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Better Buy: Plug Power vs. Brookfield Renewable Partners

With oil prices in turmoil and the coal industry in shambles, now may be the perfect time to invest in alternative energy stocks. The problem is how to choose one? With solar, wind, and other green energy sources continually increasing their market share, there are plenty of potential choices to consider.

Today, let’s compare the pure-play hydrogen fuel cell specialist Plug hole (NASDAQ:PLUG) — whose shares have risen 33.8% since the start of the year — with the renewable energy generalist Brookfield Renewable Partners (NYSE:BEP), which is only up 3%. What’s the best buy?

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Narrow or wide focus

Plug Power is a leader in hydrogen fuel cell technology for vehicles. Its products have found a niche market in industries where extended downtime (to recharge a battery) is not an option: primarily warehouse forklifts and airport security vehicles.

However, Plug wants to break out of this niche to enter the broader vehicle market. It works on fuel cell delivery vans and has supplied small fleets of them to shipping giant DHL and fedex. Unfortunately for Plug, batteries remain the dominant alternative fuel for vehicles, and with gas prices so low right now, the economic case for switching to alternative fuel delivery vans is likely to take a hit.

Conversely, master limited partnership (MLP) Brookfield Renewable Partners invests across the spectrum of renewable energy and sells the electricity it generates to utilities. Most of its revenue comes from hydroelectric dams, but it also operates significant wind and solar infrastructure. In March, the company agreed to buy the 38% of the solar and wind energy company Power of TerraForm that it did not already own, which will not only increase its exposure to wind and solar, but increase the size of its renewable energy portfolio to approximately $50 billion.

Winner: Brookfield Renewable Partners

The value proposition

Brookfield is much larger than Plug, with a market capitalization of $8.6 billion compared to Plug’s $1.4 billion. Both stocks, however, have outperformed the broader market over the past five years. Plug’s shares rose 65.2% during that time, while Brookfield’s rose 44.9%, or 94.9% if you include Brookfield’s distribution (the MLP version of a dividend). Both companies outperformed S&P500yield of 38.2%.

Even after this outperformance, Brookfield’s valuation did not soar. Although his P/E ratio of 148.1 may seem incredibly high at first glance, it is important to remember that Brookfield owns many infrastructure assets and companies with high depreciation expenses often have high P/E ratios. Brookfield’s enterprise value (EV) at EBITDA ratio, which removes depreciation, is a much more reasonable 17.78. That’s near the upper end of its 10-year range, indicating investors are willing to pay a premium for the stock.

As for Plug, it is difficult to assess its valuation, as the company has never recorded an annual profit in more than 20 years of history, so the price-earnings ratio cannot be calculated. Plug has also not had a positive EBITDA since 2015, which means that the EV-EBITDA ratio cannot be calculated either. Same thing with free cash flow: its cash flow has never been positive.

This leaves price per book and price at sales as the only – albeit imperfect – valuation metrics we can measure for both companies. Yet Brookfield beats Plug on both counts, with lower price-to-book (1.6-10.1) and price-to-sell (2.8-4.4) ratios.

Winner: Brookfield Renewable Partners

Growth prospects

Plug’s financials are clearly inferior to Brookfield’s, but we can’t ignore the possibility that Plug is on the verge of explosive growth that will wipe out those net losses and negative cash flow forever. Maybe it’s the 1998 Amazon of fuel cells.

Unfortunately, that doesn’t seem likely. Plug was too promising and underdiffusion for many years, and that seems unlikely to change given the current economic situation. Cheap crude oil is likely to last a long time, undermining the economic case for switching to alternative fuel vehicles. Meanwhile, natural gas — from which much of the hydrogen that powers hydrogen fuel cells in the United States comes — could be about to get more expensivefurther undermining the economic argument.

Interestingly, this same situation could benefit Brookfield. If the price of natural gas – a key fuel for power plants – rises, renewable energy becomes more attractive. And with low oil prices wreaking havoc on the oil industry, energy sector investors may be more inclined to invest in renewable energy. Brookfield looks like the company with the better growth prospects.

Winner: Brookfield Renewable Partners

And the winner is…

It wasn’t really a contest. Even though there are no rebates, Brookfield Renewable Partners beats Plug Power hands down. Investors looking to invest in green energy should consider taking a stake at Brookfield.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.