With the move to alternative energy sources attracting more attention these days, a lot of investors are hoping to do well by buying shares in renewable energy companies. I have been looking at some British companies exposed to hydrogen energy, such as Ceres Power (LSE: CWR). Could its shares be a good purchase for my portfolio?
Hydrogen energy share
Ceres Power is a UK-based company that designs and manufactures fuel cells. These can produce hydrogen as an energy source, while emitting less carbon dioxide than traditional fuel sources. By installing cells close to the point of energy use, Ceres also reckons it can reduce the energy loss that normally happens when power is transmitted long distances over a grid network.
The company is in growth mode, adding more than 160 people to its workforce last year. It is planning three factories worldwide, and is collaborating with well-known international companies such as Bosch with this goal in mind. Along with Bosch, Chinese company Weichai and Korean firm Doosan are both collaborating closely with Ceres too. The fact that Ceres has commercial partners of this calibre makes me think that its technology is genuinely respected within its industry. That bodes well for its future use. For example, Doosan is preparing for a soft launch of a solid oxide fuel cell system later this year that will use Ceres’ technology.
Growing business
The company has been around for a couple of decades. With the recent surge of interest in alternative energy forms such as hydrogen, it has seen customer demand increase. Last year, revenues and other operating income increased 44% to £31.7m. However, the operating loss also increased – even faster. It grew 58% to £23.4m.
The company is burning cash and last year operating activities swallowed up £20.3m of net cash. But with net cash and investments of £249.6m at the year end, I do not see liquidity as a short-term problem. Down the road it could be though. Previously the company has boosted liquidity by diluting shareholders and issuing new equity. I see such shareholder dilution as an ongoing risk at Ceres.
Ceres is still at a development stage, so it is understandable that it needs to spend considerable sums on scaling up research, manufacturing capability and commercialising its offering.
Would I buy Ceres Power shares?
But although such expenses are common in developing a company, that does not mean that I like them as an investor. I am looking for a clear pathway to profit and for now at least I do not see that at Ceres. While I think it can grow its revenues a lot, to do so it may need to spend more money on manufacturing and selling its products. So I do not expect the loss-making company to turn a profit any time soon. If it keeps making large losses, adding its shares to my portfolio might not help me make a profit either.
Ceres Power shares have lost 36% of their value in a year. But the company still commands a market capitalisation of £1.4bn. I think that is expensive given the size of its revenues and lack of profits. With its ongoing losses and large market cap, I will not be adding Ceres Power shares to my portfolio.