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Energy Conversion Devices
The One Trick Horse

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By dduct
May 30, 2002

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I had a major position in Ballard a few years ago. Because the stock shot out of sight, I was able to write covered call options and, eventually, had the shares called away. At the time I was glad to have sold these shares for a total cost of well over $100 each. Although I was convinced Ballard had a technology lead at that time, I was concerned that:

a) The market capitalization was too high.

b) Every Tom, Dick and Harry was entering the PEM field.

c) The implementation of fuel cells could be delayed years by recessions and slow moving auto companies.

That explosion in Ballard's share price really transformed my IRA. It also taught me a lesson. Ballard had, maybe, a bright future. It's present was all red ink. It was a one trick horse with Triple Crown potential. Unfortunately, like the horse races, the races have to be run, and all three won, in order to get the Triple Crown.

ECD is not a one trick horse. Yes, technically the products are all related. But the markets are all large, diverse, and going through paradigm changes. DVD and NiMH have not generated the royalty revenue that was expected. PV's have been anything but a financial success. But, NiMH are in the market and in a position to make a run (in auto application for hybrids and 36-volt systems. DVD's may be transformed by ECD technology that can produce them for a fraction of today's low cost producer. And PV's are going to be transformed by ECD technology that will mass-produce them at industry leading prices.

I am thankful that I owned Ballard. But at $21.08 today, Ballard still looks overvalued when compared to ECD. Consider too, the advantages ECD has in the fuel cell race. While Ballard's PEM is probably still a technology leader, we do not know its production cost or that of its other many PEM competitors (which include other auto manufacturers). Then there is the Ovonic Regenerative Fuel Cell (ORFC) and the other non-PEM fuel cell technologies. The ORFC will be unique and its design may have no other equals in the marketplace. The integrated NiMH battery is more 'system oriented' than Ballard's power source-only approach. The ORFC may benefit from NiMH component costs being driven down by other applications. And the total cost to develop the ORFC will be a fraction of the billion or so already sunk into the Ballard PEM -- something that may produce a pricing advantage when the ORFC is announced to the public.

So, let's do a quick measurement of Ballard and ECD. Ballard, valued at $2.2 billion, is still a long way away from profitable operations. It ability to dominate its markets is unclear although Ford and DaimlerChrysler are contractually bound to use their product. I expect that if Ballard shows up with an expensive saddle for an inexpensive horse, their stock will crater and the partners will buy them out (for a few million dollars) to get away from that contract.

ECD, at $450 million (i.e., about 1/5th the market capitalization), is about to go into growth mode in PV's, NiMH, and DVD's. It has these dark horses in the barn: Solid hydrogen storage, OUM, ORFC, and the cognitive computer. It is hard to see Ballard winning in all its PEM markets: Transportation, home, and mid-scale power generation. Could ECD win in three of its three growth market races? Yes, although PV's and DVD's look like they would be long shots based on the current market leaders. Could ECD win at one or two of its dark horse races? Yes. And that is the beauty. We are well funded and have more than one horse in one race.


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