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What is it about green technologies? A sector with so much good karma and so much government support seems to create some of the poorest investments. Do we so badly want those companies to be successful that we believe in their future, and to heck with the financial reports? Ten years ago Ballard Power (NASDAQ:BLDP) was trading at more than $100 per share, and is now about $1.40. The company still is losing millions every quarter, but revenues are growing. Is it time to buy yet?

Ballard’s Business

Vancouver based Ballard is a manufacturer in the proton exchange membrane (“PEM”) fuel cell business. They focus on a variety of applications including motive power (material handling and buses) and stationary power (back-up power and distributed generation) markets.

Ballard claims its fuel cell products feature high fuel efficiency, low operating temperature, low noise and vibration, compact size, quick response to changes in electrical demand, modular design and environmental cleanliness.

Ballard Strategy

Over the past few years, Ballard has moved to focus on its core fuel cell business and on fewer markets with near-term commercial prospects.

Ballard has shed some of its less productive assets in recent years. For example, in 2008 it sold its automotive fuel cell research and development assets to AFCC Automotive Fuel Cell Cooperation Corp (AFCC). The stated intent is to allow Ballard to focus on development and commercialization of fuel cells for non-automotive applications and buses. Nevertheless they have continued involvement with automotive products and services for Daimler AG (OTCPK:DDAIF) and AFCC on a contract basis.

In 2009, they dissolved EBARA Ballard Corporation which was working on the residential cogeneration market in Japan.

Target Markets

Ballard identifies these applications as target markets:

  • Motive Power: Forklift trucks and Buses
  • Stationary Power: Backup power, distributed generation

PEM Fuel Cell Technology

Here is what the U.S. Department of Energy has to say about PEM Fuel Cells:

"Polymer electrolyte membrane (PEM) fuel cells - also called proton exchange membrane fuel cells - deliver high-power density and offer the advantages of low weight and volume, compared with other fuel cells. PEM fuel cells use a solid polymer as an electrolyte and porous carbon electrodes containing a platinum catalyst. They need only hydrogen, oxygen from the air, and water to operate and do not require corrosive fluids like some fuel cells. They are typically fueled with pure hydrogen supplied from storage tanks or on-board reformers.

Polymer electrolyte membrane fuel cells operate at relatively low temperatures, around 80°C (176°F). Low-temperature operation allows them to start quickly (less warm-up time) and results in less wear on system components, resulting in better durability. However, it requires that a noble-metal catalyst (typically platinum) be used to separate the hydrogen's electrons and protons, adding to system cost. The platinum catalyst is also extremely sensitive to CO poisoning, making it necessary to employ an additional reactor to reduce CO in the fuel gas if the hydrogen is derived from an alcohol or hydrocarbon fuel. This also adds cost. Developers are currently exploring platinum/ruthenium catalysts that are more resistant to CO.

PEM fuel cells are used primarily for transportation applications and some stationary applications. Due to their fast start-up time, low sensitivity to orientation, and favorable power-to-weight ratio, PEM fuel cells are particularly suitable for use in passenger vehicles, such as cars and buses.

A significant barrier to using these fuel cells in vehicles is hydrogen storage. Most fuel cell vehicles (FCVs) powered by pure hydrogen must store the hydrogen on-board as a compressed gas in pressurized tanks. Due to the low-energy density of hydrogen, it is difficult to store enough hydrogen on-board to allow vehicles to travel the same distance as gasoline-powered vehicles before refueling, typically 300–400 miles. Higher-density liquid fuels, such as methanol, ethanol, natural gas, liquefied petroleum gas and gasoline, can be used for fuel, but the vehicles must have an on-board fuel processor to reform the methanol to hydrogen. This requirement increases costs and maintenance. The reformer also releases carbon dioxide (a greenhouse gas), though less than that emitted from current gasoline-powered engines."

Competition

In forklift trucks, the alternatives are internal combustion power or batteries. Batteries have the disadvantage of requiring downtime for recharging, and also occasionally need replacement. Ballard claims for high throughput operations a lower life cycle cost than lead acid batteries. For advanced batteries Ballard claims they still require significant time for recharging and, in many cases, cannot meet desired run times without requiring spare batteries and substantial space for battery charging and storage.

Companies also developing fuel cell systems for material handling applications include Toyota (NYSE:TM), Hydrogenics (NASDAQ:HYGS) and Huvera.

