Blind faith the only reason to buy Ballard
By MATHEW INGRAM
Friday, February 21, 2003 - Page B12
Fuel cell pioneer Ballard Power Systems Inc. turned in better-than-expected results for its fourth quarter, beating most industry estimates on revenue and posting a smaller loss than most analysts had predicted. Does that mean the stock looks attractive as a result? It depends on how you feel about fuel cells because apart from relying on sheer faith, it's difficult to justify investing a dime in Ballard.
The Burnaby, B.C.-based company had sales in the fourth quarter of $29.3-million and a loss of $39.6-million or 23 cents a share, excluding certain restructuring costs. According to brokerage firm H.C. Wainwright & Co., this beat the firm's revenue estimate of $21.7-million and its forecast of a 31-cent-a-share loss, attributed to lower-than-expected research costs, reduced sales and marketing expenses, and currency gains.
That was the good news. The bad news was that Ballard clarified its earlier forecasts of when it might break even, and it now expects to be profitable on an EBITDA basis (earnings before interest, taxes, depreciation and amortization) in 2007. In other words, Ballard is not going to be profitable by even the loosest definition for four years. Morgan Stanley forecasts actual bottom-line earnings by 2010.
As H.C. Wainwright put it, fuel cell cars remain a next-decade event at best, requiring a number of technological breakthroughs before becoming a reality that are mostly beyond Ballard's control. In addition, the arrival of hybrid gas/diesel/electric cars will only raise the proverbial bar for fuel cell vehicles seeking entry into the commercial scene. Morgan Stanley said Ballard was still on a 15- to 20-year path to successful commercialization of fuel-cell-powered cars.
At the moment, Ballard is able to finance its cash-burning operations from its licensing revenue as a result of partnerships with large auto makers such as DaimlerChrysler AG. It has $400-million in cash on hand, and that plus annual revenue of about $120-million this year should be more than enough to make up for its annual cash needs of $80-million for several years. But how do you value that kind of company?
As an example, Morgan Stanley acknowledges that it has no real idea about what a future fuel cell business might look like in terms of costs, revenue or profitability. It is not clear to Morgan Stanley (or perhaps anybody) yet what that cost curve looks like, the firm said in a recent report. So the brokerage has come up with a probability-weighted residual income model to arrive at its price target of $20.
Under that model, Morgan Stanley assumes that fuel cells eventually will account for 50 per cent of global automotive sales by 2020, and that Ballard will have 25 per cent of that market. According to the brokerage firm's model, there is about a 13-per-cent chance of that happening (and a 17-per-cent chance of mass market acceptance of fuel cell cars). Morgan Stanley says it then discounted the income Ballard might hope to generate at the rate of 12 per cent a year to arrive at a current forecast.
If you feel comfortable buying a stock based on the idea that 10 or 15 years from now it has a fairly slim chance of making some actual money, then Ballard Power is the one for you.
Mathew Ingram writes analysis and commentary for globeandmail.com.
This column first appeared on GlobeinvestorGOLD.com. For more exclusive analysis, please see the Web site. |
