Ballard Power Systems Is A Strong Sell

Jul.16.14 | About: Ballard Power (BLDP)

Summary

Fuel cells are less efficient than natural gas which will restrict their usage.

Competition from Plug Power and Fuel Cell Energy will hurt Ballard Power.

Hydrogen has many disadvantages over conventional methods of generating energy.

With a P/S ratio of over 8, Ballard Power won't be able to justify its valuation, making it a sell candidate.

Ballard Power Systems (NASDAQ:BLDP) is more hype than substance. Although the fuel cell company has gained around 160% this year, it might not be able to continue growing for long. Ballard's growth will be curtailed by the fact that fuel cells might not find much adoption going forward. Let's take a closer look at the reasons why Ballard might struggle.

The company's Telecom Backup Power system shipments were low in the previous quarter, which resulted in a decline in revenue and gross margin. Investors might get tricked by the stock of Ballard Power, which is down more than 50% since its peak in March, but yet it is too pricey. The company currently is trading at nearly seven times revenue, which is a very high multiple. This multiple is especially unreasonable because Ballard is still not profitable. While the company expects to improve its profitability, it is nowhere near to justifying a stock price equal to seven times revenue.

Betting on fuel cell is not a good idea

Ballard is betting on its fuel cell technology, which is not likely to drive in much profit because of many reasons. The one thing that favors this technology is the use of biogas as a cheap fuel. While this is a nice option for Ballard Power Systems to make the best out of a waste product, it might not turn out to be the best for a speedy growth.

Fuel cells still are much costlier because of the high capital costs for their installation and their up-front operating costs. Biogas, being the cheapest source of natural gas which is used for fuel cells, is obtained from wastewater treatment plants, landfills, farms, etc. So, Ballard has been developing ways for its products to run on biogas so as to avail the benefits of this cheap feedstock. Although, not all sources of biogas are economically feasible, its economic feasibility for fuel cells is even less. Some sources wouldn't even generate expected revenue using fuel cells or gas turbines.

Competitors

Not only Ballard, but even its competitors like Plug Power (NASDAQ:PLUG) and FuelCell Energy (NASDAQ:FCEL) are using biogas as a feedstock for fuel cells. The main target of these companies is to bring down the leveled cost of energy for these systems, which will help them capture a larger share of the biogas market and to compete in the natural gas market as well.

The inconsistent performance of these companies over the years is a matter of confusion for investors. Earlier, FuelCell Energy's deal with POSCO took it to the top, and this year it was Plug Power's deal with Wal-Mart (NYSE:WMT) that drove investors madly into fuel cell stocks. Ballard faces tough competition. When looking at the long-term revenue trends of these three companies, only FuelCell has been showing significant growth, which also isn't way too profitable.

Economics aren't right

Fuel cells are currently not economical, and even if in the future they develop adoption, it is definitely going to turn out bad for companies like Plug Power, Ballard Power Systems, and FuelCell Energy as they would strive for profitability and share dilution. Thus, investors are a strict "no go" for Ballard.

Disadvantage of fuel cells make Ballard a sell

While Ballard investors tend to believe that hydrogen fuel cells are the future of generating energy, it still has numerous disadvantages which will restrict its deployment. These disadvantaged are:

1) Expensive: Although hydrogen is readily available, the process of separating hydrogen from other elements is very costly. It's being used to power a few hybrid cars, but due to the expensive production cost, it is not a practical source of fuel yet.

2) Storage: Unlike other fossil fuels, hydrogen is very difficult to transport, which makes storing it very expensive and impractical.

3) Flammable: Apart from being difficult to transport, hydrogen is also a hazardously flammable gas, which makes transportation and storage even more difficult. Moreover, hydrogen gas is compressed into liquid form in order to use it as a fuel. Thus, it has to be kept under a suitably low temperature in order to keep it in liquid form.

4) High Infrastructure cost: Deployment of hydrogen fueling station is probably the biggest barrier. The cost of setting up a hydrogen refueling station is astronomically high, and if you add the cost of transportation and storage to it, its usage becomes completely impractical.

So, although hydrogen is vastly abundant and is a cleaner source of energy, it doesn't seem likely that it will replace fossil fuels in the near future. Ballard's stock price has been pretty volatile and although it has fallen significantly, it still looks bloated. With a P/S ratio of over 8.1, Ballard Powers looks like a disaster waiting to happen.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.