Can Westport Innovations Deliver Profits For Your Portfolio?
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Westport Innovations (NASDAQ: WPRT) is a well-managed company that focuses on building and marketing natural gas engines for various transport segments. Westport’s engines reduce the amount of greenhouse emissions, offer a relatively inexpensive alternative to oil based fuels without reducing performance, and simultaneously takes advantage of a plentiful U.S. natural resource. Westport continually develops new products, and expands addressable markets creating an increasingly diversified portfolio, but their focus is to change the economics of the trucking industry.
According to American Trucking Association, trucks deliver 70% of tonnage in the U.S. supply chain. Freight demand continues to grow annually with commercial trucks logging more than 415 million miles annually, representing 14% of all motor vehicle miles traveled with most of these engines powered by diesel. Consider that a barrel of oil contains the energy equivalent of 6 MCF (thousand cubic feet) of Nat gas and one MCF is now trading at $2.99 per MCF versus a barrel of oil at $97 per barrel, the equivalent amount of energy for $18. While liquid natural gas (LNG) and compressed natural gas (CNG) vary from the aforementioned price, by any metric both are significantly cheaper (and cleaner) than oil.
The Westport product portfolio is diverse, and starts with a substantial patent portfolio, strategic relationships with leading original equipment manufacturers (OEMs) in both the car and truck industry to extend their manufacturing capacity as well as diversify their products.
Products and Partners
Westport Innovations offers LNG and CNG gas engines as well as bi-fuel engines to different end-markets, from light duty trucks and vehicles (less than 5.9 liter) to heavy-duty engines (15 liters and larger). Westport’s light duty fuel system, specifically their patented Wing System is a fully integrated bi-fuel engine (runs on CNG first then Gasoline when depleted) for both commercial and passenger vehicles. In Sweden, WPRT partners with Volvo to offer a bi-fuel passenger wagon, and they have recently formed partnerships with GM, and Ford (NYSE: F) integrating the Wing Product in to Ford F-250/F-350 pick-ups with additional products planned. This is especially notable since the Ford F-Series is the best selling truck in the U.S. for the last 30 years. Westport also offers after market conversions to OEMS, as well complete engine solutions for industrial clients including their new partnership with Caterpillar to provide Nat Gas engines for off-road vehicles, and locomotives. Westport recently announced the completion of an assembly center in Kentucky with an annual production capacity of up to 20,000 Westport Wing Systems.
Westport’s 50:50 partnership (CWI) with Cummins (NYSE: CMI) combines the patents and technological know-how of Westport with Cummins supply chain, distribution and sales networks that serve medium/heavy duty trucks, buses, and waste management vehicles with both compressed and liquid natural gas engines. Additionally, part of agreement includes a 3-year contract for Westport to develop their heavy-duty 15-liter engine in Cummins’ Jamestown, NY manufacturing facility. Westport Heavy-Duty engine offers a 15-liter engine powered by LNG to compete with the Diesel powered long haul trucking segment. Westport uses their HPDI technology to utilize natural gas as the primary fuel along with a small amount of diesel as a pilot ignition source, or what they refer to as a "liquid spark plug".
One of the most exciting partnerships is Weichai Westport, Westport’s joint venture in China of which they are 35% partner. Weichai Westport manufactures and sells Nat Gas engines for autos, buses, trucks, marine applications and power generation with sales doubling in the second quarter. Not only has China prioritized Nat Gas adoption, but also significant finds in China including Sinopec’s successful drilling in the Sichuan Basin bodes well for the future. Weichai Westport recently doubled production capacity at the Weichai Westport facility to be able to produce 40,000 engines annually.
Westport’s partnerships with Clean Energy (NASDAQ: CLNE) and Royal Dutch Shell are important aspects of helping to create the infrastructure necessary to make Westport’s products economically feasible and viable fuel alternatives. Expanding distribution, and creating a natural gas highway system will enable broad adoption of Nat Gas for middle/heavy duty trucks and increase the practicality for passenger and light duty vehicles.
According to the U.S. department of Energy, there are 54 LNG stations in the U.S. with the largest concentration in California. Only 21 are publicly accessible, but 60 new stations are scheduled to be commissioned by the end of year as part of Clean Energy Fuel’s Nat Gas highway expansion. Additionally, Shell recently announced a partnership with TravelCenters Of America (TA) to construct 200 LNG fueling lanes and 100 TA sites along US highway major arteries which will make conversion from HD Diesel engines to Nat Gas a viable alternative for the huge market of long haul trucks. The EPA is considering future incentives for CNG cars, and GE (NYSE: GE) has begun a 28-month project to create a home refueling station for CNG vehicles that would cost approximately $500 for homeowners, and fill the vehicle in 60 minutes. The combined potential is enormous.
Performance and Valuation
Revenue for the second quarter was $106.1 million, a 136% increase (YoY), highlighted by an 182.2% increase in light duty revenue and a 205.8% increase in Weichai Westport revenue and 78.5% increase in CWI revenue. HD revenue was $3.7 million, but consider that they sold 75 HD systems in comparison to 17 systems in Q2 2011. Full year guidance was reiterated at 50% growth.
WPRT’s net loss for the second quarter was 6.1 million versus 18.1 million for the same period in 2011. Westport issued 6,325,000 common shares in a secondary offering in February at a price of $43.25 for gross proceeds of $273.6 million. As of June 30, WPRT had $307.2 million cash on the balance sheet, which provides them with a strong working capital position, and firepower to invest in R&D and future growth.
While margins vary by product, consolidated revenue margins were 38.2% versus 33.9% in the same period in 2011. At an intraday price of $32.18, Westport trades at 4.42 price to sales ratio, which is reasonable given the growth trajectory.
Speculative pick or Smart Investment?
Westport has displayed growth in all segments in 2012 despite tough macroeconomic factors, continues to expand their products, and markets. Despite the Nat Gas bill failing to pass in early 2012, the momentum and economics bode well for the future of Westport. Economics, and markets can eventually trump politics.
The risks are real, especially when you invest in a company with no earnings, an uncertain regulatory landscape, and high execution risk. However, after following Westport, I have gained an appreciation for the management, and my perception of Westport has gone from a speculative pick to a company that is close to a tipping point. While I do not expect the company to become profitable in the short-term, an investment now is a chance pre-empt a breakout that I feel will happen over the next few years in several market segments, but especially in long haul trucking where the economic, and environmental benefits of Nat Gas engines is a no-brainer. This is not an all-in investment. Please buy in increments and at better value points. The stock trades with extreme volatility, so remember to think long-term. Rarely do economic and environmental benefits work in tandem, but Wesport offers the opportunity to get in early and fill your portfolio with profits.
Interested in Learning More?
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JAF1975 has positions in WPRT and GE. The Motley Fool owns shares of Clean Energy Fuels, 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.