General Electric's Game-Changing Fuel Cell May Spark A Revolution - General Electric Company (NYSE:GE) | Seeking Alpha

http://seekingalpha.com/article/2349395-general-electrics-game-changing-fuel-cell-may-spark-a-revolution

General Electric's Game-Changing Fuel Cell May Spark A Revolution

Overview

General Electric's (NYSE:GE) stock has been trending lower in recent weeks. Nonetheless, I see this as nothing more than an excellent buying opportunity. A selloff of the entire industrial sector appears to be underway. Even so, the selloff should be viewed as an opportunity to lock in shares at a discount. In the following article, I will make my case as to why General Electric will remain a great vehicle for long-term dividend investors.

Current Chart

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Industrial Sector selloff

General Electric shares are down 2.5% for week. Nevertheless, the company is not alone. Four out of the five largest industrial conglomerates are down for the week as well. United Technologies (NYSE:UTX) is down 4.13%, Boeing Company (NYSE:BA) is down 3.48%, Honeywell (NYSE:HON) is down 1%, and 3M Company (NYSE:MMM) is basically flat over the past week.

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(Source: Finviz.com)

My point here is the drop in General Electric's share price most likely has to do with macro issues rather than anything specific to the company itself. When selloffs like this occur, it is often a great time to accumulate the stock. Nonetheless, the company in question needs to have strong catalysts for growth and be fundamentally sound. In my past few articles on General Electric, I have detailed several areas where I see the potential for future growth. In the process of performing further due diligence on the name I have discovered another gem I feel may become a big winner for the company in the future. The company appears to have made a major breakthrough regarding the fuel cell power generation. In the next section, I will detail this most intriguing catalyst.

General Electric's game changing fuel cell

General Electric could be on the verge of a major breakthrough in fuel cell energy generation. Buried in deep behind all the headlines regarding the company's upcoming spin off was a report put out by the company of a recent breakthrough regarding fuel cell energy generation. With all the brouhaha regarding the company recently, this news seemed to fall on deaf ears. The information regarding the new innovation was derived from this report.

Fuel cell historical perspective

Fuel cell energy generation has been the holy grail of power generation for many years. For instance, the automotive industry has tried with little commercial success to replace the combustion engine with fuel cell technology for years to no avail. Why is the fuel cell such a sought after energy source in the first place?

What is a fuel cell?

A fuel cell uses chemical reactions to provide energy. The reaction involves hydrogen molecules and oxygen. One of the key reasons why this method of energy generation is so sought after is the abundance of these two chemicals in nature. Hydrogen molecules are abundant in natural gas while oxygen is prevalent in the air we breathe. The issue is no one has been able to make this work efficiently enough to be commercially viable. Yet, General Electric may have just solved the riddle.

Solving the fuel cell riddle

The main issue regarding fuel cell energy generation was the lack of energy efficiency. Nonetheless, it appears General Electric may have finally come up with a commercially viable solution. According to the report:

"Scientists in General Electric labs recently cracked an important conundrum involving one iteration of the technology called solid oxide fuel cell, or SOFC. The breakthrough allowed the company to start building a new pilot fuel cell manufacturing and development facility in upstate New York. The resulting technology could soon start producing electricity around the world. The new system's power generation efficiency can reach an unprecedented 65 percent. Overall efficiency can grow to 95 percent when the system is configured to capture waste heat produced by the process. The basic configuration of the system can generate between 1 to 10 megawatts of power."

This is an unprecedented leap in energy efficiency for fuel cell technology. The question remains how did General Electric make this happen?

The details behind the new fuel cell

The new fuel cell uses stainless steel in place of platinum and rare metals. Johanna Wellington, advanced technology leader at General Electric Global Research and the head of General Electric's fuel cell business, states:

"The cost challenges associated with the technology have stumped a lot of people for a long time. But we made it work, and we made it work economically. It's a game-changer. The new fuel cell can generate electricity at any location with a supply of natural gas. It can get going quickly, does not need new transmission lines and produces lower emissions than conventional power plants."

This is tremendous news and truly is a game changer if it comes to fruition. How did General Electric do it is the question.

It's the icing on the cake that makes the difference

Fuel cells have no moving parts. The new revolutionary fuel cells are simply a stack of metallic plates with a maze of flow channels cut into the bottom of them. Each one has a square of black "icing" on top.

