Apparently, the pessimism that flooded fuel cell stocks in 2018 has largely -- for the moment at least -- dried up. While the S&P 500 has climbed 15% so far in 2019, shares of Ballard Power Systems (NASDAQ: BLDP) have risen more than 43% year to date as of this writing, and Plug Power (NASDAQ: PLUG) has more than doubled -- noteworthy rebounds considering Ballard and Plug plunged 23% and 48%, respectively, in 2018.
For those investors who still find Ballard on their watchlists and not in their portfolios, it may seem like they've missed the boat. However, plenty of bulls would argue that the company -- and its stock -- still has plenty of growth ahead of it. The bears, conversely, would likely contend that the stock is too richly priced, and patience is the best approach.
So, let's plug in to the various perspectives and see if this familiar name in the fuel-cell space deserves a position among your holdings.
The bull case
Although it provides fuel-cell products and services to several markets, including material handling and portable power, bulls recognize the heavy-duty motive market -- which represented 53% and 41% of the company's revenue in 2017 and 2018, respectively -- as the one affording Ballard the greatest path to prosperity. And while the company is partnering with Audi on developing fuel-cell modules for electric buses in Europe, the company seems most intent on pursing its opportunity in China.
In addition to working with Zhongshan Broad-Ocean Motor Co. to develop fuel-cell engines for buses in several Chinese cities, Ballard is partnering with Weichai Power to form a joint venture. According to the terms of the agreement with Weichai, Ballard will receive $90 million under a technology transfer program, granting the joint venture the exclusive rights to manufacture Ballard's fuel cell stacks and power modules for several applications in China, including buses and commercial trucks. For some sense of Ballard's opportunity in China, consider the recent conference call on which management stated its estimate that there are more than 200 fuel-cell electric buses operating in China today; meanwhile, Weichai has committed to delivering 2,000 fuel-cell electric buses in Shandong province alone.
The bear case
Of course, not all investors are interested in running with the fuel-cell bulls. While Ballard has made some progress in its joint venture with Weichai, it has also encountered some challenges in China, leading some people to be more circumspect about the company's dealings in the Asian market. In the third quarter of 2018, for example, the company reported revenue of $21.3 million, falling short of analysts' expectations of $31.3. Addressing the poor performance in its press release, management stated that "Near-term headwinds in China resulted in a material reduction in MEA [membrane electrode assemblies] sales to the Guangdong Synergy-Ballard joint venture in Q3 and in our outlook." And the challenges have continued. In the Q4 report, management stated that the joint venture didn't make "contractual pre-payments required to enable any significant fourth quarter of 2018 and first quarter of 2019 MEA shipments."
Ballard's woes in China are hardly a surprise for some bears, namely Spruce Point Capital, which issued a critical report on the company in January of 2018. At the core of its report is the very thing the bulls laud: the company's dealings in China. Articulating its doubt about the fuel-cell market in general, Spruce Point states in the report, "At this point, it still remains highly uncertain if China will develop the fuel cell vehicle market beyond an experimental phase."
But China isn't the only reason bears are skeptical. While the company has managed to keep its costs down enough to generate a gross profit, net income continues to remain elusive, and there seems to be no prospect of profitability appearing on the income statement at anytime in the near future, suggesting that Ballard will have to continuously rely on raising capital through the issuance of equity, ensuring further dilution in shareholder value.
Is the price right?
While its partnerships with Weichai Power and Broad-Ocean inspire hope in some investors, pessimists will point to the fact that success in China is hardly a certainty.
Currently, Ballard's stock is trading at over 6.5 times trailing sales, notably higher than the five-year average of more than 4.8 times sales, according to Morningstar. With such a rich valuation, now hardly seems to be the time to pick up shares of a stock that carries such a significant amount of risk; therefore, Ballard should only appeal to those investors with the highest risk tolerance. Instead, investors eager to add fuel-cell exposure to their portfolios may be more interested in Plug Power, which currently trades at a discount to its five-year sales multiple.
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