Don’t bother with Ballard Power, this portfolio manager says

The tech may be promising but fuel cell company Ballard Power (Ballard Power Stock Quote, Charts, News, Analysts, Financials TSX:BLDP) isn’t a good place to bet on the green economy. That’s at least for the time being, according to Jason Mann of EHP Funds, who thinks Ballard’s fundamentals just don’t add up.

“Ballard is fascinating to me,” says Mann, chief investment officer at EHP, who spoke about Ballard Power in a segment on BNN Bloomberg on Tuesday. 

“It’s been around since I can remember and it seems like every cycle it becomes this growth darling — it rallies furiously, they issue a ton of stock and then ultimately the hype doesn’t pan out as much as everyone would like,” he said.

Ballard Power makes hydrogen fuel cells systems for heavy transport vehicles, a field that’s certainly been in the spotlight in recent years as governments worldwide search for ways to green their economies and adjust to meet their climate commitments. 

Fuel cells, which use most commonly hydrogen as a source for electricity via chemical reaction, have been a key investment in that green future, with heavyweights like the European Union and the United States funding clean hydrogen projects. Canada’s government has also laid out a hydrogen energy strategy, one which is banking on hydrogen to represent up to 30 per cent of the country’s energy needs by 2050, with fuel cell tech powering fleets of zero-emission transportation vehicles. 

Ballard, too, has made headlines recently, announcing just this week a partnership with German clean battery and hydrogen-powered e-mobility heavy vehicle company Quantron AG. The partnership will see Ballard deploy its heavy duty fuel cell modules for Quantron’s electric trucks with a plan for vehicles to be ready and on the road in about a year’s time.

“Ballard is looking forward to collaborating with QUANTRON to accelerate the adoption of fuel cell technology for truck applications,” said Robert Campbell, Chief Customer Officer for Ballard, speaking in a press release on Tuesday. 

“The combination of both companies’ expertise will deliver high performance hydrogen trucks to respond to the growing demand for zero emission vehicles from fleet operators and unlock new business opportunities for medium and heavy-duty fuel cell trucks in Germany.  Ballard is bringing its eighth generation of heavy-duty fuel cell power module experience built upon over 85 million km’s of road service from over 3,500 buses and trucks powered by our leading PEM technology today,” Campbell said.

The Quantron news seemingly hasn’t yet moved the needle for investors, though, as BLDP remains in the tight range it’s been living in for the past few months, somewhere around $20 per share. 

That stability is actually a rarity for a stock like Ballard, which has seen incredible ups and downs over the years, including over the fourth quarter 2020 and first quarter 2021 where BLDP went from $20 to as high as $52 before falling right back to where it started by around May.

That volatility is definitely one of the reasons investors might want to steer clear of Ballard, but there are others, says Mann.

“We saw this really ramp higher in that December, January and February timeframe. Ballard got caught up with a lot of the other growth stocks, renewables and EV stocks,” Mann said.

“We put them all into the highly speculative, non-cash flowing businesses, and as a group, it’s very tough to make money on that long term because most of those hopes and dreams don’t pan out [although] there are always a few that do,” he said.

“Ballard was a decent short position for us. We’ve covered it in the spring as the price has come off, but it still doesn’t scream cheap for us. It’s in the bottom five per cent on valuation, it’s one of the worst in terms of volatility, a negative return on equity, no EBITDA to speak of in today’s dollars. And, again, forward estimates are always much better than current, but we do put a lot of weight on what they’ve delivered recently. And that hasn’t been a whole lot,” Mann said.

On the financials, Ballard recorded its third-consecutive quarter of lower revenue on a year-over-year basis when it reported in early August $25.0 million for its second quarter 2021 revenue, down three per cent from a year earlier. The company’s net loss was $21.9 million compared to a loss of $10.7 million a year ago. The company reported $26.1 million in new orders over the second quarter and registered its order backlog at the end of the Q2 at $113.3 million, while Ballard’s cash reserves stood at a huge $1.24 billion.

“Their balance sheet is not a problem,” said Mann. “They’ve cashed up, so there are no risks from that perspective. There may yet be another cycle for them, but it wouldn’t be one that we would own. And frankly, it has fallen too much to short, so it’s kind of neutral for us.”