7 Reasons to be Bearish on Westport Innovations
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Westport Innovations (NASDAQ: WPRT) is global leader in converting diesel engines to low-emission engines which are able to run on compressed natural gas, natural gas liquids and other types of clean burning fuels. Westport focuses on three separate markets through distinct business divisions and joint ventures – light-duty engines for forklifts and oilfield service machinery, technologies for commercial vehicles such as buses and heavy duty engines for trucks and diesel equipment. The company has entered into joint venture agreements with global original equipment manufacturing (OEM) leaders such as Cummins (NYSE: CMI) and Weichai Power which assist with the developed and distribution of gas operated fuel engines. Furthermore, Westport also has strategic alliances with General Motors (NYSE: GM), Caterpillar and other well recognized vehicle and component OEMs. Key agreements with General Motors and Cummins have effectively introduced Westport Innovations into the spotlight.
The promise of reduced green-house gas emissions and a replacement of a domestic energy source from foreign oil is undoubtedly an appealing concept; investors have been quick to dump their money into this hot company. Over the last year, shares prices of Westport have more than doubled as revenue has surged 50% on strong shipped unit growth. Westport’s fundamental growth almost resembled that of a high flying internet based company rather than a firm which operates in the heavy equipment space. However, there are several reasons to be bearish on Westport Innovation despite its innovative technologies and bullish momentum.
Over the last 10 years the company has consistently been losing money and over the last 5 years the losses have been quickly increasing from $10 million in 2008 to an expected $59 million in 2012.
Analysts are bearish on the stock, claiming that in order to justify the current valuation the same level of sales growth must be realized over the next 7 years. Some analysts have a target price of $11 on the shares, well below its current trading range of around $45.
Cost of revenue and SG&A costs continue grow as a percentage of revenue, especially over the last year. Gross margins fell from 40% to 32% as added costs are integrated into the operation.
Leverage is another key issue which must be addressed; between 2010 and 2011, long term liabilities soared from $24.5 million to $92.6 million. This problem is magnified by the ongoing need to spend cash on operational activities.
Many of these arguments can be dismissed for internet based stocks such as saleforce.com which has somewhat similar balance sheet and income statement trends. However, unlike salesforce.com, which operated in a high growth market, Westport is leveraged to a slow growth industry.
In order for Westport technologies to realize its full potential, Congress would have to pass the New Alternative Transporation to Give American Solutions Act. Although efforts have been underway for several years, material progress has not yet been made.
Investors get impatient quickly and forecasts suggest that it could take approximately 5 years before Westport Innovations reaches a state of profitability.
According to PIMCO’s Mark Kiessel, the U.S., which has ample newly discovered natural gas reserves, can potentially overtake Russia as the world’s largest energy producers within the next 10 years. The vast amount of economically recoverable shale reserves found in North America has driven natural gas prices to historic lows. Cheap natural gas has opened the door for many “new” companies to engage in building infrastructure which will one day allow natural gas to be used as a transportation fuel. Clean Energy Fuels (NASDAQ: CLNE), for example, builds and operates natural gas fueling stations while Fuel Systems Solution (NASDAQ: FSYS) provides alternative fuel delivery components such as pressure regulators, flow control valves and metering equipment. The ongoing discussion regarding the potential of these new technologies which will revolutionize transportation, while the major players continue to lose money, reminds me of the type of banter present before the collapse of the internet bubble.
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