Monday, March 17, 2014

Should You Buy Into the Rise of the Fuel Cell Makers?

This article was originally published by TheStreet and also appeared on Yahoo! Finance. 
By Sarfaraz A. Khan, research assistant:  Gohar Yousuf
March 17, 2014
NEW YORK (TheStreet) -- Fuel cell shares now are behaving like the 3-D-printing stocks of 2013. Shares of Ballard Power (BLDP_), like those of its peers FuelCell Energy (FCEL_) and Plug Power (PLUG_), have soared. In 2014, Ballard's shares have risen by 250% to $5.28.
Ballard Power manufactures and sells fuel cells and provides engineering services for fuel cell applications. A fuel cell is an environmentally friendly electrochemical device that uses hydrogen fuel and oxygen to produce electricity. So far, Ballard Power has designed and sold 150 MW of hydrogen fuel cells.
The recent sector rally can be attributed to increasing optimism due to some new orders, as well as Plug Power's deal with Wal-Mart (WMT_). More important, Ballard Power has made significant improvements in its top and bottom lines. The company's shares could continue going higher in anticipation of positive cash flows and break-even earnings in the near future.
Ballard Power's long-term outlook appears bright, as some of the leading automakers have been betting big on the future of fuel cell cars. Furthermore, Tesla (TSLA_) could also provide growth opportunities with its expansion plans.

Ballard Power has been trading on the Nasdaq for decades. It used to be a fairly large organization, with a market cap of $5 billion in 2000. Back then, the company's stock soared to more than $120 because of all the excitement surrounding fuel cell vehicles, which later turned out to be false hope. Consequently, Ballard Power's shares tanked. Despite the recent rally, its market cap is less than $580 million.
In the last three years, Ballard Power's revenue has risen by 10%, which isn't a lot, but its gross profits have more than doubled. Its gross margins have risen from just 13% in 2011 to 27% in 2013.
Revenue (in thousands)
Gross Profit (in thousands)
Net Loss (in thousands)
Gross Margin
In its previous fiscal year, Ballard Power's revenue climbed 40%, while its adjusted losses shrunk 63%. Its net cash reserves also rose to $30.3 million from $12.48 million in the previous fiscal year.
In the last year, the company's sale of telecom backup power rose 74% to $20.5 million, which was driven by high demand from Japan, Southeast Asia, South Africa and the Caribbean. In the current year, Ballard Power is eyeing deeper penetration, with a focus on growing in its new markets, such as Australia, Myanmar and the U.S.
The company also reported 24% growth in its higher margin engineering services division. The segment remains the biggest contributor to Ballard Power's revenue and income. The company is expecting 30% growth from this segment in the current year, which will be driven by its partnership with Volkswagen (VLKPY) as well as design and commissioning of fuel cell infrastructure for other customers.
Ballard Power's revenue from development stage markets rose 50% from 2012 to $13.2 million in 2013, due to the bus licensing agreement with China's Azure Hydrogen. This deal could continue to power the company's profit and margins in the coming quarters.
The unit's growth, coupled with higher licensing revenue, has driven Ballard Power's margin expansion. Another year of solid growth could result in further margin expansion. The business has forecast break-even EBITDA for 2014, which could be followed by positive cash flows.
Ballard Power's material handling sales are up just 5% this year, but they gained momentum in the last quarter of the fiscal year. This was due to higher orders from Ballard's partner Plug Power, the market leader in the fuel cells materials handling systems in North America. This unit could witness significant growth in 2014 with considerable increase in shipments. Moreover, the recent deal between Wal-Mart and Plug Power could also give a boost to Ballard's revenues.
In the long term, Ballard Power could once again go on to become a mid-cap stock but that requires significant growth of the commercial fuel cells market. However, some of the leading automakers -- such as Toyota (TM_), which I have also discussed in my previous articleHyundai; and Honda (HMC_) -- are gearing up to launch fuel cell cars in the coming years. Moreover, Tesla's new Gigafactory and its expansion plans in Europe could turn into bigopportunities for the fuel cell makers. This sets up a positive tone for Ballard Power's long term future.