Record Orders And Cost Cuts Will Strengthen Bus And Rail

Key Takeaways

• Strategic focus on stable markets and restructuring initiatives are poised to enhance margins and improve financial stability over time.
  
• Strong presence in bus and rail sectors, along with innovative products, signals promising revenue and earnings growth potential in Europe and North America.
  
• Ballard faces multiple risks including policy uncertainty, tight financing, strategic retreats, and market challenges impacting revenue growth and diversification.

Catalysts

Engages in the design, development, manufacture, sale, and service of proton exchange membrane (PEM) fuel cell products.

• A record-breaking new order intake in 2024 and an increased order backlog are significant indicators of future revenue growth potential. Ballard is well-positioned in both the European and North American markets with significant contracts in place, particularly in the bus and rail sectors, which should positively impact future revenues.
  
• The company's cost-reduction initiatives, including a global restructuring that is expected to lower annualized operating costs by more than 30%, are likely to enhance net margins over time. These include workforce reductions, rationalization and consolidation of operations, and a reduction of capital expenditures.
  
• Continued product innovation and cost reduction programs, such as the introduction of the FCmove-XD engine and the high-volume bipolar plate manufacturing line under Project Forge, are expected to lower production costs and improve gross margins, supporting future earnings growth.
  
• Collaboration and contracts in the high-growth bus and rail sectors, especially in Europe and North America, indicate a strong revenue pipeline, driven by partnerships with key OEMs and large-scale order commitments, which could contribute to higher revenues in the near term.
  
• Reducing reliance on unpredictable markets like China, and no additional investments in the Weichai-Ballard JV, allows Ballard to focus resources on more stable and promising markets like North America and Europe. This strategic redirection is aimed at improving financial stability and long-term profitability.

Ballard Power Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ballard Power Systems's revenue will grow by 34.8% annually over the next 3 years.
• Analysts are not forecasting that Ballard Power Systems will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ballard Power Systems's profit margin will increase from -464.0% to the average US Electrical industry of 10.2% in 3 years.
• If Ballard Power Systems's profit margin were to converge on the industry average, you could expect earnings to reach $17.4 million (and earnings per share of $0.06) by about April 2028, up from $-323.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2028 earnings, up from -1.1x today. This future PE is greater than the current PE for the US Electrical industry at 9.2x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Ballard Power Systems Future Earnings Per Share Growth

Risks

• The hydrogen fuel cell industry is experiencing prolonged policy uncertainty, which may further delay the development and deployment of hydrogen projects, impacting future revenue growth.
  
• The continuing deterioration in the financing environment for the industry poses a risk to Ballard's financial stability and could affect its ability to invest in new projects, impacting future earnings.
  
• The strategic decision to reduce investments and halt the Texas gigafactory may hinder Ballard's production capacity expansion, potentially affecting long-term revenue and margin growth.
  
• Challenges in the truck market, including business failures and delayed adoption timelines, suggest limited revenue potential from this segment in the near term, impacting overall revenue diversification.
  
• Continued policy and market challenges in China and the underperformance of the Weichai-Ballard JV indicate a risk to Ballard's market position and revenue streams in the region.

Valuation

• The analysts have a consensus price target of CA$1.71 for Ballard Power Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$2.14, and the most bearish reporting a price target of just CA$1.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $170.7 million, earnings will come to $17.4 million, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 7.3%.
• Given the current share price of CA$1.65, the analyst price target of CA$1.71 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.