Forget Fuel Cell Stocks: Here Are 3 Better Clean Energy Plays to Buy
Hydrogen stocks are hot, but these top picks offer less risk.
John Bromels, Scott Levine, and Lee Samaha
(TMFTruth2Power)
Dec 5, 2020 at 7:10AM
John has found investing to be more interesting and profitable than collectible trading card games. He seeks growth and value stocks in the U.S., in Germany, and beyond!
It seems like every week, there's a new hot trend in the stock market, and during Thanksgiving week, it was hydrogen. While many Americans were getting excited about stuffing and pumpkin pie, investors were bidding up hydrogen fuel cell stocks like Bloom Energy (NYSE:BE) and Plug Power (NASDAQ:PLUG).
But hydrogen stocks are risky, especially at these prices. With that in mind, we asked three of our Motley Fool contributors what alternative fuel stocks they like better. They came back with Clean Energy Fuels (NASDAQ:CLNE), Air Products & Chemicals (NYSE:APD), and Emerson Electric (NYSE:EMR). Here's why they think these are better bets for your money.
This natural gas play is cleaning up its act
John Bromels (Clean Energy Fuels): One big debate about hydrogen is whether it is, in fact, a "clean" energy solution. Yes, hydrogen itself, when burned, releases no carbon dioxide. But in the U.S., most hydrogen is derived from natural gas, a fossil fuel. While you can extract hydrogen in other ways -- from seawater, for example -- it's a lot less economical.
Clean Energy Fuels, on the other hand, is all about the economics. The company started out with a mission of promoting natural gas-based truck fuel, which burns cleaner than traditional diesel or gasoline fuel, and thanks to the abundance of natural gas, tends to be cheaper as well. That was good news for companies with big truck fleets that wanted to be more environmentally friendly without breaking the bank.
Now, Clean Energy has gone one step cleaner with the introduction of Redeem, a renewable natural gas fuel. Instead of using traditional natural gas to make Redeem, Clean Energy uses methane collected from dairies, farms, landfills, and wastewater treatment plants. It processes this biogas into usable fuel that -- when burned in a truck's engine -- has less of an environmental impact than the methane from which it was made.
In its most recent earnings call, Clean Energy CEO Andrew Littlefair revealed that Redeem now makes up more than 60% of Clean Energy's overall fuel mix, and the company hopes to shift to 100% Redeem by 2025. Unlike hydrogen, which has yet to prove it can compete when renewably sourced, Clean Energy has already signed big contracts with companies like UPS to provide sustainable truck fuel. Clean Energy looks like a buy.
Have a gas with one of the head honchos in hydrogen
Scott Levine (Air Products & Chemicals): Fuel cell stocks have skyrocketed over the past couple of months, thanks to Bloom Energy entering the commercial hydrogen market and its fellow hydrogen specialist Plug Power expanding further into the stationary power market.
But one of the problems with fuel cell stocks like Plug Power and Bloom Energy is that -- though they're experienced noteworthy top-line growth -- they've consistently failed to prove that their endeavors can generate earnings. That doesn't mean, however, that all hope in hitching your wagon to a profitable hydrogen-oriented company is lost.
APD Net Income (Annual) data by YCharts.
While investors will find that fuel cell stocks feature bottom lines consistently shaded red, Air Products generates considerable profits. Over the past 10 years, Air Products has generated average annual EPS of $6.60.
Dealing in a variety of industrial gases, Air Products is far from a pure-play on hydrogen, but the company recognizes the substantial opportunity in the burgeoning hydrogen economy. This past April, for example, Air Products went on a $530 million spending spree, acquiring five operating hydrogen plants from PBF Energy. But this pales in scope to its July transaction.
Forming a joint venture with ACWA Power and NEOM, Air Products will work to develop a $5 billion facility that will produce ammonia from wind and solar power. Air Products will then commit an additional $2 billion to develop the infrastructure to convert the ammonia to hydrogen. Located in Saudi Arabia and scheduled to begin operations in 2025, the joint venture project is expected to supply 650 tons of hydrogen daily for transportation applications around the world.
Speaking to the joint venture and the company's leading position in hydrogen writ large, Seifi Ghasemi, the company's president and CEO, stated on the company's third-quarter conference call, "This project is a true game changer for the carbon-free hydrogen market, which as we have always said, we expect to grow significantly in the next decade and we are positioning Air Products to continue to be the leader in the hydrogen space."
I've carved out a nice niche in my portfolio for riskier stocks, and I trust that hydrogen will become increasingly popular in terms of energy solutions. But the risks related to fuel cell stocks are too great for my taste. Air Products seems like a much more reasonable approach.
Emerson Electric is also into alternative fuels
Lee Samaha (Emerson Electric): Emerson Electric generated 58% of its segment earnings from its automation solutions segment in its fiscal 2020. And given the heavy exposure that the process automation industry has to the oil and gas industry, it's not surprising that the company is often seen as a play on the traditional energy industry.
Indeed, during the company's recent earnings call CEO David Farr disclosed that oil and gas were responsible for 24% of Emerson's sales in 2020. As such, Emerson is still going to be seen as having heavy exposure to oil and gas. But here's the thing: It may well be that the market is underestimating its growing exposure to alternative fuels.
In fact, Emerson Automation Solutions executive president Lal Karsanbhai said Emerson's clean fuels and renewables businesses grew 10% in 2020. Farr also pointed out that Emerson had and would continue to invest in businesses to take advantage of the transition from oil and gas toward alternative energy sources. Meanwhile, management intends to continue to generate earnings and cash flow from oil and gas.
As such, the best way to think about the company is to acknowledge its current exposure to traditional energy sources, but also its ability to transition to new sources of revenue. Simply put, Emerson can use the cash flows from oil and gas revenue streams to invest and develop its alternative fuel solutions which play in industries such as biofuels, biomethane, and clean hydrogen.
Trading at less than 20 times current free cash flow and sporting a 2.5% dividend yield, Emerson Electric continues to look like a good value for investors.
United Parcel Service, Inc.
CLNE
Clean Energy Fuels Corp.
NASDAQ:CLNE
NASDAQ:PLUG
PBF Energy Inc.
NYSE:PBF
Bloom Energy Corporation
NYSE:BE
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