Technology & Opportunity
September 2016
Technology & Opportunity
September 2016 Issue
In this month’s issue: • A well-timed reader question • Our take on the fuel cell market • One new recommendation • Portfolio News • Position Updates
Aloha Jason and Angel Technology & Opportunity Report, I just am a brand new member of your report yesterday. I love your report and predictions about the iPhone Killer age coming soon!! I have a question please about the future of Hydrogen cell powered automobiles and other vehicles. Have you and your firm been following the latest new developments in this new high tech industry and how many years away do you think are we from where electric cars will be challenged by cars that run on Hydrogen cells? Thanks for your guidance and I look forward to reading and becoming more educated soon about all the exciting new technology opportunities. Best Wishes, Mike A. Maui, HI Mike, thanks for the question, and glad to have you with us. We’ve had a number of inquiries concerning hydrogen fuel cell stocks since the launch of this newsletter in 2013, but we have never actually dedicated much attention to the technology. Our avoidance of the topic has not been without reason, but the timing of your question is quite appropriate — we had actually already been planning to spend the bulk of this month’s issue discussing opportunities in the hydrogen fuel cell space. I’m going to assume that most of you, at some point or another, have heard of the promise that 1
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hydrogen fuel cells hold for generating clean and cheap electricity. However, there’s a bit of common confusion surrounding exactly what a fuel cell is and isn’t. Part of this confusion is highlighted in Mike’s language regarding when electric cars will be challenged by fuel cells. I say this because I’m a stickler for words, and the two technologies are, in fact, complimentary, not competing. We’ll get into that a bit more below and clarify what (I think) Mike is asking, but first a uniform definition I’m stealing from Wikipedia: A fuel cell is a device that converts the chemical energy from a fuel into electricity through a chemical reaction with oxygen or another oxidizing agent. Fuel cells are different from batteries in that they require a continuous source of fuel and oxygen/air to sustain the chemical reaction. Fuel cells can produce electricity continuously for as long as these inputs are supplied. Investors have long been told of the great promise fuel cells hold for the transportation and energy industries in particular. Using little more than hydrogen (the most abundant element on earth) and air, fuels cell can generate electric power with water as the only byproduct. It almost sounds too good to be true — and for nearly two centuries, it has been. Despite the incredible potential of fuel cell technology to disrupt the energy market, it’s been a long and arduous road to commercial adoption since its invention way back in 1838. Hydrogen fuel cells have been one of the toughest areas for growth-centered investors, with many seeing huge promise from the technology but few knowing how to profit from it. The disappointing truth behind fuel cell stocks (at least so far) is that anyone investing in them since their entry into public markets has likely lost a fair amount of money in the process. We’ve seen numerous waves of fuel cell hype among retail investors, but quarter after quarter, these companies have continued to disappoint, and the air has been let out of every bubble. Below is the normalized (percentage change) 10-year performance of the six most commonly traded fuel cell stocks (we’ll discuss a few of these in a moment) on the domestic market. As you can see, while the niche sector has provided some immense profit opportunities (namely in 2014), overall performance has been abysmal. Note that the S&P 500 (in pink) has more than doubled the 10-year return of even the best-performing fuel cell stock.
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Yet after a decade of declining stock prices, it’s finally beginning to look like the fuel cell market may just have a chance at meeting its once-lofty expectations. The investment opportunities might not be exactly where most people expect, but they do exist. Here are a few things you absolutely need to know before investing in this space.
Five Things You Need to Know About Fuel Cells #1: The Period of Disillusionment is Over The quickest way to lose money in the stock market is to get caught up in false expectations, and that’s what happened to a lot of early fuel cell investors. But with most fuel cell stocks now trading close to 10-year lows and volume as thin as it is today, it’s safe to say that the majority “blue-sky” investors have exited this sector already. The hype that once bloated fuel cell stock prices has, for the most part, come and gone. Keeping in mind the enormously high premiums once priced into fuel cell stocks due to their disruptive potential, 2017 is shaping up to be quite the attractive entry point for long-term investors. Of course, this doesn’t mean scooping up any random fuel cell stock in an attempt to catch a falling knife — but it does indicate an ideal time to start looking at the sector again. #2: After Over a Decade in the Red, Fuel Cell Firms Are Beginning to Turn a Profit 3
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September 2016 Issue
After many quarters of posting negative income, several fuel cell companies are finally turning the corner and have recently posted positive income for the first time in the history of this niche sector. While no company has yet proven consistently profitable, the tide is clearly shifting. In June 2014, for instance, a small fuel cell company by the name of Plug Power (NASDAQ: PLUG) recorded its first-ever quarterly profit. While the success of Plug was short lived, this moment signaled a crucial turning point in the niche fuel cell market. By the end of 2014, fuel cell turbine firm Hydrogenics (NASDAQ: HYGS) had followed in Plug’s footsteps, recording a narrow quarterly profit by year-end. Then in the first quarter of fiscal 2015, another fuel cell company, known as Ballard Power Systems (NASDAQ: BLDP), recorded a positive bottom line of its own. #3: Fuel Cell Vehicles Will Outshine Plug-in Electrics... But Not Quite Yet While the path to consumer adoption has been undeniably slow, fuel cell vehicles have long been regarded as one of the most potentially disruptive technologies to hit the automotive industry. As Car and Driver magazine points out in a recent issue: The fuel-cell vehicle (FCV) is an automotive holy grail that promises the low emissions of a battery-electric vehicle (BEV) with the range and refueling convenience of a gasoline-powered car. Once a barren product line, FCVs have very recently reached a meaningful turning point. This year, three production models came off the lots, including the Hyundai Tucson Fuel Cell, the Toyota Mirai, and the Honda FCX Clarity. Next year, Mercedes will release a production FCV too, while BMW is heavily investing behind the scenes. It seems that major automakers are finally committing to developing this technology, even if we’re still years away from mass production. With each generation of fuel cell vehicles, these cars are becoming increasingly cheaper to produce while simultaneously lengthening their range and shortening fill time. The Honda FCX Clarity, for instance, boasts an impressive 435-mile range, a three-minute fill time, and a compact fuel cell powertrain that’s one-tenth the cost of previous versions. Now, just to clear up any confusion before we continue, understand that FCVs and electric vehicles are not mutually exclusive — FCVs are, in fact, a type of electric vehicle, which is why the abbreviation FCEV is sometimes used interchangeably. As Edmunds puts it: 4