General Electric's new icing material is the breakthrough that makes the solid oxide fuel cell work. The icing contains three layers made from special ceramic materials: the cathode on top, the anode on the bottom, and a dense layer of solid oxide electrolyte in the middle. This is the same revolutionary material that allowed General Electric to make a breakthrough in the company's new LEAP engine design I wrote about previously. You can read the article here. According to Wellington:

"The system generates electricity by feeding hydrogen-rich fuel heated to 1,500 degrees Fahrenheit through the channels cut under the anode. Equally hot air travels over the cathode. An electrochemical reaction mediated by the solid electrolyte between the hydrogen in the fuel and the oxygen in the air generates electricity, water, heat and synthetic gas, or syngas. This syngas, which contains residual hydrogen, still holds enough energy for more power generation. The fuel cell feeds the syngas to a Jenbacher engine attached to the fuel cell to generate additional electricity, bringing the electrical efficiency to 65 percent."

General Electric is currently building a new pilot development and manufacturing facility to manufacture the cells. The pilot facility is already under construction as we speak. Even so, we are talking about something that won't move the needle any time soon. I want to make this clear. My point here is the fact General Electric has many irons in the fire with regard to future growth prospects. These types of efforts will help keep General Electric relevant for years to come.

General Electric is fundamentally sound today

The selloff in General Electric's stock should be viewed as a major buying opportunity. The key fundamental metrics for General Electric are trending higher on a long-term basis. General Electric has the lowest forward P/E ratios of the five largest conglomerates at 14.12. The company has met or exceeded earnings for the previous seven quarters as well.

The turnaround is at an inflection point

General Electric is focused on streamlining operations, divesting itself of unprofitable business units, and spinning off risky financial units. If you take a step back and look at the big picture, you can see that the turnaround is at an inflection point as we speak. The synergies from recent transactions have not had time to take hold. Moreover, a spinoff of the finance division is about to occur. The uncertainty regarding these developments is what provides the buying opportunities. Risk and reward come hand in hand. There are always downside risks involved.

Downside Risks

General Electric is counting on growth coming from emerging markets. In the last few months, two major developments have taken place that may seriously threaten the stability of these markets. Emerging markets, which have been one of the biggest beneficiaries of quantitative easing, were hit particularly hard last year when talk of "tapering" first started to panic investors. Countries with higher current account deficits saw vicious sell-offs as a result.

The current geopolitical turmoil in Eastern Europe and the Middle East presents multinational corporations with two new major risks. Sanctions against Russia could inadvertently punish U.S. interests, and the Russians could push back against American companies as well. At the very least, there has been a significant amount of uncertainty and risk in the air currently. Moreover, conflict in the Middle East appears to have accelerated significantly in recent months. It seems as though all-out war could start at any time. This would not be good for anyone. Nevertheless, market participants seem almost completely desensitized to these developments at this point. I'm not sure if this is good or bad for the markets at this point.

Conclusion

General Electric is focused on the future. This is my primary reason for staying bullish on the company. I see the company's investment in the future as good news for long-term shareholders. General Electric has a solid long-term growth story and pays a hefty dividend of 3.41%. These facts coupled with the Fed's announcement that rates will remain at ultra-low levels for at least the foreseeable future is what investors should focus on. Forget about the short-term noise. The current selloff in the stock offers new investors a better entry point and current investors a chance to lock in additional shares at a higher yield. Nevertheless, I suggest layering into any position over time to reduce risk. The market does appear to be getting "toppy" here, yet no one really knows what the future may hold. Take your time and be patient.

Stuart Don Levy

Buy Qualcomm Despite China Chaos - Qualcomm Inc. (NASDAQ:QCOM) | Seeking Alpha

http://seekingalpha.com/article/2336065-buy-qualcomm-despite-china-chaos

Buy Qualcomm Despite China Chaos

After the bell on Wednesday, Qualcomm (NASDAQ:QCOM) reported its third quarter earnings, and Wall Street was pretty unimpressed with the results, knocking shares down 4%. QCOM shares had been gaining some momentum ahead of this report with shares hitting a new 52-week high during the regular session. After this release, the momentum has likely come to an end, and in the immediate term, I would not be surprised to see shares trade all the back down to $75. As an investor in QCOM, this report was deeply disappointing; however, I believe the long term story is still intact as the world is increasingly mobile and reliant on smartphones. As the premier patent holder and chip marker, Qualcomm will profit from this trend. With its outsized cash balance, the stock is also very attractive value. On a drop below $77, I will probably add to my position and suggest you buy some as well.

