Is this the best way to play the fuel cell market?

The potential of the fuel cell industry is evident, even in the face of the rapid growth of electric vehicles (EVs). Electric vehicles are the favorite vehicles of the anti-oil crusaders, but they too have ecological problems and the most extreme environmentalists are already on the attack, stressing that powering cars with electricity is useless if the electricity is generated by the burning of fossil fuels. Hence, a power unit that uses only natural gas and whose main emission is water is tempting. Add in the fact that fuel cell technology, particularly hydrogen fuel cells, already has quite a broad foothold in some areas of the market, and as I said, the potential of the industry is evident.

The problem for investors is that while fuel cell stocks have been in the news a lot recently, the technology isn’t really new, with several companies dating back over twenty years. Despite this, however, the biggest problem potential investors in the industry still have is finding a company that plays the most fundamental role of a company … one that makes money. The three best-known companies in the industry are Plug Power (PLUG), Fuel Cell Technologies (FCEL), and Ballard Power Systems (BLDP), and none of them have had a profitable quarter as far as I can remember. Businesses can only continue to post losses for so long, so someone like FCEL, which hasn’t had positive EPS since 1999, is not an attractive proposition to me.

Like this,…

The potential of the fuel cell industry is evident, even in the face of the rapid growth of electric vehicles (EVs). Electric vehicles are the favorite vehicles of the anti-oil crusaders, but they too have ecological problems and the most extreme environmentalists are already on the attack, stressing that powering cars with electricity is useless if the electricity is generated by the burning of fossil fuels. Hence, a power unit that uses only natural gas and whose main emission is water is tempting. Add in the fact that fuel cell technology, particularly hydrogen fuel cells, already has quite a broad foothold in some areas of the market, and as I said, the potential of the industry is evident.

The problem for investors is that while fuel cell stocks have been in the news a lot recently, the technology isn’t really new, with several companies dating back over twenty years. Despite this, however, the biggest problem potential investors in the industry still have is finding a company that plays the most fundamental role of a company … one that makes money. The three best-known companies in the industry are Plug Power (PLUG), Fuel Cell Technologies (FCEL), and Ballard Power Systems (BLDP), and none of them have had a profitable quarter as far as I can remember. Businesses can only continue to post losses for so long, so someone like FCEL, which hasn’t had positive EPS since 1999, is not an attractive proposition to me.

So, I fall back on an old, tried and tested approach.

I know I’m repeating myself here, but when an emerging technology has huge potential but not yet realized, I look for what I call a “pick and shovels” game. The name is based on the old investment adage that during the 19th century, investing in manufacturers and suppliers of the equipment, picks and shovels that every prospector needed made much more sense than investing in individual prospectors. You might get lucky and find one that hit gold, but you and they were more likely to go bankrupt. The pick and shovel companies, on the other hand, made money no matter who got rich.

This brings us to Linde PLC (LIN).

First, let’s clarify that LIN is not a pure fuel cell game. They are an engineering and industrial gas company which is now based in the UK. They produce oxygen, nitrogen, helium, and any other gases you have and haven’t heard of, but which have industrial or commercial use. They are, however, a major manufacturer, supplier and operator of hydrogen refueling stations.

As such, they can benefit from the growth of the industry. However, even if that growth takes time to really materialize, they can continue to make money and pay a dividend to boot! More importantly, however, whoever wins the next contract to produce fuel cell power plants for forklifts, or bus or train systems or whatever, there’s a good chance Linde will provide the fuel they need to run.

If you believe hydrogen fuel cells have a future, but are put off by companies that have decades of broken and unprofitable promises in their history, a company like Linde could be the answer. They will benefit if the industry finally takes off, but in the meantime they will have other profitable revenue streams and you will be paid a dividend while you wait. To me, this beats buying stock in a company that has consistently lost money, no matter how much you believe in its product or mission.

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