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“Hydrogen fuel-cell vehicle” sounds pretty exotic, but in reality it’s just an electric car that replaces the bulky, heavy and expensive grid-charged battery pack with a relatively small, lightweight and expensive electrochemical system that produces electricity onboard. Or as Merten Jung, head of BMW’s fuel cell development, points out: The basic idea is that you take an EV with a large battery pack, and you replace the pack with a fuel cell, a hydrogen tank, and a smaller battery. From there on the drivetrain is identical; the electric motor, the electronics, the gearbox, it’s all the same. And they have the same driving experience, too. In both cases it’s pure electric so you can’t tell the difference between the two when you’re behind the wheel. I know I’m being nitpicky with words here, but for the sake of clarity, what Mike was really getting at in his question above was, “When will fuel cell electrics (FCVs) challenge conventional plug-in electrics (PEVs)?” The argument as to why this will inevitability happen is pretty simple: A fuel-cell electric system isn’t range- or fill-constrained like a battery-electric system. FCVs carry enough fuel for 300+ miles of range, and their tanks can be refilled in just a few minutes. But for FVCs to overtake PEVs, costs still need to come down and infrastructure needs to develop substantially. Unlike PEVs, FCVs cannot be charged at home, so without filling stations they’re essentially useless — even with superior ranges and fill times. (Note: The Mercedes-Benz GLC, expected next year, will be the world’s first production plug-in FCV. This is essentially a hybrid that will still require fill stations for extended range). Now, I know this isn’t going to be the answer most of you were looking for, but I won’t make things up for the sake of excitement: As of today, there’s no telling when FCVs will become economically viable, or at least more economically viable than PEVs. Most experts will pin it down to within less than 10 years, but that doesn’t leave much investment opportunity today. Wolf-Henning Scheider, head of Robert Bosch’s automotive division, for instance, predicts FCVs won’t be economically viable until 2025. Notably, Scheider expects the production cost to still be twice that of PEVs in 2025, but cites extended ranges and charge times as major selling points. All I can say for those of you looking to invest in FCVs today is you’ll need to be patient. With three major automotive companies now pushing fuel cell technology, hydrogen filling stations have begun popping up across the globe — but consumer adoption is still years away. 5
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Here’s what the current state of infrastructure looks like: California is a jumping-off point in the U.S., with at least 22 stations currently in development, making for a total of 58 in the state.
Then there’s a big gap of empty space until we get to the other end of the continental U.S.:
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And just for kicks, Mike’s home state of Hawaii (sorry, none on Maui):
When it comes to fuel cell infrastructure, though, the U.S. is simply way behind the game. Comparatively, Europe is crushing it:
In any case, the key takeaway here is that slowly but surely, the international groundwork for FCVs is being established. Half a decade ago, all four of these maps were barren, but given another five to 10 years, charging up an FCV will be as convenient as pumping petrol in many 7
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regions of the world. #4 Research Firms Suggest Broader Fuel Cell Market is on the Cusp of Exponential Growth According to data from Lux Research, the long-term outlook for fuel cell revenue is absolutely enormous despite limited opportunities in the transport sector. As predicted by the research firm, what’s less than a $250 million market today is expected to reach $2 billion in less than a decade. Jointly, MarketWatch reports that the global PEMFC (Proton Exchange Membrane Fuel Cell) market is forecast to grow at a CAGR of 26.67% in terms of unit shipments through 2019. Market research firm Technavio holds a similar forecast for the global fuel cell market, with a CAGR projection of 30.40% during the same period. And according to Freedonia, “Global demand for commercial fuel cells will almost triple to $4 billion in 2017, and then triple again by 2022 to $12 billion.” Navigant Research offers perhaps the most bullish projection, predicting global stationary fuel cell revenue to reach $40.0 billion by 2022. While each of these research agencies breaks down the fuel cell market in its own way, some more bullish than others, the key takeaway here is that strong growth is expected across the broad fuel cell market in both the near and short term. #5 Fuel Cells Break Down to Three Primary Applications Stationary Stationary systems are the most common fuel cell application today. These systems generally provide supplemental power or backup assurance for critical areas such as hospitals, nursing facilities, hotels, schools, cellular towers, treatment plants, etc. In breweries, landfills, and wastewater treatment, the waste gas from fermentation can be recycled to power the fuel cells, making these applications especially efficient. Transportation There are very few commercial applications for fuel cells in vehicles as of today. While many major automotive manufacturers have at least one fuel cell vehicle under development, currently, the most successful application of fuel cells and transport is for forklifts. Many forklifts cannot produce substantial emissions because they are used indoors, making them a key target for low emissions energy production. 8
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Portable Portable fuel cells are used for remote power in things like military applications and camping. Fuel cells have an advantage here because they are generally lighter and easier to transport than IC (internal combustion) generators. They are also quieter and produce fewer emissions.
Fuel Cell Stocks to Watch in 2017 Perhaps one of the most important habits of an intelligent growth investor, as we touched on above, is patience. As promising as any technology might be, it could end up taking many years to develop into commercial viability. While the auto industry is certainly the most talked about fuel cell market, there are far better ways to invest in this technology than transport today. As you may have noticed looking at the projections above, the most bullish mid-term fuel cell projections surround not FCVs but stationary applications. In fact, of the three primary applications for fuel cells today (portable, stationary, and transport), transport accounts for just a small sliver of shipments. That said, our current focus on fuel cells will largely ignore the automobile industry. Below is a list of the six fuel cell stocks you’ll be able to trade on American exchanges. None of them operate in the consumer FCV space. • Ballard Power Systems, Inc. (NASDAQ: BLDP) • FuelCell Energy, Inc. (NASDAQ: FCEL) • Hydrogenics Corp. (NASDAQ: HYGS) • Plug Power, Inc. (NASDAQ: PLUG) • HyperSolar, Inc. (OTC: HYSR) • Quantum Fuel Systems Tech Worldwide, Inc. (OTC: QTWW) Of these six stocks, there are only three currently worth diving into today, and one worth our seal of approval. You’ll find more information on these three stocks (ranked in ascending order) below. We are only recommending the top company today.
