Is Ballard Power Systems A Solid Long-Term Investment?

Aug.27.14 | About: Ballard Power (BLDP)

Summary

Despite some volatility, the year-to-date gains of 156% are extremely impressive for the stock.

Growing demand for clean renewable energy indicates the fuel cell manufacturers will continue to grow.

Ballard Power Systems can benefit from the massive potential in Africa if its experiment in the region is successful.

Stationary power solutions are expected to show CAGR of over 51% over the next 8 years, making it one of the most attractive segments.

The fuel cell sector is relatively new in the energy industry, and the stocks in this sector tend to be volatile. Ballard Power Systems (NASDAQ:BLDP) has also been volatile over the last few months, but the overall trend in the stock price has been upwards - the stock has gained over 156% year-to-date.

The trend in the stock price is backed by impressive financial performance, as well as the overall optimism about the success of a new technology. Ballard Power Systems has reported impressive performance over the last few months, with increased order backlog and enhanced products deliveries. The future is looking even brighter for the company, as the acceptance of the technology and the demand for clean energy is rising. We are optimistic about the sector, and believe Ballard Power Systems will be an important member of the sector.

Pinpointing the Progress Made by the Company

During the second quarter, Ballard Power Systems reported substantial revenue gains, which is mainly due to increased segmented revenues and enhanced product deliveries during the period. The company also reported revenue increase of around 209% in the material handling segment during the second quarter, which is mainly due to increased fuel cell stack orders from Plug Power (NASDAQ:PLUG), along with intellectual property licensing revenues from M-Field Energy Corporation.

(Source: Investor Presentation, Second-Quarter Earnings Highlights)

The increasing order backlog of Plug Power has been helping Ballard in the past, as the company supplies to Plug Power - however, as the agreement between these two companies is coming to an end, we might see a small decline in growth for Ballard Power Systems.

Where will the Future Growth Come From?

Ballard Power Systems offers a comprehensive portfolio of fuel cell products in order to fulfill the needs of a wide range of customers. The fuel cell market holds strong growth potential in the coming years, and it is expected to grow to $2.5 billion by 2018, with a CAGR of 32% from 2013 to 2018. Moreover, the stationary power sector has also reported strong growth over the last two years, including prime power and residential combined heat and power fuel cell system shipments globally. The growth prospects in the stationary segment are even better, and it is expected that over 1 million fuel cell systems will be shipped annually in 2022, compared to 40,000 in 2014 - this translates into CAGR of around 52%.

The company's agreement with Azzure Hydrogen in June will provide considerable opportunities to grow in the region. The revenue decrease from the development-stage markets and telecom backup power segments during the second quarter raised doubts about the company's revenue sustainability from these segments. However, the company anticipates significant growth in orders and product shipments from these segments by the second half of the current year. The pipeline reflects strong growth opportunities in Asia, U.S., Europe, South Africa and the Caribbean.

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(Source: Investor Presentation, Second-Quarter Earnings Highlights)

Emerging Markets

Recently, Ballard Power Systems and Anglo American Platinum announced the launch of an initial trial of a methanol-powered home energy generation system in a remote residential location in South Africa. Anglo American Platinum is the world's largest primary producer of platinum, which accounts for approximately 38% of the world's total annual supply. The trial is conducted without access to grid power, which suitably tested the operating capabilities of Ballard's commercially proven ElectraGen fuel cell systems.

The pilot project uses Ballard's 5-Kilowatt [kW] ElectraGen fuel cell system, which is designed to provide a total of 15 kW of fuel cell generated electric power and has a maximum output of around 70 kW with the support of additional batteries. Further, this field trial is carried out to evaluate the technical and operating consumption requirements of a single home generation unit for remote location applications in South Africa.

According to the Energy Department of the Republic of South Africa, the region has a high level of renewable energy potential, and currently has a deployment target of around 10,000 GWh of clean and renewable energy. Further, Bloomberg New Energy Finance research predicted that 1.8 Gigawatt of renewable energy will be deployed in the region during 2014. This might create an opportunity for Ballard Power Systems, as the company is in the initial phase of testing its products in the region.

Possible Threat from New Entrants

The entry of General Electric (NYSE:GE) in the fuel cell sector is being taken as a threat for smaller capitalized fuel cell companies. However, this might also be a vote of confidence for the technology from the larger players, as giants like GE are putting their money on the success of this technology. GE might prove to be a threat for FuelCell Energy (NASDAQ:FCEL), as both companies are focused on the same segment of the fuel cell market. However, GE's business model is different from Ballard Power Systems, and these companies will not be competing with each other in the near future.

Conclusion

We are confident about the fuel cell sector, and the demand for the products is gathering pace. Companies like Ballard Power Systems are set to benefit from the focus on clean energy. We expect BLDP to continue its revenue growth in the short term, and we might see a considerable gain if the experiments in South Africa are successful, as there is a massive market for renewable energy in the region. We believe Ballard Power Systems remains a solid long-term pick in the fuel cell sector.

Additional Disclosure: This article is for educational purposes only, and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks, and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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.