Fuel Cells, No Longer Too Early

Includes: AIQUY, BLDP, TM
by: Henry Miles


Occasionally, I find myself accepting that an “out there” investment idea is worth a leap-of-faith – hydrogen fuel cells.

Such was the case two years ago when I wrote about the promise of CRISPR gene editing.

This article explores three fuel cell ideas, one on the "demand side," one on the "supply side", and one, well, have a look.

If I had to guess, Japan’s move into fuel cells was deeply rooted in the county’s vulnerability to imported oil and the realization that building nuclear reactors near tectonic fault lines is a bad idea. It didn’t take long for snide nullifiers such as Elon Musk to refer to hydrogen fuel cells as “fool cells.” Such dismissiveness is unwelcome, but never mind all that, the idea of hydrogen fuel cells seems to be finally gaining support. In addition to Japan, other progressive jurisdictions including California, Connecticut, Denmark, France, Germany and Korea are moving ahead. The “S-Curve” may be beginning to arc up for fuel cells.

Electric motors are simpler and much less polluting than internal combustion engines. On the other hand, battery-stored electric power limits driving distance and involves long(er) waits to recharge at the “pump.” With human patience and station throughput at a premium, these tradeoffs are suboptimal.

In laying out the benefits below, the US Department of Energy summarizes that hydrogen fuel cell technologies, “are bursting on to the scene and have the potential to solve some of the biggest problems in energy ranging from commercial buildings to transportation”:

  1. Hydrogen, the most abundant element on earth, has very high energy content by weight, and can be “refined” in various ways.
  2. Fuel cells are grid-independent and, in addition to vehicles, can be used to power data centers, telecommunications towers, hospitals, emergency response systems, and even military applications for national defense.
  3. Fuel cells are a clean way to produce power and can reduce emissions substantially even if hydrogen is produced using natural gas.
  4. Hydrogen fuel cell cars have the range of gasoline vehicles, can be refueled quickly, and are twice as efficient as internal combustion engines.
  5. Refueling stations are beginning to crop up as various countries and manufacturers take the lead in generating demand for the technology.

Now, I’ve heard the naysayers bark about the illogic of converting the energy trapped in hydrogen. However, this is no different whatever the source of power. Oil needs to be sucked from the ground and refined into gas to run engines. Solar and wind power need to be converted through photovoltaics or turbines. So, provided the economics are there – and, absent serious externalities – I am unpersuaded by conversion distractors of any stripe. Oh, and by the way, neither am I impressed by the dirty energy crowd which howls about clean energy subsidies. Never forget that two of the largest subsidies in US history came in the form of depletion allowances and tacit permission to pollute our environment with fossil fuels.

A Look-back on CRISPR Gene Editing

But, before we look forward, let's take a look back. Not quite two years ago, I wrote an article for SA about another radical idea, CRISPR gene editing. The piece focused on Intellia Therapeutics (NASDAQ:NTLA) but the comment string quickly expanded the conversation to Editas Medicine (NASDAQ:EDIT) and then to CRISPR Therapeutics (Crispr) (NASDAQ:CRSP). The first two companies had already gone public; Crispr was not far behind them.

My initial foray into the field was through NTLA but commenters persuaded me that I should establish beachhead positions in all three companies. The premise was compelling: a) gene editing could address heartbreaking defects – blindness, cystic fibrosis, sickle cell, hemophilia, etc., and b) in exchange for a piece of the action, big pharma was helping finance the development of CRISPR solutions via these early-stage bio-techs.

“We don’t know what we don’t know.” – Donald Rumsfeld

And I did invest, and these companies have done very well. Since August 29, 2016, the date of my article, NTLA and EDIT have risen 37% and 105%, respectively. CRSP is up 317% since its first trading day on October 19, 2016. In all but one variation, these three stocks handsomely outperformed two indexes, the S&P 500 and NASDAQ; alpha. Still, I recently backed away from the CRISPRs out of concern about their loftiness and market conditions overall.

08/29/2016 06/29/2018 Appreciation B/W v. S&P v. NASDAQ
S&P 500 2,180.38 2,718.37 24.67% - -
NASDAQ 5,232.33 7,510.30 43.54% - -
NTLA $19.91 $27.36 37.42% +12.75% -6.12%
EDIT $17.42 $35.83 105.68% +81.01% +62.14%
10/19/2016 06/29/2018 Appreciation B/W v. S&P v. NASDAQ
S&P 500 2,144.29 2,718.37 26.77% - -
NASDAQ 5,246.41 7,510.30 43.15% - -
CRSP $14.09 $58.76 317.03% +290.26% +273.88%

One Fuel Cell “Demand-Side” Idea

Therefore, following on my experience with CRISPR, and taking a lesson from Indiana Jones, I put a foot out over the abyss and made three investments in the fuel cell sector. Actually, two of the ideas aren’t really leaps-of-faith because in both cases they are world-class companies that have business interests well beyond fuel cells.

The first idea is on the “demand-side” of fuel cell technology with Toyota (NYSE:TM) and its initial entrant, the Mirai. To be successful with it, the company understands that it must manufacture key components including stacks and tanks. Toyota also knows that it must promote the development of hydrogen refueling stations as it has been doing throughout the northern hemisphere, including in collaboration with Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B).

