreciation in its stock value.

Institutional investors and hedge funds have recently changed their FCEL stock holdings. Institutions hold roughly 44.1% of FCEL shares. Of the 291 institutional holders, 108 have decreased their positions in the stock. Moreover, 46 institutions have sold out their positions in the stock with 5,825,754 shares, indicating bearish sentiments.

Over the past year, the stock has declined 66% to close the last trading session at $1.44. Over the past three months, the stock plunged 38.2%. Moreover, it is trading lower than its 50-day moving average of $1.90 and 200-day moving average of $2.62, indicating a downtrend.

Here are the factors that could affect FCEL’s performance in the near term:

Weak Financials

FCEL’s total revenues declined 40.8% year-over-year to $25.51 million for the fiscal third quarter ended July 31, 2023, while its gross loss came at $8.22 million, up 96.5% from the prior-year quarter. Its loss from operations grew 47.9% year-over-year to $41.40 million.

Its net loss and net loss per share attributable to common stockholders were $25.08 million and $0.06, respectively. Also, its adjusted EBITDA loss widened 52.2% year-over-year to $31.61 million.

Stretched Valuation

In terms of its forward EV/Sales, FCEL is trading at 3.74x, 119.5% higher than the industry average of 1.70x. The stock’s forward Price/Sales multiple of 4.88 is 267.8% higher than the industry average of 1.33.

Poor Profitability

FCEL’s trailing-12-month EBIT and net income margin are negative 79.74% and 79.13% compared to the industry averages of 9.80% and 6.19%, respectively. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.17x is 78.4% lower than the industry average of 0.81x.

Disappointing Analysts’ Estimates

Analysts expect FCEL’s EPS for the fiscal fourth quarter ending October 2023 to come in at negative $0.08, while its revenue for the same quarter is expected to decline 24.5% year-over-year to $29.59 million.

Moreover, Street expects the company’s EPS to come in at a negative $0.29 for the current year (fiscal 2023) and a negative $0.28 for the next year (fiscal 2024). Furthermore, the company failed to surpass the consensus EPS estimates in three of the trailing four quarters.

POWR Ratings Reflect a Somber Outlook

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.

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 3.59.

The stock also has an F grade for Quality, consistent with its poor profitability. FCEL’s higher-than-industry valuation justifies its Value grade of D.

It has a D grade for Sentiment, in sync with the unfavorable bottom-line estimates.

It is ranked #87 within the 91-stock Industrial – Equipment industry.

Beyond what we have mentioned above, to see the other ratings of FCEL (Growth and Momentum), click here.

Bottom Line

The challenging macroeconomic landscape, combined with FCEL’s unstable financial performance, deteriorating revenues, and unfavorable estimates, is exerting significant strain on the stock. Consequently, it may be prudent for investors to steer clear of this stock now.

How Does FuelCell Energy (FCEL) Stack Up Against Its Peers?

While FCEL has an overall grade of F, equating to a Strong Sell rating, you may also check out these other stocks within the Industrial – Equipment industry: LSI Industries Inc. (LYTS), The L.S. Starrett Company (SCX), and Preformed Line Products Company (PLPC), with an A (Strong Buy) rating. For exploring more A and B-rated industrial equipment stocks, click here. 

What To Do Next?

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FCEL shares were trading at $1.50 per share on Monday afternoon, up $0.06 (+3.95%). Year-to-date, FCEL has declined -46.04%, versus a 18.14% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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