Heads up: Is This Stock on the Verge of a Turnaround?
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This was exactly the kind of quarterly numbers Westport Innovations (NASDAQ: WPRT) was waiting for to keep the momentum going. After five straight quarters of misses, the natural- gas engine maker managed to crush Street estimates on both top and bottom lines in its second quarter.
No, black still seems some distance away, but a huge reduction in losses and whopping top line growth has brought the million-dollar question out of the bag—has Westport stepped on the turnaround pedal?
Just look at the way Westport’s revenue is growing. After a 133% surge in the first quarter, revenue clocked impressive 136% growth from the year-ago period during its second quarter. Top line growth is critical for a company that is in its growth phase, like Westport. Steady and improving gross margin is another encouraging sign. It has stayed above the 30% clip in the past few quarters. For the second quarter, gross margin hit a high of 38%, gaining four percentage points from the year-ago period.
All divisions reported strong growth, with light duty leading the pack yet again with a 182% jump in revenue. The division has also been the cynosure of all eyes as leading automakers continue to strike a chord with Westport through partnerships. If Ford (NYSE: F) snatched the spotlight in the first quarter, it was General Motors (NYSE: GM) in the second.
Bigger and better
Development of compressed natural gas bi-fuel systems for Ford’s F-series pick-up trucks got into full swing, and Westport started shipping them in June, on schedule. Note that this is an extremely important development for Westport, as it could turn out to be a great source of revenue considering its potential to save more than $2 per gallon of fuel costs. As for the General, it has probably taken a liking to Westport’s expertise. Within a year, General Motors has entered into its second agreement with the company to develop a nat-gas engine system that will power its light-duty vehicles.
But the bigger highlight of the quarter was the deal Westport inked with the world’s largest mining and construction equipment maker, Caterpillar (NYSE: CAT). In what will be a first-of-its-kind development for the off-road market, Westport’s cutting-edge technology and expertise, and Cat’s financial strength will come together to develop high horsepower natural-gas fuel systems for use in off-road vehicles. The program is about to take off soon. Again, this isn’t the first time Cat has shown confidence in Westport.
Bonds = gains
All these only prove how Westport’s technology, or rather, the use of natural gas as an alternative fuel is gathering steam. But Westport investors should also know that the company is an expert in providing design technology only, and doesn’t really build the engines; its partners do it. So how efficiently the company handles relationships with existing ones, and manages to get more on board will be critical in determining the success of its business.
Things are looking fine on this front right now, though. I’ve already mentioned some of the heavy names it has partnered with. But no story about Westport is complete without the mention of the old and strong bond it shares with engine maker Cummins (NYSE: CMI). The venture continues to be the biggest revenue driver for Westport. During the second quarter, it contributed a positive $3.6 million to its net income that helped offset losses significantly.
The venture is up for bigger things now, looking to foray into new market segments, such as regional hauling, and refuse trucks through its highly-advanced fuel-efficient ISX12 G engines, which are undergoing trial runs currently. So high are Cummins-Westport engines in popularity that orders have poured in even before these engines go into full production.
Ironically, it was Cummins that dropped a bombshell on Westport investors some time back when it announced plans to develop its own 15-liter engine. Is Cummins planning to edge Westport out in the long run? Not necessarily, as the offerings of both companies will have different technology, and Westport’s apparently scores higher. Yet, Cummins’ move signals two things – it’s a huge market waiting to be explored, and Westport isn’t shielded from potential competition.
Others are getting in too
Rising competition is not the real challenge in Westport’s face, though. It is natural gas prices. They are downright low now, but won’t stay so forever. As it rises above water and inches closer to oil in the years to come, Westport will need to work harder to convince others of the benefits of its technology.
Right now, abundant and cheap natural gas is also shaking up investment in areas that need immediate attention to boost the alternative fuel, such as infrastructure. Westport’s concentration on freight truckers seems closely tied to what a related company, Clean Energy Fuels (NASDAQ: CLNE), is doing – dotting interstate highways with natural gas fueling stations. Busy building America's Natural Gas Highway, the more active Clean Energy gets, the better it is for Westport. Truck makers are already warming up to nat-gas vehicles, and freight truckers might just lead the charge in adopting gas as a fuel.
Insiders are pumping up Westport’s shares, and the stock has gained a whopping 41% in the past three months alone. Solid top line growth, growing margins and narrowing losses—the road only seems to go up for the company.
Volatility will be a close companion to Westport’s shares, but patience will be the key for investors. It looks like an awesome long term bet to me, unlikely to fail. I strongly suggest you add Westport Innovations to your personalized stock watchlist to stay updated on how and when it turns around. Click here to add it.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Westport Innovations. Motley Fool newsletter services recommend Clean Energy Fuels, Cummins, Ford, General Motors Company, 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.If you have questions about this post or the Fool’s blog network, click here for information.