Ballard Power: They’re up, they’re down

The concept of non-polluting fuel cells powering our cars and trucks seemed too good to be true when it first exploded on the scene nearly two decades ago. Investors in one of the leading hydrogen-cell developers, Ballard Power Systems Inc. (Nasdaq: BLDP, TSX: BLD) might be left wondering if commercializing the technology is just a lot of hot air.

Ballard is a Canadian company that was a pioneer in fuel-cell research. Founded in 1979 to research and develop lithium batteries, it migrated to proton-exchange-membrane (PEM) fuel-cell products in the 1980s. With headquarters outside of Vancouver in Burnaby, B.C., it has another manufacturing facility in Lowell, Mass.

Fuel-cell technology seems like the modern-day successor to the medieval claims of alchemists that they could turn lead into gold. Combine hydrogen and oxygen, and presto-change-o, you have electricity flowing, with the only byproducts being water vapor and air. Ballard launched its first commercial fuel cell product, the Nexa power module, in 2001.

This is no wave of the magic wand; it works. But the reality is that you also have a lot of weight to tote around in the costly fuel-cell device. General Motors Corp. (NYSE: GM) invested heavily in fuel-cell technology, but its interest faded. At the time, automakers were bumping up the fuel efficiency of their gasoline and diesel engines, crude oil was cheap and plentiful, and few were heeding the cries of researchers about global warming and potential petroleum-product delivery bottlenecks.  

Now with the growing fears of global warming and $3 gasoline way too common, vehicle makers appear to be warming to fuel cells again, as well as using hydrogen as the fuel in internal-combustion engines. While hybrid technology combining an electric motor with a gasoline engine is the current rage, a fuel cell could take the place of that gasoline engine. Both Ford Motor Co. (NYSE: F) and DaimlerChrysler AG (NYSE: DCX) have invested in Ballard Power.
 
Already fuel cells are proving their viability in real-world situations. In January, DaimlerChrysler rolled out a Mercedes-Benz F-cell compact sedan powered by a stack of Ballard fuel cells as a supervisor?s response vehicle for the Sacramento, Calif., Metropolitan Fire District. Daimler has a fleet of fuel-cell vehicles deployed, mostly in Europe, including cars, medium-duty vans and buses.
 
In early June, Ford showcased one of its Edge crossovers, a fuel cell-electric hybrid with plug-in capabilities on a drive from Seattle to Ballard?s hometown of Burnaby. Last January in Washington, Ford unveiled the HySeries Drive Edge, which uses its lithium-ion battery?s stored electricity for the first 25 miles, after which the Ballard fuel cell kicks in for another 200 miles. Hydrogen refueling is needed after about 400 miles, with the potential of becoming an ideal zero-emissions commuter vehicle.  
 
Until fuel cells become feasible as a standalone power plant, this new type of hybrid could offer a solution in the face of rising gasoline prices. Mujeeb Ijaz, manager of Ford?s fuel-cell vehicle engineering program, told the Canadian press that a plug-in hybrid might be ?the first commercially viable market, because it?s got the greatest pull from the customer?s point of view.?
 
And there sits Ballard out in western Canada, waiting to capitalize. Some alternative-energy analysts have estimated that it could take nearly another decade before fuel-cell vehicles reach the market. Ballard is not abandoning its vehicle fuel-cell development, but it is turning to other fields that might be able to put it to practical use faster.
 
At its May annual meeting, Ballard Chief Executive John Sheridan told shareholders that the non-automotive uses of its fuel cells could make the company profitable again after a string of hefty annual losses. Some shareholders bought Ballard at the height of the tech boom at more than $100; it?s currently trading around $5.
 
?Our path to profitability is non-automotive,? Sheridan said, noting that ?we do not foresee early-stage commercialization of fuel-cell cars until 2014, 2015.?
 
While Sheridan did not divulge when the company expected to become profitable, some analysts are willing to give their best guesses. RBC Capital analyst Stuart Bush, who has an underperform rating on Ballard?s shares, said in an April note to investors that he doesn?t expect to see a profit until 2010.

Bush?s analysis came out after Ballard client General Hydrogen Corp. said it was delaying orders pending a possible acquisition by Plug Power Inc. (Nasdaq: PLUG). The $10 million acquisition went through, and Ballard signed a new two-year agreement with Plug Power to supply fuel-cell stacks for materials-handling applications. Plug Power also acquired another Ballard customer, Cellex Power Products, earlier this year. Terms of the new Plug Power deal weren?t disclosed, but Ballard was banking on $22 million flowing from its former General Hydrogen pact alone, before scaling back expectations.

Despite those setbacks, Ballard executives sounded fairly optimistic in reporting first-quarter results in April. For the three months ended March 31, the company pared its loss to $14.3 million from $17.2 million the year before. Revenue grew 44% to $13.6 million. In its 2007 outlook, Ballard is expecting revenue from continuing operations to increase 30% to a range of $55-$65 million, while it plans to slice its cash burn by 20% to $40-$50 million.

Ballard has some new contracts, including one from the U.S. Department of Defense, for $3 million to develop a materials-handling demonstration program. It?s also continuing as a player in Japan?s government-subsidized residential fuel-cell cogeneration program.

Perhaps it?ll take something more than Al Gore stumping for change and $3-a-gallon gasoline to spur fuel-cell development. Many analysts that cover alternative-energy companies rate Ballard at something equal to a hold, or perhaps a sector underperform. If it can turn the corner by becoming a force in materials handling or proving ways that fuel cells can be put to use, shares of green pioneer Ballard would undoubtedly climb out of their blue funk.

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