Westport Innovations Has an Audacious View of the Future

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

I admire Westport Innovations (NASDAQ: WPRT) for going out on a limb in the company's recent earnings call. The CEO stated without qualification that the world is undergoing a major shift from oil to natural gas. Doubts are shoved aside and the course of energy is clearly delineated. The shift does not mean rapid adoption of the new system and dumping the old one. This is not DVD replacing VHS. There will be a time of two primary energy sources. However, the enormity of the change is considerable since the world has been on oil for many, many decades after the transition away from coal.

Obviously the statement plays right into Westport's hands, but it is not just political hyperbole. I believe it is a real event that is transpiring. I do not know if it's the solution of the century, but natural gas will become an ever-increasing part of the U.S. economy. It is too useful, abundant, and (for now) cheap to be unused. Even exporting it would be a mistake, because we need that energy here. It might not be time to sound oil's death knell, but it definitely needs to take a back seat.

Westport really laid out a heavy plan and it makes me think they want to become the name in natural gas when it comes to both distribution and usage. It sounds like it wants to make the tanks that store the natural gas and the engines that burn it. So far there are only partnerships with companies building stations. However, Westport is leasing out mobile refueling stations for remote sites or while stations are being built. I think that is a great strategy for bring in some regular income.

As the build-out happens across major transportations corridors, those temporary refueling devices will be exceptionally useful. Particularly if you want truckers to know that a location has natural gas as an option. Having the leased device while building makes sure that when the full station comes online some customers are already built in. Right now, though, the focus is on capturing as much of the market share as possible considering the projected breakneck growth. Diversifying into other avenues is a secondary thought at best. For now the focus should be on scale, cost, and outreach.

For those interested in the fuel providers and not the engine-makers, take a look at Clean Energy Fuels (NASDAQ: CLNE), which is deeply involved in building stations on America's Natural Gas Highway. The company focuses on distribution, not production of the fuel or automotive parts involved in burning the fuel. According to the earnings call the company is already a leader in distribution in certain specific areas like airports and other transit locations. The real focus of its expansion plans is building stations for the increasing number of vehicles and trucks shifting to natural gas. A changeover to natural gas will never happen without the convenience of refueling stations.

However, refueling stations are unlikely to be built unless there is some way to make a profit. So both tracks have to progress simultaneously. It finally seems like natural gas is over that hurdle, and both engines and distribution have started to roll out at an even pace. Clean Energy will have 70 stations up and running by the end of this year, and another 64 already in the works for next year with more planned. One reason to consider this investment side-by-side with Westport is that the earnings call makes numerous mentions about the Westport engines being used by different organizations. Own the company that fills the tank and the company that burns the fuel for a powerful investment on natural gas. Add in a production company and you have a very bold statement.

Fuel Systems Solutions (NASDAQ: FSYS) is a natural gas component maker that is far smaller than Westport. It also has agreements with GM and Ford to name a few. The company is small, so agreements are not yet plentiful or numerous, but from what I have seen so far it seems to be a solid company doing good work. Unlike Westport's earnings call, Fuel Systems' focused more on past and current laurels rather than a bold picture about the future.

Luckily for us, everything Westport said about the natural gas fuel market applies to Fuel Systems as well. The goal is for the company to capture the growth. This last quarter the company posted some losses, but that doesn't mean that it will fail to capture future growth. Also, margins contracted due downward pressure from local European competitors. I hope economies of scale will eventually price out locals. It seems harsh, but it could mean lower costs for all whilst boosting margins. Other than watching those developments carefully, there is not much to say until we get a lot more info on the size and profitability of the automotive deals.

I really do think natural gas will be big in the long-term, but only in the early long-term. Westport is one of the best known names in the game. However, I do not think it is overpriced or too hot considering it is closer to its 52-week low than its high. With the powerful growth expected in the future I think it is priced low enough to make a long-term investment viable. Fuel Systems is the riskier choice and the smaller option, but it sounds like there are solid deals in place. Clean Energy deserves consideration for its vigorous effort to build out new stations, and I will be taking a closer look at the company rather than just seeing how nicely it fits into the natural gas economy. I think I will look at distributors more closely, but this time I focused on engines and components.


TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels and Westport Innovations. Motley Fool newsletter services recommend Clean Energy Fuels 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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