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Plug Power (NASDAQ: PLUG), an industry leader in providing fuel cells to the material-handling equipment market, made impressive strides in growing its top line through 2015. However, the company has never reported a profit throughout its history.
Within a week, Plug Power announced deals that it made with two customers in France: Carrefour SA and FM Logistics. The market took kindly to the news. Shares opened 10% higher following news of the second deal. Let's take a closer look to see how these transactions are likely to help the company move toward profitability.
One of Plug Power's greatest disadvantages is that its customer base is overly reliant on only a few companies. In fiscal 2015, only one company, Wal-Mart, accounted for 57% of the company's total consolidated revenue. That was far worse than what the company reported in fiscal 2014, when both Wal-Mart and Volkswagenaccounted for 37% of the company's total consolidated revenue.
And the deal with FM Logistics may not be as helpful as it seems, since Plug Power technically didn't up a new customer. FM Logistics had partnered with HyPulsion in 2013 to pilot a project at its Neuville-aux-Bois facility, and Plug Power completed its acquisition of HyPulsion in July 2015.
Unlike FM Logistics, though, the deal with Carrefour does represent an addition to Plug Power's customer base.
Image source: Plug Power corporate website.
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And it may prove to be a valuable one. Carrefour has more than 12,300 stores in more than 30 countries. If the current deal is a success, it could present Plug Power with the ability to expand its presence not only in France but also throughout Europe, as Carrefour has more than 5,600 locations in France and more than 5,000 throughout the rest of Europe. In fact, it could help Plug Power gain a presence outside Europe as well, since Carrefour has more than 1,500 stores in Asia, South America, and Africa.
Although we didn't get specific details regarding FM Logistics, it's reasonable to infer that Plug Power's deal builds on the pilot program -- entailing 10 fuel cell-powered forklifts -- that FM Logistics had entered into with HyPulsion in 2013. If successful, the pilot program was expected to result in the conversion of the facility's fleet of 84 vehicles to fuel cell power. Whether Plug Power's deal is consistent with that figure is purely speculation, though.
Unlike the ambiguity of the FM Logistics deal, there's more clarity regarding the deal with Carrefour. Plug Power will provide more than 150 GenDrive units to Carrefour for a new distribution center located in Vendin-les-Bethune. According to the press release,Carrefour's "hydrogen infrastructure will be completed in the coming months, enabling the project to be commissioned in late 2016."
The deal with Carrefour alone is impressive, for it more than doubles the number of GenDrive units that Plug Power had in Europe, which, as of its annual meeting in May, totaled 139 units. Presumably, the figure for the FM Logistics deal is not that high, or else it would have been revealed; nonetheless, it does validate Plug Power's hydrogen solution, and that, in and of itself, may be valuable and lead to future deals.
And deeper still. . .
Encouraging as it may be that Plug Power has inked these two deals, it doesn't address one of the greatest hindrances in the company's ability to achieve profitability: reigning in operating expenses. Growing 103% -- from $29 million in 2012 to $59 million in 2015 -- Plug Power's operating expenses have been largely attributable to personnel related expenses according to management. There's little chance that these two deals will do much in the way of tempering the operating expenses -- personnel related or not. In fact, as the company expands its presence in France, it will likely incur greater personnel related expenses -- suggesting that it will be some time before the company achieves economies of scale in the country and recognizes a benefit from extensive operations in the country.
In addition, management contends that its operating expenses will total about $20 million for fiscal 2016. The ability to trust management's estimates notwithstanding, it's unlikely that the 66% reduction (assuming management is correct) in operating expenses is attributable to the two deals.
Though it's an auspicious sign that Plug Power picked up a new customer, it has a way to go before it will mitigate the risk it now faces with a concentrated customer base.
Furthermore, neither of these deals seem like blockbusters that will kick-start the company's ability to generate profits. Only time will tell if the deals were harbingers of Plug Power's extensive European presence or if they were additional examples of the company's ability to grow its top line without equally recognizing growth on the bottom line.
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