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Plug Power, Inc. (NASDAQ: PLUG) Plug Power designs and manufactures fuel cell systems known as GenDrive and GenFuel that replace conventional electric batteries. At a market cap of ~$500 million, Plug is one of the largest hydrogen and fuel cell technology companies in the U.S. Plug found its first viable market powering indoor forklifts, earning a number of highbrow customers including BMW, Wal-Mart, Mercedes, Kroger, and Whole Foods. However, it’s expected that the company will soon branch off into several other verticals, including airport ground support, airport tuggers, transport refrigeration units, and hydrogen generation. Plug Power current holds the largest share of the North American Class 1, 2, and 3 clean energy lift truck market. The company also recently announced a joint venture with Axane, an Air Liquide subsidiary, to meet growing demand for its GenDrive fuel cell products in the European material handling market. In the first quarter of this year, Plug Power CEO Mandy Marsh announced that the company has kicked off expansion efforts to penetrate vehicles that are “larger than forklift trucks.” Specifically, Marsh was referring to a project with FedEx for a “range extender” program. According to Marsh, FedEx wants to “deploy hybrid hydrogen battery-powered delivery trucks to expand the useful range of these vehicles from 60 to 160 miles.” Here’s the company’s impressive revenue trend over the last five years:
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While Plug has grown revenue substantially, though, and reported its first quarterly profit in June 2014, the company has posted a loss for the past seven quarters. Ballard Power Systems, Inc. (NASDAQ: BLDP) Ballard Power Systems is a relatively small, 400-employee company that designs and manufactures high-performance fuel cell stacks used in the material handling market. The company has a product portfolio of telecom backup power systems, grid storage systems, bus batteries, and forklift truck batteries, which it supplies to Plug Power. Ballard’s line of power products is composed of three units, including stationary systems, motive modules, and fuel cell stacks based on the company’s proprietary proton exchange membrane (PEMFC) technology. In addition to these core power products, Ballard also licenses its intellectual property for power module assembly in China. The company has a substantial portfolio of intellectual property (easily the most powerful proton exchange membrane fuel cell IP in the world), including ownership of ~200 patents and applications, as well access to ~1,500 others. To give you an idea of its IP strength, the company currently has a development agreement with Audi through 2019 in relation to a number of recently purchased patents. Ballard also operates a wholly owned subsidiary known as Protonex, which develops several products with applications in military, commercial, and consumer markets — currently underserved by batteries and small generators. Protonex is also developing products for a number of different OEM customers looking to integrate high-performance fuel cells into their products and applications. Through 2015, Ballard Power Systems won an order for 300 buses from Foshan and Yunfu, cities in China. The company’s revenue has been rocky, but this was a record order for the company and signaled the beginning of widespread adoption of fuel cell powered buses in the region. Since 2015, Ballard has secured a number of fuel cell bus-related contracts, including a purchase order from Shenzhen UpPower Technology Co., Ltd. (“UpPowerTech,” a leading fuel cell bus systems integrator in China) earlier this month. All said and done, Ballard is a well-diversified fuel cell company that’s not a bad bet for a long-term hold. Still, we’re going to hold off on a recommendation here and move on with our number one pick.
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New Recommendation: FuelCell Energy, Inc. (NASDAQ: FCEL) FuelCell is an integrated fuel cell company that designs, manufactures, installs, operates, and services stationary fuel cell power plants. Specifically, the company provides distributed power generation for electric utilities, commercial and industrial customers, universities, and government entities around the world. By revenue, FuelCell Energy is a giant when compared to Plug Power and Ballard, which is one of the reasons we see it as a safer bet in a notoriously risky sector.
We also like FuelCell because of its heavy footprint in the stationary market. As noted in our forecast summary above, stationary is, by far, projected to have the highest growth rate of any other fuel cell application. In 2015, FuelCell Energy made tremendous progress in the U.S., with a number of large projects ramping up over the next several years. The company recently signed a 20-year agreement with Alameda County, California, for a 1.4-megawatt fuel cell plant. Notably, this project is to replace a previous FuelCell Energy power plant installed back in 2006, which goes to show just how sticky these customers are. In addition to the Alameda plant, FuelCell recently won four new orders from the U.S. Department of Energy that will add approximately $24 million to its backlog. Three of these projects are related to the commercialization of the company’s solid oxide fuel cell (SOFC) technology, while the fourth involves a carbonate fuel cell power plant. 12
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FuelCell is also gaining traction in Asia, specifically with a number of recent wins in South Korea. Most notably, the company has a partnership with POSCO, a South Korean multinational steelmaking company that is licensed to manufacture Direct FuelCell (DFC) power plants in South Korea. As a part of this partnership, POSCO is building a new manufacturing facility in Pohang city with an initial production capacity of 100MW per year. FuelCell Energy CEO Chip Bottone believes the company will be profitable when it’s installing 80 megawatts worth of fuel cell energy capacity per year. FuelCell installed 16 megawatts in the most recent quarter, which works out to 64 megawatts a year. Heading into 2017, FuelCell already has pending decisions for 125 megawatts of new fuel cell projects nearing decisions, including the 63-megawatt Beacon Falls Energy Park in Connecticut and 40-megawatt PSEG Long Island opportunity. If the firm can nail those two alone, it will be well past Bottone’s 90-megawatt target. As for FuelCell’s financial standing, the company is burning cash at about $11 million a quarter but last reported total cash and financing availability of $179 million (cash minus debt was last reported at ~$38 million) plus $329 million in backlog. This gives the firm plenty of run room as it nears a cash flow positive model, even at current burn rates. With such a large number of fuel cell projects awaiting decision, management expects a sequential increase in the fourth-quarter revenue, which would be a record figure for the firm for that period. Already, the firm trades at a price-to-sales ratio of just 1.05. Combined, this absolutely screams value. We rate FuelCell Energy (NASAQ: FCEL) a “Buy” under $5.30. The risk level is “Medium-High.”
