Ballard Power’s Quest For Profitability


For those unfamiliar with the name, Ballard Power Systems (NASDAQ: BLDP) is a British Columbia based company which designs, manufactures, and sells fuel cells. The technology has been part of the eco-friendly alternative fuel space and continues to mainly compete against the more well-known, prevalent lithium battery technology. Fuel cells have been and remain a niche option for vehicles utilizing a clean air alternative. These cells have been garnering attention for their zero emission benefits and reliability in warehousing, specifically in the operation of forklifts, for which Plug Power (NASDAQ: PLUG) has really made a name for itself. There also has been growing demand from municipalities seeking a green solution for their buses beyond just hybrids. In this space, Ballard has been accumulating its biggest wins which we will look further into. Fuel cells have also been used in backup power systems globally and being tested by the military to power UAVs.


While th e small to medium sized automobile market has potential, up until this point it has been stuck at an overall research stage level outside of a handful of models available for lease or sale by Toyota, Honda, and Hyundai available since late 2015. Ballard notably sold its automotive IP to Volkswagen in the same year to develop fuel cells for potential future car models, receiving a payment of $50m and an extension of its service engineering contract into 2019 from the world renowned German auto manufacturer

For years, the fuel cell industry has been downplayed and the target of much ridicule for not being a feasible self-sustaining possibility. This dynamic has yet to change due to a lack of net profitability experienced by any of the names currently publicly listed as a fuel cell company (PLUG, Hydrogenics Corp (NASDAQ: HYGS), and FuelCell Energy (NASDAQ: FCEL) to name a few). The reason I single out Ballard is because I believe they have the best odds in becoming pro fitable in the coming quarters. If they manage to accomplish this task, it would not only be groundbreaking for the industry but also begin to dispel the stigma of fuel cells being nothing more than a cash bleeding business. This potential for profitability is backed by the company having been on a fairly positive revenue trajectory over the last several years (with a slight YoY decrease recorded only in 2015) that has included improvements in gross margins and associated costs.


(USD thousands)

2016

2015

2014

2013

2012

Sales/Revenue

$85,270

$56,463

$68,721

$61,251

$43,690

Sales Growth

51.02%

-17.84%

12.20%

40.19%

COGS


$61,086

$46,489

$58,475

$44,492

$36,321

% COGS to Revenue

71.6%

82.3%

85.1%

72.6%

83.1%

YoY Change

– 13.0%

-3.2%

17.1%

-12.6%

This steady revenue gains have come with the ability to secure new contracts on an annual basis; which lately have predominantly involved Chinese based customers. Since 2015 there has been a clear favoritism towards bus deals as illustrated below to give a general sense.


2017

Company

Product Category

OEM Country

Dollars

Units

Apr 5th

Broad Ocean

Bus

China

$11.0M

200

Feb 16th

Broad Ocean

Bus

China

$25.0M

Feb 13th

FCEBC Consortium


Bus

USA

20

Jan 24th

Yinlong Energy

Bus

China

10

2016

Company

Product Category

Country

Dollars

Units

Nov 29th

Solaris Bus & Coach


Bus

Poland

10

Sep 7th

UpPower

Bus

China

10

Jul 18th

Synergy

Bus

China

$170.0M

Note: (Value through 2021)

Jan 21

Synergy

Bus

China

$12.0M


2015

Company

Product Category

Country

Dollars

Units

Nov 1st

TRC

Tram

China

$3.0M

Sep 30th

Aditiya

Backup Power

India

50

Sep 28th

CRRC Sifang

Bus


China

$6.0M

10

Sep 25th

Synergy

Bus

China

$17.0M

300

< p>Jun 8th

Zehe/Synergy

Bus

China

$10.0M

33

Apr 29th

RJIL

Backup Power

India

100


2014

Company

Product Category

Country

Dollars

Units

May 13th

CALSTART

Bus

USA

1

Jan 30th

Solaris Bus & Coach

Bus

Poland

2

This growth is not simply by chance as there is an overarching strategy shift coming from the top. Randall MacEwen took the helm as President and Chief Executive Officer on October 6, 2014 after many years under the leadership of John Sheridan. Now while the company did gross slightly less in his first full year in charge in 2015 than in the year prior, 2016 showed substantial growth (+56%) and the first quarter of 2017 has had a flurry of announcements in regards to signed deals for future deliveries. The company looks to be in the process of ramping up to a very respectable CAGR rate in the high double digits. Wall Street appears to agree based on the share price action below which shows a stark decoupling from its peers (PLUG and HYGS) since the start of 2016.


Ballard is currently sitting near its 52 week high ($3.045) at $2.81. The biggest question now is whether there is any room left for further price appreciation. The basis for that answer would have to be grounded in the company’s financial situation.


As of the end of 2016, Ballard had $72.6m in cash on hand. A sizeable amount that has been growing rapidly since 2015 at the average rate of 88.99%. One may ask what is it exactly that management plans to do with this ever increasing stockpile of the most liquid of assets. In the least, solvency is not an issue with a very healthy current ratio of 2.50 (vs PLUG 1.67 and HYGS 1.53). Long term debt has been on a roughly $1.3m annual decline, ending 2016 at $6.43m vs $13.0m in 2012. It is always encouraging to see a balance sheet being properly maintained. To add, offerings of late have been held in check with the most recent being for $11.8m back in mid-2015.