For buses, diesel owns the majority of the market, but lower emission alternatives that compete are compressed natural gas powered buses as well as electric trolley buses. Fuel cells compete as a zero emission alternative, without the expense of overhead power infrastructure.

Hybrid diesel-electric buses are in commercial use, and hybrid gasoline-electric and CNG-electric variations are available. Hydrogen powered ICE is also a future possibility

Companies developing fuel cell systems for transit bus applications include United Technologies (NYSE:UTX), Hydrogenics and Nedstack. Ballard points out that since 1991 they have accumulated far more operating hours in transit operations than any other fuel cell manufacturer.

Back-Up Power - The back-up power market is currently dominated by ICEs and batteries. Ballard believes that PEM fuel cell products are superior to batteries because of their ability to provide extended run time without frequent or lengthy recharging as well as their ability to offer lower life cycle costs, given that batteries require periodic replacement. Companies developing PEM fuel cell systems for back-up power applications include Hydrogenics, IdaTech, Distributed Energy Systems and ReliOn.

Distributed Generation - The distributed generation market is generally serviced today by diesel gen sets or natural gas gen sets. Companies developing PEM fuel cell systems for distributed generation market applications include Nedstack and Hydrogenics. Companies developing other fuel cell systems for this market are United Technologies Corporation (phosphoric acid fuel cells), Fuel Cell Energy (NASDAQ:FCEL) (molten carbonate fuel cells) and Bloom Energy (solid oxide fuel cells).

Hydrogen fueled ICEs or advanced battery technologies are emerging as competitive technologies. Fuel cell systems offer significant efficiency and emissions improvements over hydrogen fueled IC engines.

Revenues And Growth

In the most recent six months, Ballard’s revenue grew a respectable 25%, up from $27.4 mln in 2010 to $34.4 mln in 2011. Top line revenue also grew nicely in 2010 by 39% to $65 mln for the full year, up from $46.6 mln in 2009.

Projecting future growth of the fuel cell business would require an industrial strength crystal ball. Alas we don’t have one. Nevertheless a stock valuation requires some guess at future growth and we are using a 12 year growth assumption of 25% per year, and readily admit that this is a bit of a shot in the dark. Feel free to suggest your reasons for higher or lower.

Profitability

Losses are being reduced but are still large. In fiscal 2010, Ballard had an operating loss of $42.7 mln on $65 mln in revenue. In the last six months the loss was $20.5 mln on $34.4 mln in revenue. If one is searching for a silver lining, the operating loss as a percentage of sales has been improving since 2009.

Gross margin has improved from 11.3% of revenue in the first six months of 2010 to 16.8% of revenue in 2011. Operating expenses improved from 94% of sales in the first six months of 2010 to 76.5% of revenue in 2011. Still a long way to go.

At this point we are not willing to make a profitability guess for Ballard. We need to get a better idea of what is possible when reasonable production scale has been reached (by Ballard or some other fuel cell maker).

Cash

At the end of June 30, the company had $40.3 mln in cash and equivalents. Cash used by operating activities in the six months ending June 30 was $27.7 mln. At current burn rates it looks like Ballard will have to raise some more cash. An external financing could be required with a year, and such financing could be dilutive.

Risks: Highly Speculative

Negatives: More than 10 years into production, Ballard is still burning a lot of cash. A financing is likely to be needed and could be dilutive. It is difficult to accurately predict future revenues and profits in fuel cells. The long term success of fuel cells in the market is still hard to predict. We don’t see any competitors making much money either. Ballard could be more transparent about sources of revenue and profit.

Positives: Ballard has a strategy that makes sense to us, and is focusing on verticals that have a reasonable chance of succeeding using PEMS technology. Ballard has built several years of experience and credibility relative to other players in the fuel cell business. Governments continue to show willingness to finance green energy experiments.

Ballard As An Investment

The fuel cell industry continues to be a cash sink hole and Ballard has not demonstrated an ability to adequately get costs down. Given the cash burn rate and the high expense to sales ratios, and our lack of confidence in any projection numbers, this investment is too speculative for our money. A wholesale investor might be given some significant incentives to buy, however as a retail investor we are not likely to see these incentives. For retail investors, we recommend you sit out a few quarters. Watch and wait.

Source: Ballard Power: Great Karma But Poor Investment