Ballard Power Systems' Drop Is A Buying Opportunity You Shouldn't Miss

May. 6.14 | About: Ballard Power (BLDP)

Summary

Ballard shares dropped after first-quarter results, opening up an opportunity for investors to buy more shares.

Ballard counts Plug Power as a key customer, and this could be a could driver since Plug Power has entered into a deal with Wal-Mart.

Ballard is deploying its systems across the globe as fuel cells gain more adoption.

Ballard's earnings are expected to grow at a terrific pace, and its financial position looks good, making it a prime long-term investment at this juncture.

Fuel cell player Ballard Power Systems (NASDAQ:BLDP) took a beating on the stock market after its first-quarter earnings report and accompanying outlook disappointed Wall Street. Ballard shares dropped more than 10% after the company's revenue of $14 million missed analysts' estimates of $17.52 million. However, all was not bad for Ballard in the quarter as it managed to narrow its net loss and reaffirmed the guidance. In addition, the company's partnership with fellow fuel cell player Plug Power (NASDAQ:PLUG) is expected to be a long-term catalyst.

Considering the prospects in the fuel cell industry and Ballard's terrific growth expectations, investors should consider capitalizing on the stock's recent drop. Let's see why.

Improvements worth noting

Ballard saw growth in its business in the previous quarter, resulting in a 13% year over year jump in quarterly revenue. In addition, it achieved a 23% reduction in cash operating costs and a 60% improvement in adjusted EBITDA. The company's bottom line performance was better than consensus estimates, and it expects to put in a better performance as the year progresses. Ballard expects to generate 60% of its full year revenue in the second half of 2014, so investors shouldn't count the company out yet.

Ballard's restructuring strategy has been a key driver as it pushes toward profitability. It has transformed itself from a fuel cell car research and development company into a customer-focused fuel cell company. The company has entered into strategic alliances with Volkswagen (OTCQX:VLKAY) and Anglo American Platinum in a move to grow its market going forward.

In 2014, the company is focused on improving its profitability. Ballard is aggressively cutting costs and has recorded a 60% drop in product costs since 2009. The company is expecting this momentum to continue in 2014 as well, and is counting on three catalysts to drive its performance -- power system sales, material handling stack sales, and engineering services.

Plans ahead

This year, Ballard has trained its sights on aggressively penetrating regions such as Japan, Indonesia, and Philippines. Ballard has already deployed its systems in these countries. In Japan, Ballard has a base of about 350 systems deployed, while in Indonesia, the systems deployed number 300. Philippines is a new market for Ballard where it recently installed 20 systems. In India, the company's efforts are progressing beyond the early stage trial activity, so we should see systems deployment here as well going forward.

Ballard is also focusing on expansion in countries such as Australia and Myanmar. On the other hand, Ballard is expecting weakness in the U.S market as a result of stiff regulatory pressure in the wake of superstorm Sandy. Still, the overall prospects of the fuel cell industry look positive. As reported by Reuters, global fuel cell market revenue is expected to hit $2.5 billion by 2018, as per market research firm MarketsandMarkets. More importantly, shipments of fuel cells are expected to jump to 1.1 million units by 2018, from just 24,500 in 2012.

The growing base of Ballard's systems across the globe should help it benefit from the fuel cell market in the long run. As we just saw above, fuel cell unit shipments are expected to grow rapidly going forward. In addition, analysts expect the global fuel cell market to grow at a CAGR of 22% during 2014-2020.

Driven by demand for fuel cell technology in various areas such as military, electronic devices, transportation, traffic signaling, security, and remote monitoring, Ballard could see an increase in its addressable market. Also, the decline in fuel cell prices could lead to an increase in adoption rates of the technology going forward.

Combined with Ballard's current ventures and the various moves that it is making, it seems to be in a good position to benefit from the fuel cell market.

The Plug Power advantage

Ballard's position in the fuel cell market is also strengthened due to its strategic partnership with Plug Power. Ballard designs and manufactures high-performance FCvelocity 9SSL fuel cell stacks for use in the material handling market. Ballard has a supplier agreement with Plug Power for GenDrive hydrogen fuel cell systems in North America and Europe.

Now, Plug Power holds the biggest share of the North American Class 1, 2 and 3 clean energy lift truck market. It also recently announced a joint venture with Axane to meet the growing demand for GenDrive fuel cell products in the European material handling market. Since Ballard supplies its fuel cell stacks to Plug Power for use in GenDrive systems, the company should benefit as Plug Power lands more customers going forward.

Also, Plug Power's GenDrive system shipments are expected to grow at a terrific pace in 2014, with total shipments expected to come in at 300,000 units. This would translate into a year over year growth of almost 50% in Ballard's material handling stack shipments.

In addition, Plug Power recently announced a new multi-site customer contract with Wal-Mart (NYSE:WMT). This will result in the addition of 1,730 GenDrive units at six new Wal-Mart sites, building on the three existing Wal-Mart sites. This is great news for Plug Power, and it will ultimately benefit Ballard in the long run.

Like Ballard, even Plug Power is expected to soar to great highs going forward, and analysts expect its earnings to grow 73.5% this year and 155% next year. This signifies the prospects of Plug Power and the expected growth in the company's business. As Plug Power's business grows, even Ballard will benefit since both are in a partnership.

Not that bad

Ballard is expecting its engineering services to become a key growth driver in the future. The company is working with Volkswagen in this department, and it is also focusing on automotive development programs with two global OEMs. Moving on, Ballard is designing and commissioning fuel cell testing infrastructure. In addition, Ballard also has a specialized micro fuel cell application prototype product for military applications. With these bright opportunities, Ballard is expecting its growth momentum to continue in 2014.

As mentioned earlier, Ballard's recent quarterly performance wasn't bad. The company's guidance for the ongoing quarter was in line with analyst estimates. Despite this, analysts started cutting back their growth estimates regarding Ballard since the company didn't blow past estimates. So, investors should ignore this short-term hiccup.

Time to buy

This year, Ballard's earnings are expected to rise 55%, followed by 87% next year. In addition, the company has improved its financial position further with a cash balance of $30 million. Ballard's debt-equity ratio is also quite low and a healthy current ratio of 2.30 suggests that the company has got its obligations covered.

So, considering the prospects of the fuel cell industry and Ballard's strategic moves, I think investors should definitely consider capitalizing on the recent drop and buy more shares.

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.