CMI: Ballard Power Systems vs. Cummins: Which Hydrogen Stock is a Better Buy?

The energy sector has been witnessing a slow, but steady transformation across the globe. Global leaders have been taking steps to move toward a carbon-neutral economy. The entire globe is transitioning toward a sustainable energy-based future, and consequently, the demand for hydrogen-powered cells have been rising exponentially.

Hydrogen fuel cell systems are being touted as the newest wave in the renewable energy space, and Ballard Power Systems, Inc. (BLDP) and Cummins Inc. (CMI) are two of the world’s most prominent players in the hydrogen-powered fuel cell technology business.

While BLDP gained 295.9% over the past three years, CMI returned just 37.7%. In terms of year-to-date performance, BLDP is a clear winner with a 165.2% return versus CMI’s 26.9% gain. But which of these stocks is a better pick now? Let’s find out.

Business Structure and Latest Movements

BLDP engages in the development and commercialization of proton exchange membrane fuel cells worldwide. The company is primarily involved in the design, development, manufacture, sale, and service of heavy-duty modules, fuel cell stacks, backup power systems, and portable power/ unmanned aerial vehicles (UAV), and material handling products.

In October, BLDP signed a definitive agreement with AUDI AG to alter existing technology development and patent license agreements previously signed under a non-binding MoU. This deal should expand BLDP’s right to use high performance proton exchange membrane FCgen HPS in commercial cars and trucks. Earlier that month, the company also sold its existing unmanned aerial vehicle business assets to Honeywell, as part of its long-term plan to focus on its heavy and medium duty motive markets.

CMI is a global power leader that designs, manufactures, distributes, and services diesel and natural gas engines, and an engine-related portfolio of power solutions. The company primarily operates through four segments – Engine, Distribution, Components, and Power Generation.

CMI closed on the previously announced NPROXX joint venture with ETC for hydrogen storage tanks last month. This joint venture is expected to provide customers with hydrogen products for both on-highway and rail applications. Moreover, the company announced the opening of a new facility in Germany, which will initially focus on the assembly of fuel cell systems for global transportation leader Alstom’s hydrogen trains.

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Recent Financial Results

BLDP generated a net revenue of $25.6 million in the third quarter, increasing 4% year-over-year. This can be attributed to a 161% and 538% year-over-year increase in heavy duty motive and backup power, respectively. However, the company reported a loss of $0.05 per share compared to the year-ago value of $0.04 per share.

For the third quarter that ended September 2020, CMI’s net sales declined 11% year-over-year to $5.1 billion. The company’s engine sales came in at $2.1 billion, primarily driven by an 8% increase in international markets, mainly in China. CMI reported EPS of $3.36 compared to the year-ago value of $3.97.

Here BLDP is in an advantageous position.

Past and Expected Financial Performance

BLDP’s revenue grew at a CAGR of 1.7% over the past 3 years. However, the company is still not profitable.

The market expects the company’s revenue to fall 27.5% in the current quarter, but increase 0.2% in the current year, and 35.9% next year. BLDP’s EPS is expected to grow 31.6% next year and at a rate of 0.03% per annum over the next five years.

On the other hand, CMI’s revenue and EPS grew at a CAGR of 0.2% and 2.5%, respectively, over the past 3 years.

The market expects CMI’s revenue to decline 7.8% in the current quarter and 18.9% in the current year, but rise 11.2% next year. The company’s EPS is expected to grow 20% next year and at a rate of 2.1% per annum over the next five years.

CMI has an edge over BLDP here.

Profitability

CMI’s trailing-12-month revenue is more than 165 times of what BLDP generates. Additionally, CMI is more profitable with a gross profit margin of 24.6% versus BLDP’s 20.5%.

Moreover, CMI’s ROE and ROA of 18.4% and 5.4%, respectively, compare favorably with BLDP’s negative values.

Valuation

In terms of trailing-12-month P/S, BLDP is currently trading at 38.84x, 2,145% more expensive than CMI, which is currently trading at 1.73x. Moreover, CMI is less expensive in terms of trailing-12-month P/B (4.37x versus 9.96x).

POWR Ratings

Both BLDP and CMI are rated a “Buy” in our proprietary POWR Ratings system. Here are how the four components of the POWR Ratings are graded for BLDP and CMI:

BLDP has an “A” for Trade Grade, a “B” for Peer Grade and Industry Rank, and a “C” for Buy & Hold Grade. In the 59-stock Industrial – Equipment industry, it is ranked #25.

CMI has an “A” for Trade Grade, a “B” for Buy & Hold Grade and Industry Rank, and a “D” for Peer Grade. It is ranked #23 in the 51-stock Auto Parts group.

The Winner

While both BLDP and CMI are good long-term investments considering the rising global demand for clean energy and their continued expansion, CMI appears to be a better buy based on the factors discussed here.

The clean energy industry has been getting significant investor attention since Joe Biden’s win. Both BLDP and CMI soared last month when Biden selected the former Secretary of State, John Kerry, as his “climate czar.” With Kerry and his negotiations, it is expected that the United States will rejoin the Paris Accord United Nations climate change agreement to reduce greenhouse gas emissions. Moreover, the country may witness an increasing adoption of green energy, as new climate policies shape out next year.

BLDP has had an incredible run so far this year and the stock is being perceived overvalued by traditional measures. Hence, CMI is a relatively cheaper option to bet on the immense growth potential of the green energy sector.

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CMI shares were trading at $220.98 per share on Friday morning, up $0.64 (+0.29%). Year-to-date, CMI has gained 26.99%, versus a 16.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...