In the third quarter, Qualcomm earned $1.44 on revenue of $6.81 billion, which compares favorably to consensus of $1.22 on sales of $6.52 billion (financial and operating data available here). Backing out a gain of $0.12 thanks to a favorable legal decision, earnings were $1.32, still better than estimates. EPS was up 40% year over year and 10% sequentially while revenue was up 9%. At face value, these numbers seem pretty solid, but some of the internals of the report were a bit weak. More importantly, Qualcomm's guidance was very disappointing, as was its commentary on China.

First though, let's examine the third quarter more closely. MSM chip shipments came in a solid 225 million, which was up 31% year over year. This growth is a sign of how robust the smartphone market remains; however, chip revenue jumped a relatively meager 17%. This obviously implies that average selling prices were significantly lower year over year. China has been fighting Qualcomm to cut prices, arguing it has violated antitrust laws, which could be a reason for this decline. Additionally, some players like Intel (NASDAQ:INTC) are trying to build a presence, particularly towards the lower end of the market, which could be forcing QCOM to cut prices to maintain share. Average selling price data will be important to track in coming quarters to ensure QCOM is maintaining its near monopoly on the market.

Qualcomm also generates revenue by licensing its patents as it owns much of the intellectual property that 4G networks run on. Over the longer run, this business tend to correlate a bit with smart phone sales as the higher the number of the users, the larger the license fees. In fact, license revenue was surprisingly weak, down 3% year over year to $1.8 billion. This business has high margins (an 86% before tax margin this quarter), so profits fell by 5% compared to last year. I expect much of this decline can be attributed to China's efforts to get a better deal from Qualcomm (more below).

Finally, Qualcomm is the leading mobile chip company because it has out innovated the competition thanks to continued spending on R&D. While lower R&D boosts current income, it can devastate future results, which is why I always focus on it. Fortunately, Qualcomm maintains a robust R&D budget and is not cutting it simply to goose current results. R&D spending was up 11% year over year and is 18% of revenues (the same percentage as last year). With its large R&D budget, Qualcomm continues to invest in the business to ensure it maintains a technical edge over the competition.

Now while these numbers were generally good, guidance was relatively disappointing. In the past, Qualcomm has said Q4 should be the strongest quarter thanks to China's 4G LTE roll-out, but it appears the company was a bit too optimistic. It now expects to earn $1.20-$1.35 while the street was looking for $1.39. Its revenue mid-point of $6.95 billion compared to consensus of $7.15 billion. It also expects chip shipments to increase by less than 10% sequentially, which is disappointing considering the China upgrade and inventory stocking ahead of the Holiday Season. Simply put, this guidance was a miss and translates to full year estimates of $5.21-$5.36, which would be up 16-19% year over year. If we back out the $0.12 gain, QCOM's midpoint is $5.16 while I was hoping for closer to $5.20.

Finally, China is trying to win concessions from QCOM for lower fees, accusing it of antitrust activities. This probe is seen primarily as a negotiating ploy, and China has apparently escalated the situation. Qualcomm is accusing Chinese customers of not reporting all of the sales of licensed products to avoid paying Qualcomm. If true, this is a serious allegation and could significantly slow revenue growth in one of the world's largest and fastest markets. Qualcomm expects calendar 2014 device sales to be 1.3 billion while sales reported to Qualcomm will be in the 1.04 to 1.13 billion range. By my estimates, this problem with Chinese reporting could be cutting EPS by $0.25-35 over a 12 month period. Qualcomm needs to find a solution soon.

While the situation in China appears to be bordering chaos, it should also be noted Qualcomm has a ton of cash, $32.7 billion to be exact. This is up $600 million sequentially despite the repurchase of $1.35 billion in stock. Qualcomm anticipates repurchasing another $1 billion this quarter. These buybacks will help to accelerate earnings growth, and QCOM also offers a solid 2.1% dividend yield. Its cash hoard currently stands at $19.50 per share. Even with the problems in China, Qualcomm is a solid growth story thanks to secular tailwinds. The potential for more mobile devices, like watches, will only accelerate growth further, so I believe shares should be trading at least 14x earnings on an ex-cash basis or $92. At current prices, Qualcomm has over 15% of upside. China will be a drag, but Qualcomm is very inexpensive. I would be a buyer, not a seller, on weakness after this report

Stuart Don Levy