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Plug Power Buys Fuel Cell Stack Maker: What Does This Mean for Ballard?

After the market close yesterday, Plug Power (Nasdaq: PLUG) announced that it has acquired ReliOn Inc., an acquisition that gives Plug Power its own fuel cell stack technology. Plug paid $4 million for ReliOn in an all-stock deal.

Plug Power has relied heavily on Ballard Power (TSX: BLD)(Nasdaq: BLPD) to supply it with the fuel cell stacks for its GenDrive Power units. In fact, 2014 will see the expiry of an exclusivity agreement that made Ballard the sole supplier of fuel cell stacks to Plug Power. As this comes to pass, Plug is aiming to diversify its supplier base as it continues its rapid growth trajectory. Management teams at both Plug Power and Ballard have disclosed that this would be happening this year.

On the fourth-quarter conference call, Ballard’s management indicated that based on Plug Power’s reported new orders, Ballard expects a 50% increase in shipments in 2014. And this is not including the recently announced Walmart deal, which is very significant.

So what does all this mean for Ballard?

While this has negatively affected Ballard’s stock price in the short term — the stock is down over 7% so far today — the company’s revenues are nicely diversified across industries as well as customers. And while Plug Power accounts for just over 10% of Ballard’s revenue, Ballard will not lose it as a client altogether. The fast growing demand that is being seen in fuel cell stacks necessitates that Plug Power look to ensure that it can meet this demand, and diversifying its suppliers is a very prudent thing for it to do.

Earlier this week, Ballard CEO Mr. John Sheridan stressed the fact that the company is very different from the company it was in the late 1990s. In other words, Ballard has lowered its risk profile by diversifying its revenue base. Ballard’s sources of revenue now span from telecom backup power, to power generation, to buses, to engineering services. Fuel cells for the automotive market is no longer the only use for its technology.

We have heard the company talk about its expectations that it is on the verge of becoming a profitable company for the first time ever in its history. Let’s review the company’s fourth-quarter results and what investors can expect going forward.

Financially, Ballard has achieved a significant increase in gross margins in the fourth quarter and the year as a whole. This was driven by a shift toward higher margin products, as well as a 7% reduction in cash costs. Adjusted EBITDA in the fourth quarter was $200,000, a huge improvement from last year’s fourth-quarter loss of $3.2 million. For the year, EBITDA improved by 62% to a loss of $8.2 million from a loss of $22.1 million in 2012.

Ballard’s balance sheet is pretty much debt-free, and it has $30.3 million of cash. The cash burn in 2013 was $17.4 million versus a burn of $28 million in 2012. 2014 should be greatly improved as well on this front, and with $30.3 million in cash on the balance sheet, Ballard is well funded at this time.

Foolish bottom line

This acquisition by Plug Power was expected and is part of dealing with and managing the high levels of growth for fuel-cell stacks in a way that ensures success and minimizes risk. It is not a strike against Ballard; the relationship is ongoing and will remain as they both benefit from this surging industry.

Of course, when a stock has risen as much as Ballard has recently, investors are wise to be cautious. The stock has no earnings and trades at over eight times sales. There is an elevated level of risk due to its valuation, but there is also a lot of potential growth and some very promising signs.

Given the strategic changes that have occurred over the years (i.e., greater diversification of revenues), the solid balance sheet, and the strong growth profile exhibited as of late, along with the expectation of finally becoming profitable, I view the risk/reward relationship favourably.

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Fool contributor Karen Thomas owns shares of Ballard Power Systems.

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