Final Comments: While performance in the fuel cell market has been less than ideal over the last decade, stockbuying opportunities are finally opening up for investors who have been patient enough not to speculate. With the majority of fuel cell stocks trading near all-time lows and profitability on the near horizon, 2017 is shaping up to be a promising entry point. Fuel cell companies remain high-risk, high-reward stocks, but a number of these tickers are worth keeping on your watch list as the industry shapes up through 2017. Look to Plug, Ballard, and FuelCell to be the ones leading the way. 13
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Portfolio Snapshot and Updates Following last month’s barrage of quarterly results, this issue will be relatively light on news. As always, be sure to check out official ratings (bolded) for any changes from last month.
ABB Ltd. (NYSE: ABB) Snapshot: ABB Group is a multinational industrial automation corporation headquartered in Zürich, Switzerland. The company operates primarily in robotics and power/automation technologies. It ranks as a top 200 Forbes company and is one of the largest engineering firms in the world, with over 135,000 employees, operations in ~100 countries, and annual revenue over $35 billion. ABB is a company focused on keeping up with technological innovation. A diversified global powerhouse, the firm is found at the center of current developments in fields such as (but not limited to) clean energy, smart grids, microgrids (localized, independent grids), robotics, industrial asset effectiveness, and sustainable transport. Updates: A few scattered pieces of news for ABB this month: First, ABB’s YuMi collaborative robot was given a Golden Finger award and named “2016 Best Industrial Robot” at the China International Robot Show (CIROS) late last month. This was the first year the awards were held at CIROS, which is one of the top three robotic conferences in the world. Next up, ABB has received an order from Compañía Minera Doña Inés de Collahuasi (CMDIC) in Chile to upgrade its software solution in an effort to boost operations at the Collahuasi mine on Chile’s Andean Plateau. The Collahuasi mine is the world’s third-largest copper operation and is one of the largest copper deposits. To kick off September, ABB saw an upgrade from BNP Paribas from “Underperform” to “Outperform.” We’ve actually been unable to locate any official notes or analyst names regarding the rating, so if anyone has their hands on that information, feel free to forward it. This is the third upgrade for ABB since April. Lastly, ABB has appointed IoT (Internet of Things) expert Guido Jouret as Chief Digital Officer 14
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for ABB. Jouret is a citizen of both the U.S. and Belgium, with ample experience in Silicon Valley. He served for 20 years at Cisco, most recently as General Manager of the company’s IoT division. Prior to this role, Jouret was Chief Technology Officer and General Manager of Cisco’s Emerging Technologies Group, a unit responsible for incubating new businesses. Jouret’s team created nine new startups, including Cisco’s TelePresence and Internet of Things groups. We rate ABB Ltd. (NYSE: ABB) a “Hold” under $22.50. The risk level is “Low.”
Amazon Inc. (NASDAQ: AMZN) Snapshot: Amazon is an American e-commerce and cloud computing company. It is the largest Internetbased retailer in the United States and the world’s largest provider of cloud infrastructure services. The company also produces consumer electronics and sells digital media content. Updates: This was a big month of expansion efforts for Amazon, as the company looks to put its cash pile to work. Here are a few of the biggest developments: In a bid that could eventually challenge the streaming dominance of Netflix, Amazon is said to be exploring sports streaming rights. The efforts are currently focused on tennis, golf, auto racing, and rugby, which would boost the appeal of “Prime,” especially in Europe. Amazon has also expressed interest in streaming rights for American basketball and baseball, but with most U.S. sports rights locked up for years, they won’t be getting access anytime soon — and certainly not for cheap. For perspective, ESPN pays the NFL $1.9 billion per year for Monday Night Football through 2021, while the NBA rakes in $2.7 billion per year for a contract through 2025. On top of sports, Amazon is expected to introduce its own music streaming platform, similar to Apple Music, Spotify, and Google Play Music, for $10 per month or $5 a month for customers using its Echo voice-activated speakers (this should help propagate the platform). The New York Times reports that Amazon is currently completing months of negotiations with record companies and music publishers. Jointly, the retail giant is expected to open ~100 more physical locations that will showcase its 15
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hardware offerings (Echo speakers, Fire devices, Kindle, etc.) in a move that mimics the retail strategy of Apple. We rate Amazon (NASDAQ: AMZN) a “Buy” under $535. The risk level is “Low.”
Amtech Systems (NASDAQ: ASYS) Snapshot: Amtech Systems is a supplier of solar panel and semiconductor capital equipment with a global presence in North America, Europe, and Asia. Amtech’s products and services include silicon wafer handling automation, thermal processing, and various products used for fabricating solar cells and semiconductor devices. Updates: No new news or updates for Amtech this issue, but for those who missed it, here’s a brief recap of the firm’s 2016 third-quarter results from last month’s issue: Amtech recorded net revenue of $33.3 million, with its solar segment bringing in $19 million — compared to the $22.5 million from the preceding quarter. The rise in third-quarter revenue is attributable to increased shipments from solar and semiconductor segments. Customer orders totaled $30.0 million, with $13.2 million coming from solar. The company is expecting revenue for the fourth quarter to be in the range of $35 million to $38 million with an improved operating margin. Amtech’s solar subsidiary Tempress Systems, Inc. has also received an order from a top-tier solar cell manufacturer in Asia in July of 400 megawatts for its next-generation Solar PECVD. We rate Amtech Systems (NASDAQ: ASYS) a “Buy” under $7. The risk level is “Medium.”
Analog Devices, Inc. (NASDAQ: ADI) Snapshot: Analog Devices is a semiconductor company specializing in data conversion and signal processing technology. The company develops analog-, mixed-, and digital-signal processing 16
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integrated circuits (ICs) used in industrial, automotive, consumer, and communication markets worldwide. Updates: Nothing new for Analog this month minus a price target hike from Stifel Nicolaus to $80 from $78. For those who missed it, here’s a brief recap of the firm’s 2016 third-quarter results from last month’s issue: Revenue came in at $869.59 million, which was up just slightly at +0.7% from the prior year. A 6.4% increase in earnings for the firm was due to stronger sales in its communications and automotive markets, as well as cost-reduction efforts. Analog has announced that a cash dividend of $0.42 per outstanding share of common stock will be paid on September 7, 2016, to all shareholders of record at the close of business on August 26, 2016. We rate Analog Devices (NASDAQ: ADI) a “Buy” under $50.00. The risk level is “Low.”
