Fuel cells are frequent fliers in the green energy discussion. Generally, about once every decade investors and columnists get fired up about the seemingly unlimited appeal of fuel cells and jump on the bandwagon - only to see that wagon careen off the road and into a tree. With a very different mousetrap and its first ever quarterly gross profit, though, maybe FuelCell Energy (Nasdaq:FCEL) can finally redeem decades of unrewarded optimism. By no means has FuelCell turned a corner, but maybe now the corner is actually in view.

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Strong Third Quarter Results
FuelCell jolted its investor base with a surprisingly strong third quarter financial report. Revenue jumped 65% as product sales jumped 81%. As part of the higher sales base, the company's productivity rose above 50 megawatts on an annual run-rate basis.

FuelCell also reached a significant milestone that has been long in coming for this industry - the company's first-ever quarterly gross profit. FuelCell is still losing money (an operating loss in excess of $7 million), but the red ink is fading a bit and the company has eased its cash outflow to under $6 million for the past quarter.

Better still, the company's backlog jumped significantly during the third quarter. Backlog now stands at $231 million, close to triple the level of one year ago, and product backlog has likewise shown considerable growth (up to $153 million). Investors should note, though, that FuelCell's large customer POSCO Power (a subsidiary of steelmaker POSCO (NYSE:PKX)) accounts for much of this and orders are still lumpy.

Is This Finally a Real Opportunity?
It is gross understatement to suggest that investors have been burned on publicly-traded fuel cell companies. Names like Ballard Power (Nasdaq:BLDP), Hydrogenics (Nasdaq:HYGS) and Plug Power (Nasdaq:PLUG) are still out there, but at only a fraction of their value a decade ago. While there used to be a great deal of enthusiasm for fuel cells as alternatives to gasoline and diesel combustion engines (and I used to write about fuel cell companies often), a lot of that interest has faded in favor of advanced batteries and solar and wind tend to dominate the green energy discussion. (On a smaller scale, researchers are working with fuel cell companies. For more, see Top 10 Green Industries.)

By staying away from the mobile power market, FuelCell took a big gamble, but one that may have a chance of paying off. FuelCell's carbonate fuel cells offer reliable 24-hour power, high efficiency, and use readily-available natural gas. While it's true that natural gas is a fossil fuel and that diminishes the "green cred" of FuelCell in the eyes of some, the reality is that it is very pollution-efficient when compared to normal baseload power sources like coal or gas-fired plants.

The question now, though, is if this technology can be economically viable. At present, FuelCell's systems only make sense for areas where electricity is expensive or unreliable. Much as companies like Calpine (NYSE:CPN) and Dynegy (NYSE:DYN) once predicated their business models on high-cost electricity markets that never developed, so too does FuelCell need higher electricity prices for its products to be a mass-market opportunity.

At least in the case of FuelCell, though, there is an incremental opportunity - a utility could add FuelCell modules to existing plants or place them on site at major consumers and increase generation capacity without having to design, permit and build an entirely new facility. (For related reading, see Clean Or Green Technology Investing.)

Abundant Potential Competition
The fuel cell actually predates the combustion engine, but few economically viable iterations have ever come to pass. This isn't for a lack of trying, though. In addition to pure-play fuel cell companies, major names like United Technology (NYSE:UTX), Siemens (NYSE:SI), General Electric (NYSE:GE) and Rolls Royce have significant R&D efforts underway. Don't forget, too, that traditional turbine and generator companies like Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI) are constantly working on more efficient and clean designs.

The Bottom Line
Every green energy proposal has its deficiencies and drawbacks, and fuel cells are no exception. In the case of FuelCell Energy, this is a company that has worked within the limits of its technology and seems to have created a viable distributed generation product. The jury is still out on whether or not the company can lower its costs to a point where the technology can be more than a niche application at current energy prices, but if higher electricity prices do come to pass, this story could work out. (For more insight, see For Companies, Green Is The New Black.)

Investors should not kid themselves about the risks here. The company is still losing money and cash is flowing in the wrong direction. In that respect, this is very much like an industrial biotech - the odds are very long, but the technology is interesting and the potential for a major win is there. By the same token, should the market come down with another bout of fuel cell fever that pushes these stocks back up to impressive levels, investors may want to think about grabbing profits when they can.

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