Why I’m Adding More of This Natural Gas Innovator to my Portfolio

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Westport Innovations (NASDAQ: WPRT) are down over 20% since I added shares to my virtual “No Drip, No Mess” Portfolio nearly two months ago.  That’s not quite as bad as the 35% drubbing my personal portfolio has taken since I started buying shares of the company earlier this spring.  In the spirit of the Christmas shopping season, I’m going to take advantage of this sale to buy more shares of Westport.

What’s Changed?

I see two reasons for the discount since I bought my initial shares, and both appear to be short term in nature.  Over the past month, you’ll see two points where the stock sold off: when they reduced guidance on Oct. 29 and then along with the rest of the market after the election.  In both cases the market made a knee jerk reaction to the news. 

The guidance reduction was pretty steep as they cut 2012 revenue outlook from a range of $400 million to $425 million all the way down to a range of $340 million to $350 million.  The company noted “heightened uncertainty in the economy and delayed availability of LNG infrastructure which has forced their customers to sharply reduce inventory and delayed decisions to complete orders.”  However, they have several new products launches coming over the next year as well as a very bright future as more companies adopt natural gas as a transportation fuel.

That bright future isn’t as bright as it could be thanks to the rhetoric coming out of Washington.  While the post-election sell-off had more to do with fiscal cliff fears than politicsal statements, it is well noted that President Obama isn’t exactly pushing for our nation to switch to natural gas.  While he did go as far as to say, "If you’re a business that needs to transport goods, I’m challenging you to replace your old fleet with a clean energy fleet that’s not only good for your bottom line, but good for our economy, good for our country and good for our planet," it’s widely viewed that his former opponent would have been more supportive of the natural gas side of the effort.  While Washington could do more by passing legislation that could spark a shift toward natural gas engines, that doesn’t seem likely.  Despite politics as usual, the economics of switching to natural gas is what’s really going to drive Westport.

Those economics are the key to driving Westport’s efforts into new innovations.  They continue to partner with both manufacturers and end users to offer a broader array of products that are touching every aspect of transportation.  In their earnings press release, the company stated that:

"We may have changed our near-term and annual revenue expectations, however, recent announcements to bring a new Cummins (NYSE: CMI) Westport 6.7 litre engine to market, targeting school buses, and an innovative new engine with Tata (NYSE: TTM), also prove the thesis that virtually all segments of the transportation market will see significant opportunity for natural gas this decade," continued Demers. "While new markets evolve, our North American heavy-duty business is seeing repeat orders from customers such as UPS (NYSE: UPS) who've ordered 21 additional liquefied natural gas (LNG) tractors with Westport high pressure direct injection (HPDI). Finally, our programs with Caterpillar (NYSE: CAT) to jointly develop LNG as a fuel in mining truck and locomotive operations are off to a strong start. We are seeing high levels of interest from customers in these high fuel use industries."

Westport isn’t developing hope-filled technological promise looking for a change.  They are providing a viable solution to some of the world’s biggest manufacturers and end users.  This who’s who list of partners like Cummins, UPS, Tata and Caterpillar is just the tip of the iceberg.  A look at their partners by enterprise value shows just how big their future markets could be:

<img src="http://media.ycharts.com/charts/d06670df49d4fa62124a74be9268d39b.png" />

WPRT Enterprise Value data by YCharts

Each sees the potential for natural gas engines to deliver long term economical results.  Over time their vast intellectual property portfolio and asset light business model should deliver exceptional results.

What’s the Trade?

For my “No Mess” portfolio I’ll be doubling down on my position by adding another 0.5%, which should net another 17 shares for the portfolio.  I’ll also be filling out the final third of my personal portfolio’s allocation to the company as soon as trading rules allow.  I think Westport offers one of the best ways to invest in our nation’s energy future, and I’m happy to buy more shares at recent sale prices.  If they ever hit the discount bin I’d be very tempted to bump up my allocation even further. 

What’s the Bottom Line?

It is unlikely that I’m picking up my Westport shares at the bottom.  If the economy takes a turn for the worse, shares could fall much further as Westport has yet to turn a profit.  That being said, they have a strong balance sheet to weather any economic storm and have the potential to be a very big winner over the long term.

latimerburned owns shares of Westport Innovations. The Motley Fool owns shares of Cummins and Westport Innovations. Motley Fool newsletter services recommend Cummins, United Parcel Service, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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