CalAmp Corp. (NASDAQ: CAMP) Snapshot: CalAmp Corp. provides wireless communications solutions for various applications worldwide. It offers solutions for mobile resource management, machine-to-machine (M2M) communications, and other emerging markets that require connectivity. Its M2M and MRM solutions enable customers in energy, government, transportation, and automotive markets to optimize their operations by collecting, monitoring, and reporting business-critical data from remote and mobile assets. Updates: No news or updates for CalAmp this issue. CalAmp (NASDAQ: CAMP) is a “Strong Buy” under $20.50. The risk level is “Medium.”
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Cellectis S.A. (NASDAQ: CLLS) Snapshot: Cellectis is a genome engineering company that is developing immunotherapies for cancer using a gene-editing method known as TALEN (transcription activator-like effector nucleases) and pioneering agricultural biotech using a revolutionary gene-editing method known as CRISPR through its wholly owned subsidiary Calyxt. Of the two technologies above, CRISPR is the one that grabs the headlines and currently warrants the most hype. Cellectis’s efforts in immunotherapy are undoubtedly of great importance to the firm, but we ultimately see the biggest speculative upside in its agricultural arm Calyxt, which has been granted an exclusive license agreement with the University of Minnesota for worldwide rights to patent family WO/2014/144155 entitled “Engineering Plant Genomes Using CRISPR/Cas Systems.” Updates: Cellectis reported second-quarter results late last week, marking down a 126.3% increase on the top line ($20 million) thanks largely to collaboration revenues. As a developmental firm, the company’s biggest issue is solvency, but with a cash position of $300 million, it’s in excellent position. Aside from these updated figures, there’s nothing worth diving into that we haven’t already discussed. Phase 1 of UCART19 is still underway, and UCART123 manufacturing has been initiated as previously announced. Cellectis S.A. (NASDAQ: CLLS) is a “Buy” under $36.00. The risk level is “Medium.”
Crown Castle International Corp. Inc. (NYSE: CCI) Snapshot: Crown Castle owns, operates, and leases shared wireless infrastructure in the United States and Australia. The company provides towers and other structures, including rooftops and distributed antenna systems — a type of small cell network. Crown provides access to its towers, small cells, and third-party land interests through longterm contracts in various forms, including license, sublease, and lease agreements. Crown also offers network services related to wireless infrastructure, primarily consisting of antenna installations or subsequent augmentations, as well as site development services. The company operates upwards of 39,000 towers in the United States and approximately 1,700 towers in 18
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Australia. Updates: CCI has priced a public offering of $700 million, offering that sum in 2.25% senior notes due 2021, issued at a price of 99.97% to yield 2.256%. Net proceeds will be used to fully repay the company’s 2.38% senior notes due 2017, as well as part of its senior unsecured revolving facility. If you’re confused, this is just a restructuring and extension of debt. Nothing to be concerned or write home about. Crown Castle International Corp. Inc. (NYSE: CCI) is a “Buy” under $95.00. The risk level is “Low.” Editas Medicine (NASDAQ: EDIT) Snapshot: Editas Medicine is a genetic engineering company that originally spawned from five scientific founders considered world leaders in the fields of genome editing with specific expertise in CRISPR/Cas9 and TALEN technology. The all-star group of academics includes Feng Zhang of MIT, George Church and J. Keith Joung of Harvard Medical School, David R. Liu of Howard Hughes Medical Institute, and Jennifer Doudna of Berkley. Updates: Late last month, Editas appointed Charles Albright, PhD, as Chief Scientific Officer of the firm. Albright comes to Editas with over 25 years of experience, having most recently served as VP of Genetically Defined Diseases and Genomics at pharma giant Bristol-Myers Squibb. Over his career, Dr. Albright has led discovery programs that advanced investigational medicines into clinical development in a wide range of therapeutic areas, including neurodegeneration, pain, psychiatry, oncology, and inflammation. All said and done, this is a fantastic addition to the leadership team. We rate Editas Medicine (NASDAQ: EDIT) a “Buy” under $25.00. The risk level is “High.”
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Fanuc Corporation (OTC: FANUY) Snapshot: Fanuc Corporation is a leader in industrial robotics, with a product lineup that includes factory automation systems, laser cutting, motion control, and compact motors. Fanuc serves a wide range of industries including aerospace, agriculture, construction, metal forming, and automotive manufacturing. Updates: No news or updates for Fanuc this issue. Fanuc Corporation (OTC: FANUY) is a “Strong Buy” under $27.00. The risk level is “Low.”
Flex Inc. (NASDAQ: FLEX) Snapshot: Flextronics International (recently re-branded as Flex) provides customized electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) in the electronics industry. The company also supports supply chain efforts through services packaging, transportation, design, maintenance, repairs, etc. Over the years, Flex has developed a long customer list of recognizable OEMs including Cisco Systems, Dell, Eastman Kodak Company, Ericsson Telephone Company, Hewlett-Packard, Kyocera, Microsoft, Motorola, Nortel Networks, Sony-Ericsson, and Xerox. Updates: Flex has received approval to buy back up to 20% of outstanding shares, for a repurchase program up to $500 million. Since the beginning of fiscal 2012, the firm has repurchased approximately $2.3 billion worth of shares, so we expect the buybacks to continue. Flex Inc. (NASDAQ: FLEX) is a “Buy” under $13.50. The risk level is “Medium.”
