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Five Green Up-And-Comers


The lure of fuel cells

The market's enthusiasm for alternative-energy stocks these days tends toward wind, solar and biofuel companies. But if a small Danbury, Conn., company gets its way, fuel cells may soon have their day in the sun. FuelCell Energy has carved out a niche producing fuel cells that power large facilities, such as hotels, universities and hospitals. So far, it has more than 60 power plants up and running worldwide.

Fuel cells generate energy by creating a reaction between hydrogen and oxygen. Because the technique doesn't involve combustion, fuel cells produce energy more efficiently and with fewer greenhouse-gas emissions than conventional generators do. FuelCell's devices provide a reliable on-site energy source, which eases a facility's reliance on the power grid and is crucial for customers such as hospitals and hotels. It's also important for customers such as the Sierra Nevada brewery in Chico, Cal., which relies on round-the-clock power from fuel cells to keep its beer chilled. The generators can use a variety of fuels, including gases that are byproducts of wastewater treatment, of food processing and, in Sierra Nevada's case, of the brewing process.

Lately, FuelCell has seen a surge in orders. The company recently inked a ten-year manufacturing-and-distribution agreement with South Korean power company Posco. A deal is also in the works with the state of Connecticut for what could be the largest order in FuelCell's history: six projects requiring a total of 68 megawatts of fuel cells.

Although revenues are rising rapidly, FuelCell is losing money. Analysts estimate a loss of $1.35 per share in the fiscal year that ends in October. Chief financial officer Joseph Mahler says FuelCell needs to produce 75 to 100 megawatts per year to make money. "We've crossed the big threshold, and now we're trying to penetrate the market and gain volume,S he says. Analysts at Lazard Capital Markets think the stock (FCEL), which recently traded at $8 and has a market value of $541 million, will hit $11 within the next year.

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Power controller

Small efforts in energy conservation can lead to big savings. That's the philosophy behind Echelon. When you forget to turn off the lights at the office, Echelon's technology flips the switch.

McDonald's sees the opportunity for cost-cutting. In July, the fast-food chain selected Echelon technology over rival systems to control the power supply for the lights, fryers and other equipment in its new and refurbished restaurants. Echelon estimates that the multiyear contract will bring in $20 million -- not an insignificant amount for a company with $93 million in revenues over the past 12 months -- and McDonald's expects the move to reduce its energy costs by 10%. More important, the deal will help Echelon win business with other restaurants, says analyst William Gibson, of investment firm Nollenberger Capital Partners, who owns Echelon shares.

Echelon's contribution to more energy-efficient Golden Arches masks the bigger prospects. In addition to control systems, Echelon makes "smart meters" for utility companies. The meters improve efficiency by allowing utilities to control electricity service remotely and prevent blackouts by automatically limiting power usage. "The market for EchelonUs products could reach billions of dollars per year later this decade," says Gibson.

Echelon's meter business is erratic. Sales often depend on the decisions of slow-moving governments and utilities. The San Jose, Cal., company has lost money for two straight years as it's been developing its next generation of meters. Gibson expects Echelon to turn a profit in the fourth quarter of this year. The global demand for energy efficiency will give Echelon shares a tailwind, but it will be a wild ride for investors.

The stock (ELON) has soared 44%, to $23, since early July alone, bringing its market value to $905 million. But it's nowhere near its record high of $113, set in 2000. Still, it might be prudent to wait for the shares to surrender some of their recent gains before buying.

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