Another financial metric that stands out is the eve r increasing research expenditures, nearly 50% higher since 2014 into 2016 ($19.8m vs $14.3m).

(USD thousands)

2016

2015

2014

2013

2012

Research and Development

$19,827

$16,206

$14,294

$17,110

$19,273

YoY Change


22.3%

13.4%

-16.5%

-11.2%

This seems like a strategy initiated by Randall MacEwen, as the trend prior to his arrival was that of continual decreases. The more one observes the recent underlying metrics at Ballard, the more confidence this leadership endears. The CEO rightly decided to let Volkswagen figure out the complexities of using fuel cells in their small and mid-sized consumer vehicles in return for a substantial monetary sum and not to be overlooked: continued partnership that secured recurring revenue. This partnership is currently being carried out with the Audi division of VW, which fully intends on developing electric vehicles with both battery and fuel cell technology. Strategic decisions such as this indicate that MacEwen intends to focus the company’s energy not only on solidifying its winners but wisely, as a niche technology developer, to do further research with the funds obtained in order to escape that niche status. A smart strategy in the short, mid, and long term that should pay off handsomely in the years to come.


Speaking of research, let’s step back for a moment to look at the bigger picture once more. The advantage fuel cells provide over lithium batteries are several: they last for longer on a single charge, performance does not degrade under extremely lower temperatures, fully refill within 10 minutes or less, highly reliable due to no moving parts, and have range capacities that match combustible engines. The disadvantage is that refueling stations and infrastructure to spread their use is costly and at the moment a large barrier. As of now the technology has proven most relevant to both commercial and industrial interests including backup power systems (which we will leave for a future discussion), very small vehicles (forklifts), and large vehicles (buses, trucks). For the small, it offers longer hours spent on the job rather than at the outlet and for the larger it provides longer ranges without the added weight of multiple large battery packs.


The market continues to expand and Ballard has been on the proper path to capture as much of it as possible. With its spat of deals with Broad-Ocean, Synergy, and other China based manufacturers, the company has decided to open operations directly in China.

Management refers to this as an “in-country operations team”. This beach head will serve to further the expansion into China and could be utilized in future efforts concerning the nearby Southeast Asian countries (the more developed Japanese market may require a similar decision). So far these bus engine deals have been modest in total units, as the general purpose is for demonstration and optimization trials before a broader commercial launch throughout China can be decided on. The opportunity here is sizeable, there are 500,000 city buses in China alone. Of those an estimated 40,000 will be fully electric in 2017. For comparison, only 300 fuel cell buses are estimated to be deployed for the year. With the Beijing Winter Olympic games approaching for 2022, the Chinese are accelerating their clean air initiatives (as well as to be in accordance with the Paris Climate Agreement/lower dangerous pollution levels nationwide). With such entry level numbers against electric battery use, Ballard can be the lead in their growth and acceptance in the country.


This momentum towards wider acceptance in China is what may be driving short interest away from Ballard (only 2.36% of the float as of 3.31.17), even in spite of substantial share price growth in the previous twelve months. It is not a far flung conclusion to make that the early tests of these bus deals could quickly sprout into much bigger contracts considering the amount of outdated combustion engine vehicles that need replacing in the country.


The attention has been on China and while it is a massive market to enter, it also carries some risk in the form of IP theft. Ballard must be careful to protect its licenses and research from being improperly used by other parties in the country. It also runs the chance of fuel cell technology not being widely accepted after these trials and signatory roll outs of its product. Lithium battery technology remains the preferred route for a clean air alternative. Management is taking this route as it is proving fruitful, but it must keep in mind the dangers of exposing itself to a single country to a point of no return. Further diversification into Japan and Europe would be welcome.


As for the near term, I am very much looking forward to the Q1 2017 results being delivered on May 2nd. The recent positive trends under CEO Randall MacEwen’s tenure I imagine will be further demonstrated. This is a stronger, wiser leadership compared to its predecessors based on what h as been achieved thus far.

I estimate that 2018 will be a profitable year for the company if 2017 continues the trend of both higher margins and revenues driven by fuel cell bus contracts. Below is my projection for this year (with the expectation of positive EPS in the next).


(USD thousands)

2017E

2016

2015

2014

2013

2012

Sales/Revenue

$99,416

$85,270

$56,463

$68,721

$61,251

$43,690

Sales Growth

16.59%

51.02%

-17.84%

12.20%

40.19%

COGS

$65,380

$61,086

$46,489

$58,475

$44,492

$36,321

% COGS to Revenue

65.8%

71.6%

82.3%

85.1%

72.6%

83.1%

YoY Change

-8.2%

-13.0%

-3.2%

17.1%

-12.6%

Net Income

($10,217)

($21,112)

($5,815)

($27,868)

($19,964)

($42,135)

EPS

($0.05)

($0.13)

($0.04)

($0.22)

($0.20)

($0.48)

I leave out 2018 only due to the fact that 2017 is so crucial in solidifying BLDP’s gai ns in the last 18 months that it is almost impossible to lock in any numbers for next year. Considering positive growth trends, responsible management, and balance sheet strength my price target for Ballard is currently $4.50.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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