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GoPro, Inc. (NASDAQ: GPRO) Snapshot: GoPro, Inc. manufactures a line of standalone high-definition action cameras, with its flagship “Hero” product line. The company also produces various mounting accessories for its cameras and software applications for video editing and social media. Updates: GoPro is still keeping us in the dark about its latest products, including the Hero5 and Karma drone, but rumors strongly suggest we’ll see a September launch and a reveal as soon as next week. The company hinted on its Twitter that the Karma drone will be unveiled on September 19 and has given us a teaser trailer here: https://www.youtube.com/watch?v=wA-typhevCs At first glance, the video may not seem revealing, but there are a few things worth noting. First, the drone is small enough to fit under a car. Second, it is incredibly precise, being able to fly so close to the ground. Third, it is stable, able to withstand the passing force of a vehicle and maintain its flight. I’m just going to put it out there right now and say that Karma is going to be a huge hit. We’re not making this official because we don’t deal with options in this newsletter, but if you’re comfortable in that realm, I recommend giving those Sept 23 near-the-money calls a gander. GoPro, Inc. (NASDAQ: GPRO) is a “Buy” under $15.00. The risk level is “Medium.”
Himax Technologies, Inc. (NASDAQ: HIMX) Snapshot: Himax Technologies, Inc. is a fabless semiconductor company headquartered in Tainan City, Taiwan. The company seems to have intentions to infiltrate the world of virtual and augmented computing. Facebook uses its video processing chips for the Oculus Rift, while Microsoft and Google use its near-field displays for the HoloLens and Project Aura (previously Google Glass). Updates: Himax Technologies announced last week that it has partnered with NUVIZ, a maker of a connected head-up display (HUD) for motorcycle helmets. The companies plan to develop a new HUD that will incorporate Himax’s LCOS microdisplays. Himax’s LCOS manufacturing 21
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facility has already begun shipping NUVIZ’s customized displays for assembly in preparation of a pending product launch in the second half of 2016. The partnership further solidifies our thesis of Himax being a significant component provider for the augmented reality space. Himax (NASDAQ: HIMX) is a “Buy” under $11.50. The risk level is “Medium.”
Infinera Corporation (NASDAQ: INFN) Snapshot: Infinera sells low-cost and power-efficient data communications equipment to network operators building out Internet infrastructure. This includes long-haul, subsea, data-centerinterconnect, and metro applications. The company offers high-speed “super-channels” that transport 500 Gigabits per second (GB/s) and metro connections of 100 GB/s. Updates: No news or updates for Infinera this month. As we’ve discussed in previous issues, the firm is running into near-term headwinds. This isn’t a position you want to be entering heading into 2017 as margin pressure builds, but long term, there isn’t much to worry about. Infinera Corporation (NASDAQ: INFN) is a “Hold.” The risk level is “Medium.”
Intel Corporation (NASDAQ: INTC) Snapshot: Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. It is the single-largest provider of semiconductors by revenue. It operates through PC Client Group, Data Center Group, Other Intel Architecture, Software and Services, and “All Other” segments. Updates: The big news for Intel this month is that the firm has finally beat out Qualcomm (NASDAQ: QCOM) for space in the iPhone 7 and iPhone 7 Plus to provide modem components. Analysts are forecasting up to half of iPhone 7 devices shipping with Intel components. This is a big win for Intel, even with iPhone sales expected to underwhelm.
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In other news, Intel will be spinning off its security unit (formerly McAfee) and selling its majority share to TPG for $3.1 billion in cash. Intel will retain a 49% stake in the company, which it bought for $7.4 billion in 2011. The unit, rebranded as Intel Security Group in 2014, will revert to the McAfee brand name upon closing, somewhere in the second quarter of 2017. Intel Corporation (NASDAQ: INTC) is a “Buy” under $34.00. The risk level is “Low.”
Intellia Therapeutics (NASDAQ: NTLA) Snapshot: Intellia is a genetic engineering firm that uses CRISPR technologies licensed from Jennifer Doudna, who serves as a scientific advisor for the firm. Intellia represents a potential hedge against another one of our holdings, Editas Medicine, as the two companies are engaged in an important patent dispute over the groundbreaking precision genome editing tech. Updates: Late last month, Intellia presented preclinical data demonstrating in vivo gene editing using lipid nanoparticles (LNPs) to deliver CRISPR/Cas9. The data showed editing efficiency in mouse livers up to approximately 60% at the target site after a single administration. Administration resulted in an associated decrease in serum protein levels of up to approximately 80%. While just a stepping stone, the data will provide important considerations for future clinical studies. Intellia Therapeutics (NASDAQ: NTLA) is a “Buy” under $22.00. The risk level is “High.”
International Business Machines (NYSE: IBM) Snapshot: IBM is an American multinational technology and consulting corporation, with headquarters in Armonk, New York. IBM manufactures and markets computer hardware, middleware, and software. The company provides infrastructure, hosting, and consulting services in areas ranging from mainframe computers to nanotechnology.
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September 2016 Issue
Updates: No significant news or updates for IBM this issue. The company remains a long-term buy-andhold income investment. International Business Machines (NYSE: IBM) is a “Buy” under $140.00. The risk level is “Low–Medium.”
InTEST Corp. (NYSE: INTT) Snapshot: INTT is a semiconductor capital equipment company, which means it manufactures machines used in the production of electronic components. The semiconductor capital equipment industry can be divided into two classes: front-end and back-end. The front-end involves silicon wafer and computer chip fabrication. The back-end involves assembly, packaging, and testing. InTEST works on the back-end of this cycle, providing automatic test equipment (ATE) used by semiconductor manufacturers to test their integrated circuits and wafer products. Updates: No news or updates for InTEST this month, but for those who missed it last month, here’s a brief recap of the firm’s latest earnings. For the second quarter, the company saw revenue of $10.5 million, down 9.2% from the previous year. Second-quarter gross margin was $5.3 million compared to first-quarter gross margin of $4.1 million. The company’s second-quarter bookings were up heavily on a sequential basis: $12.6 million compared to first-quarter bookings of $9.8 million. President and CEO Robert E. Matthiessen had the following to say about InTEST’s secondquarter results: ...revenue growth fueled across all product lines; most notably in the automotive sector of the semiconductor market, as well as demand created by next generation smart phones. The trend of order expansion continued throughout the quarter as well, increasing 28% 24
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sequentially, based in large part upon strength from our Thermal Products segment. The company is expecting net revenues for the third quarter to be in the range of $9.5 million to $10.5 million. InTEST Corp. (NYSE: INTT) is a “Hold” at current prices. The risk level is “Medium.”
