Ballard Power Systems: This 140% Gainer Is Set To Fly Higher

| About: Ballard Power (BLDP)


Ballard plies its trade in a fast-growing fuel cell industry.

Ballard’s partnership with Plug Power and deal with Wal-Mart should help its long-term growth, apart from other key strategic engagements.

Ballard has a strong balance sheet.

Ballard Power Systems (NASDAQ:BLDP) is one of the hottest stocks in the market this year. Ballard shares have increased a whopping 145% in 2014 on the back of the expected growth in the fuel cell industry. Ballard focuses on the development and commercialization of proton exchange membrane fuel cells worldwide, and this is a rapidly growing market. Fuel cell players such as Ballard and Plug Power (NASDAQ:PLUG) have done exceedingly well this year and the trend looks set to continue.

Rapid growth expected

According to Reportlinker, the fuel cell industry is in its initial stages of growth and has huge potential going forward. Reportlinker expects the market to grow at an annual rate of 22% till 2020, which means that Ballard has got some really good prospects.

Earlier, Ballard was a fuel cell car research and development organization that was losing around $80 million a year. But now, it aims to become the market leader in fuel cells and is providing clean energy fuel cell products and services on a global basis.

Moreover, Ballard is making some notable moves to improve the positioning of its business. It has divested non-core businesses in the U.S. and Japan, restructured its cost base, developed new products, and acquired strategic assets such as Dantherm Power and IdaTech. Additionally, it has secured strategic new partners such as Volkswagen (OTCPK:VLKAY) and Anglo American Platinum.

Ballard is bullish about its outlook going forward because of the fuel cell market's growth. Driven by numerous trials, declining product costs, and commercial deployments in many different vertical market applications, the fuel cell market is growing.

To tap this growth, Ballard's focus this year will be primarily on increasing penetration across different markets. For example, in Japan, it has a base of about 350 systems deployed; in Indonesia, it has about 300 systems in operation; the Philippines is a new market where Ballard recently installed 20 systems. Additionally, Ballard has a base of about 320 systems in South Africa and expects healthy growth in China and India.

This year, Ballard is looking to increase its business in Australia, Myanmar, and the U.S. Since two major U.S. carriers are planning key deployments this year to strengthen key network nodes in critical cell sites, Ballard sees opportunity for itself.

The Plug Power catalyst

Ballard is also working very closely with Plug Power, its partner in material handling. Plug Power expects to ship more than 300,000 GenDrive system shipments in 2014, which represents about 50% growth in Ballard's material handling stack shipments.

Plug Power's GenKey has distinctive features that have attracted several potential customers. GenKey helps customers make a seamless transition away from lead acid batteries by giving them the complete kit needed for incorporating hydrogen fuel cells into business operations.

Additionally, Plug Power's successful fuel cell beta trials at Wal-Mart (NYSE:WMT) have lead the retail giant to purchase GenDrive units for its food distribution center in Washington Courthouse, Ohio, and the Wal-Mart Canada facilities in Balzac and Cornwall for 535 GenDrive deployments.

In fact, Plug Power and Wal-Mart recently entered into a contract under which the retailer will add 1,730 GenDrive units at six new Wal-Mart sites to enable material handling. Thus, Plug Power's contract wins should continue to be a strong driver of Ballard's prospects going forward.

Automotive growth

In the automotive segment, Ballard has tied up with Volkswagen. It is also working on smaller, more narrowly focused automotive developmental programs with two other global auto players. Ballard is designing and commissioning fuel cell testing infrastructure with other customers. The company also has a contract program underway to develop a specialized micro-fuel cell application prototype product for a military project.

Regarding demand in the auto market, Hyundai has announced the production of its Tucson fuel cell car for California. Toyota (NYSE:TM) recently unveiled its new fuel cell vehicles at the Consumer Electronics Show and aims to launch the production version by 2015.

Ballard is also applying its technology to buses. The company is submitting a joint bid with Van Hool for EU funding of up to 25 buses. Also, in January, Ballard announced a contract with Solaris, a new bus OEM partner in Poland, for two modules to be used as range extenders on Solaris battery powered buses.

Fundamentals and conclusion

Ballard is still not profitable. But since the company operates in a market which is expected to grow rapidly, investors shouldn't get discouraged. Ballard expects its gross margin to improve modestly in 2014 due to an improved product mix. This is a step in the right direction. In addition, analysts are also quite positive about Ballard's performance. This fiscal year, Ballard's earnings are expected to grow an impressive 61%, while for next year, the forecast is even more impressive with an expected growth rate of almost 86%.

The company also has a pretty sound balance sheet. Despite being in the early stages of growth, Ballard's levered free cash flow is positive. In addition, the company's cash position of $30 million is well ahead of its $12.75 million debt.

So, despite its solid surge this year, Ballard looks like a stock that investors shouldn't miss.

Disclosure: I 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.