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Now I can buy two shares in power of ceres (LSE: CWR) for the same cost as one just a year ago. Over a 12-month period, Ceres Power’s share price has plummeted 50%.
However, looking at the stock price chart since October, it appears that stocks may be past the worst. Could they now be a bargain for my wallet?
Long-term business prospects
As a long-term investor, I like to buy big companies when their shares are selling at an attractive price.
Ceres Power has an attractive technology platform and could benefit from the growing demand for renewable energy sources. However, until now the company has had constant losses. Last year it posted £21.4m of after-tax losses.
Revenues in the first half of this fiscal year were considerably lower than in the same period last year. The company expects second half revenue to be in line with first half. That means, at the full-year level, revenue is likely to fall, for the second year in a row. For a growing business, that’s not impressive.
The expected revenue drop this year is due to the later-than-expected completion of a key license agreement for a Chinese plant. License revenue could be substantial. Such a deal, if completed, would improve Ceres Power’s investment case, in my opinion. However, the fact that revenue is hit so hard by a single development makes me feel that Ceres’ business model remains fragile.
Right now, I don’t see it as the type of large company that I would like to invest in.
Ceres Power Stock Price Assessment
Since I don’t see it as a great company based on current evidence, the price at which Ceres Power shares are trading is of little relevance to me, as I will not be investing.
However, its £743m market capitalization seems high to me for a company that is consistently losing money with an uncertain outlook for sales growth.
At the end of June, the company had net cash of £222 million. In my opinion, that eliminates any short-term liquidity concerns. But as a loss-making company with a history of shareholder dilution, I see the risk that any future fundraising could lead to further dilution.
Valuation Concerns
Relative to their sales, the company seems expensive to me even taking into account the cash pile.
Lack of earnings means that a price-earnings ratio cannot be calculated. I think the stocks seem expensive for what they are. So based on what we currently know, I definitely don’t see it as a bargain.
That could change. For example, the company believes that the potential Chinese joint venture could be worthwhile.£30 million to Ceres in short-term license fees plus future royalties”. That can still be transformative for the company. For now, though, I think Ceres’s business as it stands is not worth its current valuation.
