Ballard Power: Investors Need To Hope For A Sale Or Change In Strategic Focus - Hold

seekingalpha11-19

Leading Canadian fuel cell systems developer Ballard Power Systems reported abysmal Q3/2024 results, with revenues and profitability missing consensus expectations by a mile.Consolidated gross margin ...

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Scharfsinn86 I have covered Ballard Power Systems Inc. (NASDAQ:BLDP) (TSX:BLDP:CA) previously, so investors should view this as an update to my earlier articles on the company. Two months ago, leading Canadian fuel cell systems developer Ballard Power Systems Inc. (\"Ballard\" or \"Ballard Power\") disclosed a major corporate restructuring in order to preserve capital \"amid a slowdown in hydrogen infrastructure development and delayed fuel cell adoption\". At that time, I expected poor industry conditions to keep investors sidelined, despite the company trading at a discount to its sizeable cash position.   Yahoo FinanceSince the release of the article, shares have traded mostly sideways until Ballard Power reported abysmal Q3/2024 results on November 5 with revenues and profitability missing consensus expectations by a mile: Company Press Releases / Regulatory FilingsIn the earnings press release, management openly admitted to the company's issues:  We had a tough quarter, marked by weak revenue, strained gross margin, soft new order intake, adverse order book adjustments, a restructuring charge of $16.1 million, and non-cash impairments totaling approximately $147.0 million (...). We have taken difficult but important actions to better align our spending with a multi-year push-out in market adoption of hydrogen and PEM fuel cells.  With gross margins at all-time lows and approximately 75% of Q3/2024 revenues derived from fuel cell bus manufacturers, the lack of pricing power in the company's core vertical is eye-catching. Adding insult to injury, Ballard Power decided to remove almost $40 million of orders \"relating to certain high-risk markets and customers, including in China\" from the company's backlog. With a remaining 12-month backlog of just $58.2 million, the company's 2025 revenues are not likely to be anywhere close to current consensus estimates of $104.5 million. In addition, Ballard Power has initiated a strategic review of its underperforming joint venture in China, Weichai Ballard Hy-Energy Technologies Co., Ltd. (“the Weichai Ballard JV”). With immaterial sales and no prospects for near-term improvements, I would expect the company to sell its stake in the joint venture to partner Weichai Power Co. (OTCPK:WEICF) for a nominal amount, particularly after recent disagreements on technology milestones resulted in the requirement to impair close to $8 million in receivables related to the Weichai Ballard JV, as outlined by management during the questions-and-answers session of the conference call. Following the recent decision to suspend a proposed $130 million investment in domestic MEA manufacturing capacity, a sale would likely put an end to the company's decade-long efforts to become a leading player in China's fuel cell market. Given the poor near-term outlook, Ballard Power has initiated actions to reduce operating expenses and preserve capital. As a result, the company has delayed a final investment decision with regards to its proposed $200 million investment (gross of anticipated U.S. government funding) for a new fuel cell gigafactory in Rockwall, Texas:  Given this industry context, we do not see a business case for production capacity expansion investments in the foreseeable future. Accordingly, we have also repositioned our previously planned Texas gigafactory expansion program to an optionality plan, where we will defer our final investment decision to 2026 pending clear market adoption and demand indicators, while still preserving our over $94 million of awarded government funding. With no material capital investments made during this optionality period, we will reassess the underlying business case in 2026.  Going forward, Ballard Power expects to reduce operating costs by more than 30% with a substantial part of the savings expected to be realized next year. With much lower cash operating expenses and limited capital expenditures, I would expect the company's cash runway to extend well into the next decade. At least in my opinion, management should consider putting the company up for sale or change the strategic focus to stationary power solutions similar to Hyliion Holdings (HYLN) last year in order to pursue the AI data center opportunity. While such a move would certainly reasonate with investors, it is important to note that Ballard Power's stationary power solutions require expensive hydrogen and aren't suited to provide primary power at scale. As a result, Bloom Energy's (BE) solid oxide fuel cell technology is likely to dominate the AI data center fuel cell market going forward. However, the company is working on backup power solutions for data centers, as discussed by management on the conference call:  And then on stationary, just to pause for a minute on stationary, because I think this is kind of a very interesting market and it's a market that's going to take some time to develop. But some interesting developments over the last quarter, Caterpillar, a partner we've worked with, won a U.S. Department of Energy 2024 Hydrogen Program Merit Review Award for system development and integration. This is on a project in collaboration with Microsoft and Ballard where they tested the feasibility of a large format hydrogen fuel cell for reliable backup power over a simulated 48-hour outage at a data center. That was a data center basically hosted at a Microsoft site in Cheyenne, Wyoming. And that included a 1.5 megawatt Ballard fuel cell solution.  Based on Ballard Power's weak business prospects, a \"Sell\" rating would be appropriate, but with the company now trading at a 35% discount to its cash balance, I am reiterating my \"Hold\" rating on the stock. Risks Despite Ballard Power's efforts to preserve capital and extend its cash runway, poor industry prospects could result in the company's already sizeable negative enterprise value deteriorating even further, thus resulting in additional downside for the stock. On the flip side, a formal sales process or a change in strategic focus, similar to the actions taken by Hyliion Holdings last year, could result in substantial upside for the shares. Bottom Line Ballard Power reported abysmal third quarter results and warned of a multi-year push-out in market adoption of hydrogen and PEM fuel cells. Consequently, the company is taking actions to reduce expenses and preserve capital in order to extend Ballard Power's cash runway will into the next decade. Considering the bleak outlook, the stock is likely to remain in the penalty box until management decides to put the company on the auction block or change its strategic focus to the AI data center market. However, with Ballard Power now trading at a 35% discount to its $635 million cash balance, I am reiterating my \"Hold\" rating on the stock.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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