The six-month return of Ballard Power Systems Inc. (TSX:BLD)(NASDAQ:BLDP) shares is a dismal -56%. Does this represent a good time to enter the stock or should we look away and move on?
Last year, things were really looking up for the company. Revenue growth was strong and the company had lowered its risk profile by diversifying its business into four segments: telecom backup power, material handling, engineering services, and development stage markets. At one point last year, the company expected 30% revenue growth in 2014, with a break-even adjusted EBITDA.
Unfortunately, a big wrench was thrown in the company’s plans when they had to terminate two licensing agreements with Azure Hydrogen due to breaches in the agreement. Both of these agreements pertained to the Chinese market, one was related to the assembly of Ballard’s bus power modules and the other related to the assembly of Ballard’s Backup Power systems. In its press release Ballard stated that the company is considering legal action against Azure.
We now have a company that has experienced a big setback that will have a big impact on 2014 results, which will be released in late February. The company had expected to collect over $4 million in cash from Azure in the fourth quarter of 2014 and to realize $3 million in additional revenue related to these contracts and now the only thing that will be booked is an impairment of $4.5 million.
A ray of sunshine
About a month after the Azure announcement, Ballard announced progress on the fuel cell bus commitment in Europe. Ballard’s customer, Van Hool N.V., signed an agreement for the deployment of 21 fuel cell buses in Europe. Ballard expects that it will receive orders for these buses imminently, which will lead to delivery of the fuel cell modules in 2015 and 2016. There are already 27 Van Hool, Ballard-powered fuel cell buses on the road in Europe. Ballard has 80% of this market. It is expected that as many as 500 to 1,000 fuel cell buses can be put in service in Europe during 2017 to 2020.
A review of third-quarter results
Financially, Ballard continued to post strong overall revenue growth in the third quarter of 2014. Revenue growth was 21.2%, with the material handling segment (17.4% of revenue) reporting the strongest growth, at 70% (+127% for the first nine months of 2014), and the development stage markets segment (12% of total revenue) reporting the weakest result, with a 43% decline in revenue (-40% for the first nine months of 2014). The telecom backup power segment posted a 60% increase in revenue (-12% for the first nine months of 2014) and the Engineering Services segment posted a 26% increase in revenue (+62% for the first nine months of 2014).
Ballard kept its gross margins steady versus the previous quarter and cash operating costs declined 15% year over year (mostly due to lower R&D). Adjusted EBITDA was $451,000, a huge improvement from the prior year’s third-quarter loss of $4.6 million.
The company had $32.7 million of cash on its balance sheet and no debt, and a backlog of $43 million.
While Ballard still belongs in the “speculative” portion of a portfolio, it is interesting to me in that it has promising technology, it has attempted to diversify its revenue base, its balance sheet is strong, and there is progress being made in the fuel cell bus market in Europe. I remain interested to hear the update that the company will give in late February when it releases its fourth-quarter results and I eagerly await management’s outlook for 2015.
Trading at $2.00 as of Friday’s close, the stock trades at three times sales, compared to last year when it was trading at over nine times sales for a while. In keeping with the tradition of the stock, and coming as no surprise to anyone, it will probably be very volatile in response to the company update.
