View From the North: Ballard Power System

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I don't own any

Ballard Power System

(BLDPF)

maker of, among other things, a hydrogen-based fuel cell dubbed Proton Exchange Membrane (PEM). It feels strange, since Ballard is headquartered about 10 miles over the water and down the road from me. I have watched this Burnaby, BC, Canada-based company over the years with pride but, alas, no investment dollars. Like everyone else, I was left breathless by the recent run to US$71.25. Prior to last week, the stock had crept up to US$43.00. After rocketing to its recent peak, it slid back to US$52.00. A year ago it was a mere 20 bucks.

Any "local" company, in this case a Canadian one, wants to break onto the world stage. But not necessarily so conspicuously. Last week

Bill Clinton

mentioned the company twice as having relevant technology to combat the global warming problem. Tuesday, a

Morgan Stanley Dean Witter

analyst came out with an initial 'outperform' rating on Ballard (more on this later). And Wednesday saw a front page story in the

New York Times

business section. So instead of a gentle zephyr wafting Ballard onto the world investment stage, BLDPF blasted in like an Arctic Express. Great and deserved news for Ballard. But was it good for those investors that bought on the surge?

The "irrational exuberance" noted above amply rewarded loyal shareholders and analysts who had been long-term holders/followers of the stock. Given that there are only 15 million shares outstanding (and probably a much smaller public float), any material external PR was bound to move it. As the capitalization moved from US$285 million a year ago to a peak of over US$1 billion last week, new investors' rationale became apparent. Instead of looking at the fundamentals of a well-managed, goal oriented company (Ballard publishes and reviews its goals each year in its annual report), investors bought into a frenzy that has become all too prevalent: Do the trade worry about it later, but don't miss the boat. As the froth subsided, new investors owned overpriced stock, short sellers had found a new target, and everyone was left with a "what do we do now?" feeling.

Ballard is a good company. But the reality is, "earnings" estimates out to the year 2000 show no positive numbers. The range for FY1998 negative earnings is wide. According to

First Call

, projections are from (C$1.00) to (C$2.12). Mean earnings come in at a loss of C$1.44. Robert Chewning, the analyst at Morgan Stanley who initiated coverage last week, predicts a loss of C$2.12 for FY1998 -- the lowest of the group. Markets for Ballard's products are certainly huge and fashionable. Global warming is the poster child for the excesses of the past and Ballard's PEM fits to a tee.

Chewning uses a projected 40% plus annual growth rate over the decade following the millennium. He notes that by the year 2010, BLDPF, according to his 'base forecast' could make C$21.50 a share. Further, he writes that the market is so huge that 'it would not be difficult to envision an earnings scenario with double the growth rate implicit in our base forecast.' And this for a company he also categorizes as 'development stage'. His report also warns of the risks going forward as the company's products develop for commercial markets. But the caveats don't seem to stop him from making forecasts going out well over a decade. Which is it, Mr Chewning? And why did you wait so long to follow the company? And isn't an 'outperform' rating at this juncture a bit over the top?

On the other hand, Toronto-based investment dealer

Nesbitt Burns'

analyst Andreas Hoppe -- a long-time follower of Ballard -- has prudently warned investors not to get too excited, and has put the stock under review for both a rating and target price change. The stock has blown past the previous target of C$60.00.

Debbie Roman, Media Relations with Ballard, stated that while pleased with the attention, it has not taken Ballard's focus away from doing business. More announcements will come just as they have before, and Ballard will continue on a program of being upfront with investors as to where it wants to go, how it will get there and when. I would suggest that investors spend more time reading the company's annual report (available at its website--www.ballard.com) and a little less time reading reports that make projections out over more than a decade. That's a long time. Anything can happen.

****************

NorthNotes:

Remember

Startech

(SEH:TOR) -- the Calgary-based oil stock? I wrote about it back in the Spring at C$12. It's moved up to around C$17. With all the mergers and stuff happening in the Canadian "Oil Patch," this cash rich, debt-free company is still one to watch.

By the way, I received an email from a

TSC

reader last week that simply asked "Hey Bob, Ballard -- Buy Sell or Hold?" I don't give advice, but personally, I would wait until the furor dies down. If you must buy, average in. Or reread the previous article. Or both.

Bob Beaty writes about Canadian issues from the quiet venue of Bowen Island, British Columbia. He welcomes your feedback at

bbeaty@netcom.ca.