I continue to be impressed with Toyota’s long history as a thoughtful innovator, sustainable product line, formidable market-share, and financial strength from the top to the bottom of its P&L, right through its cash flow, and into its balance sheet. Thirteen out of 21 analysts give TM a buy or outperform with a median price target, of all analysts, of $155.15 representing a 20% premium over Friday’s closing price. And, the company pays a nice and extremely well-protected dividend of 4.6%.

Lest anyone think that Toyota is going it alone when it comes to fuel cells, it is not. Honda (NYSE:HMC) is investing in the technology through its Clarity car as are Hyundai (OTCPK:HYMLF) and Audi (VLKAY) in partnership together. I like these stocks, but I like TM more.

One “Supply-Side” Investment Idea

My investment in Toyota notwithstanding, most of my followers know that I’m a “supply-side” bigot where a fewer number of companies stand the chance to serve many/all automobile or other end-users. Here, I introduce you to a company unfamiliar to many investors west of the Atlantic. Operating in 80 countries, with $23 billion in revenues, 3.5 million customers, and 65,000 employees, 115-year-old, Fortune Global-500, Air Liquide (OTCPK:AIQUY) happens to be the world’s largest supplier of compressed and liquid gases. Its products find use in industry, healthcare, electronics, construction, and new energies.

It’s hard to overestimate the reach of Air Liquide. If you need acetylene to cut steel (as did when I worked on the farm), oxygen to breathe, specialized gases to manufacture semiconductors, or other compressed/liquid vapors for a magnitude of applications, chances are Air Liquide supplies them. Check out its “Gas Encyclopedia.”

Among its offering is hydrogen needed for fuel cells. The company is ramping up for higher demand of the element, including in the delivery of it to the pump in Japan, Europe, the US, and elsewhere. In other words, Air Liquide may well be a/the key player in processing and delivery of hydrogen needed for fuel cells.

Readers can and should peel through Air Liquide’s numbers. Suffice it to say here that over the last three years the company has steadily grown revenues, operating income, pretax and net income, EBITDA, and earnings per share. Its operating and free cash flow also continue to grow. While thin on working capital, the company’s financial leverage, at 1.5:1, is acceptable if not conservative.

With a dividend of just shy of 2.5%, of the 21 investment analysts that cover Air Liquide, 3 have it as a sell, 1 as an underperform, 5 as a hold, 2 as an outperform, and 10 as a buy. Of note is that the number of bearish analysts has been coming down while the number of bullish ones is rising. Collectively, their median price target for AIQUY is $27.17 just $2.14 above where the ADRs closed on Friday. In terms of short-term upside, it’s not the best of stories. However, I view Air Liquide as a strategic investment along the lines of the very first article I wrote for SA.

And, One Genuine “Leap-of-Faith”

As for a genuine leap-of-faith in the fuel cell space, my personal choice is Ballard Power Systems (NASDAQ:BLDP); its website is worth a crawl thorough. Many aspects of Ballard are solid. Its balance sheet is strong. While top-line revenue – including two years of strong growth – has never made it to the bottom line, it is due to its strong commitment to R&D with IP acquired from United Technologies (NYSE:UTX) and continued nurturing by a multidisciplinary, if not particularly diverse, board and leadership team.

Both directly and via partnerships, the company’s geographic reach extends from Canada and the US to Europe and the Far East. Ballard serves both commercial and government clients with solutions that cover the automotive, busing, trucking, locomotive/rail, drone, infrastructure, and defense industries. A scroll down the “Newsroom” tab on Ballard’s website, and a review of its SEC filings, indicate that a lot is going on.

For an external perspective, here is the announcement of ABB’s (NYSE:ABB) MOU with Ballard for the development of marine applications, yet another market. I’m drawn to Ballard’s focus on organizations rather than retail clients. I’ve come to know that the private and public sectors are usually less fickle and driven to understand economics without being afraid to invest in innovation. You can see evidence of this in Ballard’s project-sales docket.

Ballard’s stock has been plunging and appears to be flat-lining around its 52-week low; it has been under assault by short sellers including on SA. Nevertheless, a quick toggle to NASDAQ’s website shows that the company hasn’t been abandoned by legitimate institutional investors including Morgan Stanley (NYSE:MS), Invesco, UBS Holdings, and Swiss National Bank.

Rolling it all together, I established a quarter position in BLDP because I sense positive momentum in a company that has taken on many learning curves – technological, product, geographic, sector, financial, regulatory, and perceptual. Ballard’s team deserves a lot of credit. Added to my confidence in the potential for fuel cells, I see a company that is on the threshold of commercial success. However, as it was two years ago with gene editing and the three CRISPRs, no one should invest in newer markets, in newer companies, unless they are prepared to lose it all.

A Final Note for Non-Believers

Returning to our Rumsfeld quote above, we do know that world-class companies and entrepreneurial ones know more than we lowly investors do. We also know that the continuing investment in fuel cells is intended to help win the war against emissions and the war for corporate growth. I’m long TM, AIQUY and BLDP because I believe that the technology now represents a reasonable bet in a world demanding clean energy supplied by companies focused on shareholder value.

Disclosure: I am/we are long TM, AIQUY, BLDP, RDS.B, ABB.

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.

Additional disclosure: Always do your own due diligence in consultation with a licensed and competent financial adviser who understands your unique needs and puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with ADR sponsorship, buying and selling the pinks, foreign withholding taxes on dividends, and fees. (All my proceeds from contributing to SA go to charity.)

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.