A recession is likely to occur later in the year due to expected rate increases and tighter credit standards. A recession would put enormous pressure on equipment manufacturers' profitability. Avoid fundamentally weak equipment shares such as FuelCell Energy, Solid Power (SLDP), or Advent Technologies (ADN). Continue reading.
The Federal Reserve has not reached its long-term inflation target despite the fact that the rate of inflation is now lower than the peak last year (9.1%). The Fed is likely to continue raising interest rates, which could push the economy into recession later this summer.
Equipment companies are not immune to the effects of a recession on profitability. It is wise to avoid the fundamentally weak equipment shares FuelCell Energy, Inc., Solid Power, Inc., and Advent Technologies Holdings, Inc., given that a recession is likely this year.
I will explain why an equipment company could be under enormous pressure if there is a recession in this year.
Federal Reserve economists predict that the recent turmoil in banking will lead to a mild recession this year.
In March, the U.S. Industrial production, which includes manufacturing, mining and utility output, increased by 0.4%. The colder weather pushed the heating demand of the utility sector, which led to a higher industrial production than anticipated. The manufacturing output, which is the largest component of industrial production in March, fell by 0.5%.
As evidenced by the 0.2% growth in March, compared with February's revised 2.2% rise, personal spending has slowed. Personal spending fell short of expectations for a 0.3% increase in March.
The consumer spending will likely be hit harder during the recession. The decline in demand for goods, services and industrial equipment is likely to affect the revenues and profits of manufacturers.
In a recession, businesses may delay or even forgo new equipment purchases in order to save money and cut costs. In a rising rate environment, it may be difficult for businesses to get financing for new equipment purchases or debt restructuring.
In this context, it may be prudent to avoid the equipment names mentioned above as they will not recover from an upcoming recession.
FuelCell Energy, Inc.
FCEL is a manufacturer of fuel cell technology platforms. It also offers sustainable products and solutions. Customers include utility companies and municipalities as well as hospitals, universities, government agencies and military bases.
FCEL's 12-month trailing gross profit margin is negative 15,19%, compared to industry average of 29,75%. The trailing-12 month net income margin of FCEL is negative 88.92%, compared to an industry average of 6.67%. The stock's asset turnover ratio of 0.16x for the trailing 12 months is 80.6% less than the industry standard of 0.80x.
FCEL's operating loss for the first quarter ending January 31, 2023 was down 49.9% on an annual basis to $22,46 million. The net loss attributable common stockholders decreased by 53.1% to $19.42 millions.
The loss per share of the company decreased by 54.5% compared to the previous quarter, from $0.05 to $0.05. The company's adjusted EBITDA loss increased 6% over the prior-year quarter to $14.41 millions.
Analysts predict that FCEL's earnings per share (EPS) for the quarter ending 30 April 2023 will remain negative. The revenue for the quarter that ends July 31, 2023 will decline by 23.8% over the previous year to $32.83 millions. In three of the last four quarters, it failed to exceed the consensus EPS estimate. In the past year the stock price has dropped 54.2%, closing the last trading day at $2.02.
The POWR ratings reflect FCEL's weak foundations. Our proprietary rating system gives the stock an overall F, which is equivalent to a Strong Sell. The POWR ratings are calculated by weighing 118 factors to the optimal level.
It is ranked #81 among 90 stocks in the industrial - equipment industry. It is rated F for Stability and quality and D for Value and Sentiment. Click here to see FCEL's other ratings for Growth and Momentum.
SLDP is a developer of solid-state batteries for electric vehicles and other markets. The company licenses solid-state cell designs, manufacturing processes and its sulfide based solid electrolyte. It also sells and produces EV, 0.2 ampere-hour and 20 amperehour cells.
SLDP's gross profit margin of 18.64% for the trailing 12-month period is 46.9% less than the industry average of 35.11%. The trailing-12 month net income margin of SLDP is negative 81.05%, compared to an industry average of 4.43%. The stock's asset turnover ratio of 0.02x for the trailing 12 months is 98.1% less than the industry standard of 1.04x.
SLDP's operating expenses for the fiscal year ending December 31, 2022 increased 142.4% over the previous year to $70.91 millions. The operating loss increased by 122.7% to $59.12 millions.
The net loss of the company was $9.56m, compared with a net profit of $18.09m in the previous period. The company's loss per share was $0.05 compared to $0.11 for the same period last year.
SLDP is expected to have a negative EPS for the quarter ending March 31, 2023. The stock price has dropped 70.7% in the past 12 months, closing the last trading day at $2.32.
The POWR ratings of SLDP reflect its weak prospects. The stock is rated F, which is equivalent to a Strong Sell according to our proprietary rating system.
It is ranked #80 within the same industry. It is rated F for Stability, D for Value, Growth and Quality. You can click here to view the other ratings for SLDP Momentum and Sentiment.
Advent Technologies Holdings, Inc.
ADN is a company that develops advanced materials and technologies. It operates on the markets of fuel cells and hydrogen technology. It manufactures and assembles critical components and fuel cell systems that are crucial to the performance of fuel cells, hydrogen, and other energy systems.
ADN's 12-month trailing gross profit margin is negative 9,49%, compared to the industry average of 29,75%. The trailing-12 month Return on Common Equity of ADN is negative 76.50% compared to an industry average of 13.86%. The stock's asset turnover ratio of 0.06x for the trailing 12 months is 92.3% less than the average industry value of 0.80x.
ADN's fourth-quarter fiscal revenue fell 32.6% from the previous year to $1.96M in December 2022. Gross loss was $498 thousand compared with a profit of $159 000 in the previous quarter.
The operating loss of the company increased by 200.6% over the past year to $50.08 millions. The company's net loss also increased by 428.8% over the past year to $47.63 millions. The loss per share increased by 411.1% compared to the previous quarter, reaching $0.92.
ADN's EPS for fiscal 2023 is expected to be negative. In three of the four previous quarters, it failed to exceed the Street EPS estimate. In the last nine months, shares have fallen 73.3% and closed the last trading day at $0.77.
ADN's POWR ratings reflect this bleak outlook. Its overall rating is F, which in our proprietary system translates into a Strong Sale.
It is ranked #78 within the Industrial-Equipment industry. It is rated F for Quality and Stability, and D for Growth. Click here to see ADN's other ratings for Value, Momentum and Sentiment.
Death trap stocks lurk in your portfolio
In premarket trading on Tuesday, FCEL shares dropped $0.04 (-1.98%). FCEL shares have fallen -27.34% year-to-date compared to an 8.31% increase in the benchmark S&P 500 Index during the same time period.
About the Author: Dipanjan B.
Dipanjan has been interested in stock markets since he was in elementary school. Dipanjan obtained a Master's Degree in Finance and Accountancy. Dipanjan is a financial journalist and investment analyst. He has a keen interest in reading about and analyzing new trends in the financial markets.