Fuel up on Ballard

06/27/2003 12:00 am EST


Michael Murphy

Former Editor, New World Investor

Michael Murphy is expanding the focus of his Technology Investing --which to date has focused on large, dominant tech companies. He notes, "In this new cycle, there will be new industries and new 'gorillas' that emerge. I am expanding coverage to include medium- and even small-cap companies that will help the technology recovery over the next seven to ten years." One such company is the leader in hydrogen fuel cells.

"Ballard Power (BLDP NASDAQ) dominates a nascent industry--hydrogen fuel cells. Fuel cell technology is still at a developmental stage, with governments in the US, Canada, Japan, and Europe taking initiatives to promote the technology (and help ensure our opportunity). It's very unusual to know the clear winner when an industry hasn't even taken off yet, but that's the case with Ballard. Consider this: Over the next two years, major automakers plan to put 176 fuel-cell powered cars in fleet demonstrations; 150 (85%) of these will be powered by Ballard fuel cells. Ballard makes fuel-cell modules and engines, parts for electric vehicles, and stationary fuel cell applications like the AirGen, which is a partnership with Coleman Powermate to develop portable power sources or emergency backup systems.

"For early-stage companies, cash conservation is key, and Ballard is making progress. In the March first quarter, they burned only $19 million, a substantial improvement over last year's first quarter when they went through $66 million. They have $358 million in cash and short-term investments, more than enough at the current burn rate. Ballard is not expected to be profitable for another two years. One way to value development-stage companies is by how much they invest in R&D vs. their market cap. This tells us what we are being asked to pay to buy into their science. Under ten times is interesting, five times or so is cheap, and three times is a ‘venture capital’ valuation. Over the last ten years, Ballard has put $400 million into research, so at their current market cap of $1.5 billion, we are paying only 3.75 times their R&D investment. That's very attractive. Once business starts to accelerate, both the top and bottom lines will grow sharply. Buy up to $14. I'm looking for the stock to hit $28 by the end of 2004."

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