Iridium Communications Inc. (NASDAQ: IRDM) Snapshot: Iridium is a global communications provider. The company offers the world’s most extensive voice and data service through a fleet of next-generation low-orbit satellites. It is currently launching the NEXT satellite constellation to serve the machine-to-machine (M2M) communications market. Updates: Iridium’s stock has retreated over the last two weeks, as investors have grown concerned over potential launch failures following the recent explosion of a SpaceX rocket. Elon Musk called the failure the most complex problem in the company’s history — but there’s little reason to be concerned the issue will persist considering the firm’s long history of successful launches. If anything, having a failure before the deployment of Iridium’s NEXT Constellation is good news, because it ensures additional precautions will be made for upcoming deliveries. Consider this a good opportunity to buy the dip. Iridium Communications Inc. (NASDAQ: IRDM) is a “Buy” under $9.00. The risk level is “Medium.”
iRobot Corporation (NASDAQ: IRBT) Snapshot: iRobot is an American robotics company that serves the consumer, medical, enterprise, and military industries. iRobot’s product functions range from home cleaning to telecommunication to various military operations. iRobot currently generates the vast majority of its revenue from its Home Robotics division.
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Updates: No news or updates for iRobot this month. iRobot (NASDAQ: IRBT) is a “Hold” at current prices. The risk level is “Medium.”
JinkoSolar (NYSE: JKS) Snapshot: JinkoSolar (NYSE: JKS) is a Chinese firm that makes a variety of photovoltaic (PV) products, including solar modules, solar cells, silicon ingots, and silicon wafers. The company operates internationally (69% outside of China) in two segments: manufacturing and solar projects. Updates: Jinko reported mixed second-quarter earnings late last month, missing on the top line but beating earnings estimates. Earnings per share came in at $1.92, up from $1.04 last year and exceeding consensus of $1.74. Revenues increased 86.1% year-over-year to $896.1 million but still fell short of consensus of $903.7 million. In total, Jinko shipped 1,716 megawatts (1.7 GW) of solar modules during the quarter, marking a record high. Geographic distribution was as follows: 46% to China, 43% to North America, 5% to Asia Pacific region, 4% to Europe, and 2% to emerging markets. For its outlook, Jinko expects total solar module shipments to be lower, in the range of 1.5 GW to 1.7 GW for the third quarter. The firm expects demand to begin to recover in the fourth quarter, but will likely face headwinds for the remainder of fiscal 2016. JinkoSolar Holding Co. is a “Strong Buy” under $22.00. The risk level is “Medium.”
LG Display Co. (NYSE: LPL) Snapshot: Not to be confused with LG Electronics, LG Display is its own independent company with a niche focus on panel technology. It is one of two organic light-emitting diode (OLED) companies trading on the public market.
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Technology & Opportunity
September 2016 Issue
Beyond becoming the new standard for crystal-clear resolution, the flexibility of OLED allows displays to wrap around the edges of devices, providing more surface area and multiple viewing angles. OLED displays can be rolled up into a tube for easy transportation or worn like wristbands. The technology can create a more panoramic viewing experience on curved televisions and can even be used as virtual paper. Updates: After coming off a one-year high, LPL is seeing some pullback this month as a result of profit taking. We’re still up ~44% on the stock, but we were looking at a higher 55% return last month. You can secure the gain if you’re feeling uncommitted, but we like LPL as a long-term hold. If you want to increase your stake, now is a good time to buy the dip. LG Display Co. (NYSE: LPL) remains a “Hold.”
Micron Technology Inc. (NASDAQ: MU) Snapshot: Micron is best known for producing many forms of semiconductor devices. This includes DRAM, SDRAM, flash memory, and SSDs. Its consumer products are marketed under the brands Crucial Technology and Lexar. The company was named one of the Thomson Reuters Top 100 Global Innovators in 2012 and 2013. It is ranked among the top-five semiconductorproducing companies in the world. Updates: Micron continues to climb on an improved memory-pricing environment, and our position is now up 33%. We think there’s still plenty of momentum left here, but the value case is beginning to diminish. We’re changing the position to a “Hold” and increasing the risk to “Medium.” Micron Technology Inc. (NASDAQ: MU) is a “Hold” at current prices. The risk level is “Medium.”
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September 2016 Issue
NXP Semiconductors N.V. (NASDAQ: NXPI) Snapshot: NXP specializes in near-field communication (NFC) technology. NFC allows for wireless communication between devices at very short distances with increased security. The technology is being used in public transport, event ticketing, home health care, patient identification, interactive museum exhibits, contactless credit cards, and as hotel keys, just to name a few markets. Updates: No news or updates for NXP this issue. NXP Semiconductors N.V. (NASDAQ: NXPI) is a “Hold.” The risk level is “Low.”
Oceaneering International, Inc. (NYSE: OII) Snapshot: Oceaneering International provides engineering services and hardware primarily to customers operating in marine environments. The company’s services are marketed to oil and gas companies as well as the aerospace and construction industries. The company receives the bulk of its revenue from ROVs and Subsea Products. Updates: No news or updates for OII this issue. Oceaneering International, Inc. (NYSE: OII) is a “Buy” under $35.00. The risk level is “Medium.”
