Ballard Power Systems: A Solid Buy Going Into Earnings

| About: Ballard Power (BLDP)


Ballard Power Systems' products are gaining traction across the globe.

Ballard is partnering with a number of companies, with Plug Power being the most prominent, as it will help it profit from customers like Wal-Mart and Volkswagen.

Ballard is expected to see solid growth in earnings, which means that it should be able to sustain its impressive run.

Fuel cell player Ballard Power Systems (NASDAQ:BLDP) had disappointed investors when it released its first-quarter results. However, the company has gained some solid momentum in the last one month, with shares up 7%. Overall, Ballard shares are up a whopping 184% so far in 2014, and the short-term hiccup was on account of a slight slowdown in its business.

Ballard is expected to report second-quarter earnings on July 30, so it is a good time to see if the stock will be able to sustain its solid run once the results are out.

Gaining traction across the globe

Ballard Power Systems looks set to soar, as it is on track to benefit from opportunity in the fuel cell market, which is estimated to grow at a CAGR of 22% till 2020. In addition, Ballard is a supplier to Plug Power (NASDAQ:PLUG), which is striking deals with the likes of Volkswagen (OTCQX:VLKAY) and Wal-Mart (NYSE:WMT) to supply its fuel cell-based products.

Ballard is well-positioned to grow its business going forward. The company is already seeing considerable growth in material handling. During the first quarter, the company bagged a four-year contract from Volkswagen, which boosted its engineering services revenue considerably. It is also seeing solid growth in its IP licensing business, driven by the multi-year agreement that the company signed for bus module assembly in China.

In addition, Ballard expects its Telecom Backup segment to get better once again, after dropping 55% on a year-over-year basis in the previous quarter. Telecom Backup Power demand is mainly driven by two different catalysts. The first is targeted at markets with unreliable power grids, and the second is targeted at markets requiring network hardening for crisis situations. Ballard is currently working on two customer engagements for both applications.

The first is in East Timor, which is a market with an unreliable grid. East Timor is a 5,400-square mile independent state on the Indonesian Island of Timor, where the company has supported its channel partner, Cascadiant, in providing methanol-fueled ElectraGen systems. These systems are being used as the only source of backup power at base station sites in the telecom network.

The second proposition includes network hardening, which can be seen in Germany. Ballard is supporting FutureE, which has bagged a contract to deploy more than 50 backup power systems using Ballard's fuel cell stacks at critical sites in Germany's emergency services network, also known as BOS. Going forward, FutureE cites greater opportunities for deployments in the BOS network.

Ballard remains optimistic about its growth going forward. According to management, "Our biggest sales pipeline opportunities are in Southeast Asia and India, where unreliable power grids predominate, and in the U.S., where network hardening activity is underway." The company currently has a strong market in Japan, Indonesia, the Philippines, and South Africa. In addition, it is expanding into new locations, such as Pakistan, Australia, Myanmar, and China.

The Plug Power advantage

The company is also focusing on its material handling business. Although this segment constitutes only 10% of its total revenue, it is important from a strategic point of view. Ballard is partnering with Plug Power in material handling, and is on track to extend its supply agreement. Ballard's objective behind this partnership is to profit from Plug Power's business by delivering the highest-quality fuel cell stacks at a competitive cost.

The partnership with Plug Power can be a big driver for Ballard going forward. As I had explained in my previous article:

"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 . 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."

Since Ballard supplies fuel cell stacks to Plug Power for use in material handling, it should benefit from the latter's moves to expand its business.

Impressive fundamentals and estimates

Ballard, being an early-stage company, is still not profitable. As a result, it does not have earnings multiples. However, its bottom line is expected to grow at a terrific pace. This year, analysts estimate that Ballard's bottom line will jump 61%, while next year, the growth expectation is 100%. In addition, Ballard's balance sheet is in a strong position, with cash of $41 million and debt of $12 million. Its current ratio of 2.95 indicates a strong liquidity position, which should allow Ballard to easily cover its short-term obligations.

Thus, Ballard seems well-positioned to make the most of growth in the fuel cell industry, and it won't be surprising if it soars further going forward. As such, in case Ballard drops after a weak quarter, investors should capitalize on the drop to buy more shares.

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.

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