Is Westport Innovations Running Out of Gas?
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We put so much emphasis on the ability to get news quickly that we often don’t look past the headlines or take a moment to delve deeper into content we have read concerning stocks. Often times, news that causes sudden corrections in share price has little to do with the fundamental reality of a stock. Westport Innovations (NASDAQ: WPRT) was recently down more than 10% after an article came out in Barron’s slamming the company and the recent news that their major partner and main source of present day revenues Cummins (NYSE: CMI) is developing their own model of a 15 Litre natural gas engine. If anything recently exemplifies the old Benjamin Graham metaphor of the mercurial Mr. Market this was it. Once the shares plunged, everyone began questioning whether this company could continue to grow and succeed in the competitive truck and truck engine market.
Most investors who begin to follow equity markets are soon introduced to the concepts of Graham and his Mr. Market Metaphor. The basic idea is that Mr. Market is your partner in business and each day he comes in and proposes to buy your share in the business, the only catch is he is an emotional wreck who some days is flying on cloud nine and other days depressed. Each day he offers you a price dependent on his wild mood swings but you can choose to either accept or reject these offers, with the knowledge he will return tomorrow. Anyone that has been followingWestport's great price appreciation over the last two years and has studied the business understood the risks and potential rewards of a company like this. The business is relatively straight forward; they develop natural gas engines for trucks in the hopes that truck makers like Cummins will switch over to their proprietary engines for cost savings as Natural Gas is at all-time lows especially in comparison to oil. The idea is easy to understand and adopt for people that hear Westport’s story even in a condensed version without doing any follow up research. When this happens often times a stock will have a sudden correction when a whiff of bad news comes out because investors that buy without educating themselves on the business are quick to sell in fear of losing their money to the unknown.
Even though Cummins is announcing they will attempt to develop a natural gas engine and that they have modified their working agreement with Westport so that they can sell natural gas engines outside of the United States, this doesn’t fundamentally change the business of Westport. The company has not been profitable since 1997 and with the recent run up in share price; the company recently issued more shares to raise money. The company’s earnings are viewed each quarter and Westport has issued shares in the past to raise capital. The only piece of new information was the announcement that Cummins would develop their own natural gas engine. The question after this announcement: does this news fundamentally change the business model ofWestport or their ability to grow and succeed in the market? I would argue that this new information doesn’t radically change anything except that there will be competitors to Westport’s tech which we knew would happen eventually anyways. When it comes down to it if their engines are as technologically advanced as we think they are and they can deliver cost savings over other competitors, then their business will flourish in the next 5 years.
Westport has first mover advantage in this space like a Netflix (NASDAQ: NFLX) in streaming videos or Apple (NASDAQ: AAPL) in digital media players and tablets, and like any first mover there comes a time when they must compete with new entrants or entrants that are modifying their existing product line to compete. They also have a portfolio of patents that would make a Silicon Valley company jealous. Westport is neither better nor worse off after the announcement, they are still in business with Cummins and will still be able to grow their business moving forward. The fact that the share price has dipped so significantly after an article written in Barons that doesn't reveal any new information about the company is as I said before another perfect example of Mr. Market showing up at your door with a bad case of the blues.
I don't see Westport as anything similar to another engine maker from Canada that had an epic flameout in the early 2000's by the name of Ballard Power Systems, a hydrogen fuel cell maker that reached a high in the $90 range and is now trading around the $2 mark. I see this as a buying opportunity and I will be adding more Westport to my portfolio over the next week. In 5 years, I will be thanking Mr. Market for his visit to Westport in his sad state. Before you buy or sell your shares on a negative news headline, take a second to look past the noise and see if the company, its situation in the market or its industry as a whole, has fundamentally changed.
Mooseelz owns shares of Westport Innovations and Apple.Motley Fool newsletter services recommend Apple, Netflix, and Westport Innovations. The Motley Fool owns shares of Apple, 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.