Plug Power: Inside The Belly Of The Beast
Shares of Plug Power (PLUG) have been in beast mode ever since CEO Andy Marsh held a business update on December 4th and announced a blowout fourth quarter, which boosted the share price and allowed the company to avoid a highly antiestéticared reverse stock split. Shares have generated a staggering three-month return of nearly 500%, and the stock just smashed through previously made multi-year highs. The rapid appreciation of Plug Power's value is warranted, and though many critics voiced their cautious opinion, almost all have been subdued. The premier fuel cell integrating company that was infamous for destroying shareholder value for more than a decade is not as small as many think, and after a tour of Plug Power's manufacturing facilities in Latham, NY, on February 28th, 2014, I walked away with both a comforting feeling of adding even more shares to my long-term position, and a sense of excitement for what lies ahead in the not so distant future. Below is a brief takeaway from my tour of Plug Power.
It's imperative that investors understand the history of every company they are invested in, and how (and why) said company is where it is today. Plug Power is no different, and the sporadic history of this fuel cell integrator has taken the company all over the map. Plug Power has integrated fuel cells into products for the home generation industry, the automobile industry, the telecom industry, and more, without picking up any serious traction. Plug Power was aimlessly driving around for more than a decade with no clear direction, blindly throwing darts at the board, until CEO Andy Marsh took the reins in 2008.
Marsh began talking to Plug Power's customers, examining what worked and what didn't work, and came to the conclusion that it made sense for Plug Power to pursue its line of products focused on the material handling market. Forklifts have become the primary focus for Plug Power, but after resembling a R&D powerhouse for nearly five years, Plug Power is ready to provide a compelling value proposition for businesses engaged with equipment in the material handling, TRUs, GSEs, and range extender markets, representing a conservative estimated combined market opportunity of tens of billions of dollars (not including GenKey offering).
Add the facts that Plug Power is expected to gain exposure to the Asian market through a joint venture later this year, is in the midst of testing a fleet of FedEx vehicles equipped with range extenders, will be deploying Ground Support Equipment (GSE) vehicles for FedEx in 2014, and has been testing Transportation Refrigeration Units (TRU) with Sysco since last year, and it's clear that Plug Power has finally found a destination on its map that enables a straight path to profitability and allows for a considerable amount of shareholder wealth yet to be created.
The mounting anticipation of touring Plug Power's manufacturing, testing and laboratory spaces just outside of Albany, NY made the three-hour drive from Ithaca, NY fly by. Teal Vivacqua, Director of Plug Power's Marketing Communications, greeted me upon arrival, walked me to the facilities and introduced me to Daniel Connelly, Production Manager at Plug Power. Both accompanied me on the facility tour, detailing the production facility, the internal components and mechanics of a typical GenDrive unit, the assembly of said product, and more.
Inside a GenDrive unit. Teal pointed out that many of the parts in a GenDrive unit are ordinary parts that can be found in a car (besides fuel cell stack of course).
The sheer infrastructure and technology integrated into Plug Power's manufacturing facilities illustrated a crystal clear image that an immense amount of time and resources have been invested into the space, and a setup like this can't be built overnight. Plug Power is the number one fuel cell integrator in the world and the barriers to entry are high.
Massive metal casings hold the GenDrives in place. The weight of the casing is necessary to counterbalance the small weight of a GenDrive unit, that way the forklift has leverage when moving heavy materials.
When asking about capacity constraints, Teal commented that the current manufacturing facility is able to produce up to 10,000 units per year, representing more than $200 million in annual revenue. This revenue figure does not include the recurring revenues that will be generated from Plug Power's rebranded GenKey solutions.
With Wal-Mart's recent order for more than 1700 units over a two year period, and shipping for said units beginning in Q2 of 2014, Daniel Connelly commented that Plug Power is gearing up for a historic quarter that will be its busiest yet, and they're ready for it. The only expansion that Plug Power currently needs to undergo is its workforce, as shown here by a steady ramp in job postings. Plug Power employs approximately 150 people in Latham, and has an outside sales force consisting of more than 60 employees.
Approximately 15 GenDrive units sit on wooden pallets as they await shipping.
The smooth workflow of Plug Power's operations reminded me of my first ever factory tour of the John Deere facility in Manheim, Germany, and I sensed many similarities between the two. In no way am I inferring that Plug Power's facilities matched the sheer size or technology of John Deere's flagship production facility. However, there was a true sense of cohesiveness among the workers, production layout, and product divisions when I walked through Plug Power's production floors, and this lends credibility to the notion that Plug Power seems more than capable to execute its strong list of business prospects and keep up with the extraordinary growth the company is currently experiencing.
Transportation of GenDrive unit mid-assembly.
Plug Power has the integration of fuel cells and the production of GenDrive units down to a tee. The quality and durability of said products are impeccable, and Connelly, who has been at Plug Power for over a decade, commented that the company just received one of their old home generations units for servicing after more than 11 years of continuous use; talk about a satisfied customer. Anecdotes were told of an average day in the life of a GenDrive unit out in California at a Kroger store. The fuel cell equipped forklifts are constantly running into sub zero freezers, and immediately back out into the sweltering California heat, all without any hiccups. Extra humid, extra dry, freezing temperatures, sweltering heat, Plug Power's GenDrive units can withstand the elements no problem.
I learned a number of things from Daniel Connelly and Teal Vivacqua about the value proposition and production facilities of Plug Power, and here are three that especially struck a note with me.
For every one GenDrive unit, there is on average three battery units for a forklift. Electric forklifts powered by massive batteries (some weigh as heavy as a washer machine) tend to have one installed in the forklift, one sitting on the charging station, and another cooling down after an extended period of use. Because GenDrives can be instantly filled with fuel and forego the long and tedious process of battery charging, only one unit is necessary for each forklift, and the backbreaking process of swapping out heavy batteries is eliminated. From an operational viewpoint, the GenDrive value proposition is through the roof, leading to increased productivity and measurable sustainability impacts.
The average life cycle of a GenDrive unit is five years (crushes battery standards), and facilities that are running 24/7 eat into that time even more. What this means is customers who committed to Plug Power's product offering are going to stay committed, especially with an installed hydrogen infrastructure. I would expect that once Plug Power begins to receive more milestone orders from other Fortune 500 companies similar to the recent Wal-Mart order, the company should begin to build a constant stream of producing and shipping replacement units for models that were established under previous orders. In other words, the 1700+ units ordered by Wal-Mart should equate to another 1700+ unit Wal-Mart order five to six years from now to replace the recent order.
Innovation, research and development are still ongoing at Plug power. The company recently innovated its GenDrive 3300 unit, the smallest of the three GenDrive offerings. The GenDrive 3300 is now a 100% air-cooled system that eliminates all of the pumps and coolant loops associated with liquid-cooled systems. A 30%-40% reduction in parts compared to a more complex system allows for simpler system maintenance. As Plug Power begins to enter new markets, it is clear that innovation is ongoing at Plug Power, which will help create a sustainable business operation for years to come.
Conclusion
Plug Power's staggering price appreciation is filled with momentum, but with a highly anticipated announcement regarding a joint venture based in Asia, and the inevitable news of receiving more orders from current (and new) customers, the momentum behind Plug Power shouldn't drop off anytime soon. Wal-Mart and their ~160 North American distribution centers alone represents a more than $1 billion opportunity (not including GenKey) for Plug Power. If you consider Plug Power's customer base of ~25 fortune 500 companies, the continued commitments from Wal-Mart, Kroger and FedEx, a progressing and promising GenKey business, and the vertical markets Plug Power is looking to enter later this year, the dramatic price action behind Plug Power is more than warranted.
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