Opko Health, Inc. (NYSE: OPK) Snapshot: Opko Health is a mid-stage biotechnology development and medical diagnostics company. OPK has a deep drug candidate pipeline spanning from kidney disease to cancer treatments. It also provides a revolutionary diagnostic test known as the 4Kscore, used in prostate cancer 28
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screening. The company’s proprietary diagnostic technologies allow doctors to keep bloodbased tests in house rather than outsourcing to outside laboratories. Updates: No news for OPK this month minus continued insider buying from Dr. Frost, which, at this point, isn’t really news at all. This man certainly injects a lot of confidence into the shareholder base. For those who missed last month’s issue, OPK posted second-quarter results beating on both top and bottom lines. EPS came in at $0.02 per share, while analysts were expecting the firm to break even. Revenue came in at $357.1 million, flying past Wall Street estimates of $324.3 million. Some comments from Dr. Frost on the call (emphasis mine): Our improved financial performance this quarter was fueled by continued growth in our diagnostics business through increases in patient volume at BioReference Laboratories and its GeneDx unit, as well as continued growth in the utilization of our innovative 4Kscore test for predicting the probability of aggressive prostate cancer. As for the 4Kscore (doctor on a chip), the diagnostic tool is currently being marketed by approximately 200 sales reps to both urologists and primary care physicians. OPK continues to see double-digit volume growth every month since expanding its sales force from an original staff of 20. Judging by comments from Dr. Frost during the call, it seems the firm may be hoping for an eventual reduction in that force as the medical community becomes more educated on 4K. We’re hoping that the urology community will take the lead in making it clear that there’s a great role for PSA testing. And as more gets done, naturally because there will be more positive or elevated PSAs, that will lead to more 4kscore being done. But this is an educational process, it will take time and we’re hoping that others such as the urology community and support groups will pick up the mantle and carry the ball. Management spent a fair amount of the call recapping the recent approval and expected launch of RAYALDEE. OPK expects to have approximately 10 internal and 35 regionally based sales representatives at the time of launch. Six months later, the company plans to mature to a size of around 70 to 80 reps. 29
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With regard to forecast, OPK is not providing guidance for RAYALDEE yet, but will do so on an ongoing basis after launch. Opko Health, Inc. (NYSE: OPK) is a “Buy” under $11.00. The risk level is “Medium.”
Parker-Hannifin Corp (NYSE: PH) Snapshot: Parker-Hannifin is an American manufacturer specializing in motion and control technologies, which allow customers to move and position materials, machines, and equipment during manufacturing. In brief, the company serves customers by helping them maximize their automation processes — from manufacturing to waste disposal. Parker is well diversified on the global front, with slightly more than half of its revenue coming from 45 countries overseas. Approximately 73% of sales come from Parker’s Industrials segment, 18% from Aerospace, and 8% from Climate and Industrial Control. Updates: No news or updates for PH this month, but for those who missed it last issue, here’s our recap for fourth-quarter earnings: The company reported fourth-quarter earnings in August of $241.8 million, or $1.90 a share. The bottom line crushed expectations, which were at $1.77 per share. PH also beat on the top line, posting revenue of $2.96 billion in the period, slightly above average consensus of $2.94 billion. Below are some highlights by segment: • Aerospace Systems segment grew 2.4% year over year to $602.4 million. • Diversified Industrials (International) fell 4.2% to $1.1 billion. • Diversified Industrials (North American) fell 10.8% to $1.26 billion. For the full year, Rockwell reported profit of $806.8 million and revenue of $11.36 billion. The midrange of its guidance for full-year fiscal 2017 ($6.40 per share to $7.10 per share) is in line with consensus of $6.71 per share. Here’s a brief excerpt from CEO Tom Williams’s 30
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comments on the call: This is going to be a year of sales leveling off, which, after the sharp reduction that we had last year, is going to be a very refreshing change for all of our people around the world. But, the way we forecasted this is first quarter is going to be soft, moving to essentially flat in second quarter, with 1% to 2% sales growth in the second half. So, our thoughts behind the numbers: The natural resource-related end markets -- so, construction, ag, mining and oil and gas, are moderating and they are going to continue to be, year over year, when we finish 2017, negative; but they’re going to get to be less and less of a drag, especially in the second half. Cash and equivalents were last reported at $1.2 billion with long-term debt at $2.7 billion (down from $2.6 billion last year). Lastly, PH is expecting $30 million in savings in 2017 as a result of continued corporate restructuring. This initiative will help improve margins going forward and drive the firm’s financial health. Parker-Hannifin Corp (NYSE: PH) is a “Buy” under $120.00. The risk level is “Low.”
Photronics Inc. (NASDAQ: PLAB) Snapshot: Photronics is a small technology firm that provides a unique fabrication tool for creating advanced chip circuit designs — something called a photomask. Photomasks are essentially high-precision plates made of quartz that contain images to be printed microscopically on electronic circuits. In short, photomasks use light to transfer complex geometric patterns onto computer chips. Updates: No news or updates for Photronics this issue. Photronics (NASDAQ: PLAB) is a “Buy” under $13.50. The risk level is “Medium.”
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Rockwell Automation (NYSE: ROK) Snapshot: Rockwell is an American provider of industrial automation solutions and equipment. This includes various power, control, and information systems that fall under two segments: Architecture/Software and Control Products/Solution, which work out close to a 50/50 split. Headquartered in Milwaukee, Wisconsin, Rockwell is a Fortune 500 company that employs over 22,000 people and serves customers in more than 80 countries. Its top brands include Allen-Bradley and Rockwell Software. Updates: Rockwell announced earlier this week that it has acquired, at an undisclosed price, software company Automation Control Products (ACP), a global leader in the automation industry that provides remote desktop server management. ACP offers two core products, ThinManager and Relevance, which provide manufacturing and industrial clients with visual displays and software to manage information and streamline workflows. If any of that sounds confusing, just know that ACP uses software to make manufacturing environments more interconnected. ACP has an international footprint with customers in 30 counties. One out of five Fortune 100 companies and one out of four worldwide manufacturers exceeding $25 billion in annual revenue use its ThinManager product, with over 50,000 seats sold. Notable customers include 3M, ABB, CocaCola, Honda, Johnson & Johnson, and IBM, just to name a few. There should be plenty of synergies with this acquisition. Rockwell Automation Inc. (NYSE: ROK) is a “Buy” under $125. The risk level is “Medium.”
Synaptics Inc. (NASDAQ: SYNA) Snapshot: Synaptics designs and manufactures human interface solutions for mobile computing, communication, and entertainment devices. Most notably, the company creates chips used for processing touchscreen movements in mobile devices. The company’s clients include Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Blackberry (NASDAQ: BBRY), Nokia 32
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(NYSE: NOK), Samsung (KSE: 005930), HTC, LG, and Sony. Updates: No news or updates for Synaptics this issue. Synaptics Inc. (NASDAQ: SYNA) is a “Hold” at current prices. The risk level is “Medium.”
Technology and Opportunity Copyright © 2016, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. Technology and Opportunity does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. Unauthorized reproduction of this newsletter or its contents by Xerography, facsimile, or any other means is illegal and punishable by law.
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