Westport Innovations, Inc. (WPRT) remains a leading way to invest in the transition to natural gas as a transportation fuel. As previously noted, the market is no longer impressed with the growth rate of this once market darling. The company expects to benefit greatly from the building of the natural gas highway by Clean Energy Fuels (CLNE) and a new engine from the Cummins Inc. (CMI) joint venture, though in both situations the catalyst remains months away.
The company is a global supplier of proprietary solutions that allow engines to operate on clean-burning fuels such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen, and renewable natural gas (RNG) fuels.
Prior to the recent quarterly report, Westport dropped revenue expectations for 2012 from greater than 50% growth to a still strong 30% growth rate. These reduced numbers, while remaining strong, unfortunately point to higher than expected losses into 2013. All signs point to a strong future as US and China demand surges, yet the stock continues to show weakness as profits remain a big question mark.
Q3 2012 Highlights
The company reported the following highlights for Q3 2012:
- Product revenue for the quarter ended September 30, 2012 was $65.1 million, a decrease of $7.1 million, or 9.8%, from $72.2 million for the three months ended September 30, 2011.
- Parts revenue for the quarter ended September 30, 2012 was $9.7 million, an increase of $1.2 million, or 14.1%, from $8.5 million for the three months ended September 30, 2011.
- For the three months ended September 30, 2012, Westport reported a consolidated adjusted EBITDA loss of $18.5 million compared with a loss of $5.4 million in the prior year period. The reconciliation of adjusted EBITDA is described below.
- Reported a net loss of $0.59 per share for the quarter compared to a loss of $0.27 for the prior year period.
The Q3 results were very disappointing as the company reported a larger than expected loss for the third time in the last four quarters. As expected, the loss was larger than last year as well. Worse yet, a company that reported strong Q2 results that approached breakeven turned around and reported the largest loss in over a year during Q3.
Due to the lowered expectations in the second half of 2012 and less confidence in the immediate ramp of new catalysts such as the Cummins Westport (CWI) 12-liter engine, analyst estimates for 2013 have plunged over the last 60 days to a loss of $1.07. Most frustrating to investors is that the estimates for 2012 were at a loss of $1.10 at that point 60 days ago. Pushing out earnings expectations a year is never good for a stock.
The company has numerous catalysts that will push the investment thesis forward over the next couple of years. Unfortunately most of these catalysts will likely lead to delayed customer purchases over the next couple of quarters while waiting on these products to hit the market.
- CWI ISX12 G engine is edging closer to production. The heavy-duty natural gas engine for regional hauling is expected to support the fueling vehicles for the Clean Energy Natural Gas Highway fueling station plan. The expectations remain for an early 2013 launch with and a ramp throughout the year with partners including Freightliner, Peterbilt, Kenworth, Volvo and Autocar.
- Cummins Westport 6.7 liter engine targeting school buses.
- New development agreement with Tata Motors (TTM) to develop an engine for light- and medium-duty trucks and buses.
- Joint venture with Caterpillar (CAT) to develop LNG engines for mining trucks and locomotives.
All of these catalysts will provide for a strong end of 2013 and beyond.
The stock has seen considerable support around $24 this year, but the lower highs are suggesting that the stock might head below that support level. While investors originally cheered the earnings report, the continued analysts revisions of earnings will pressure the stock.
1-Year Chart - Westport Innovations
The stock had a huge spike after the earnings report, but reality is now setting in that the growth of the business will stall for the next 3-6 months. On top of that, the substantial losses and disappointments over the lowered growth has pushed this stock down over 30% in the last three months. This drop is significantly more than the other natural gas infrastructure stocks and joint venture partners.
Valued at only $1.4B, Westport has a much less appealing valuation than the last review after the Q2 earnings report. Analysts have now downgraded the 2013 revenue forecasts to $450M or 28% growth. The lack of positive earnings was a big concern and the issue is even more pronounced now with lowered revenue expectations.
While analysts were forecasting 20% revenue growth for Q4 and a loss of $0.21, those numbers have now been thrown out. The expectation is now for a dramatic revenue decline and a loss approaching Q3 levels.
The stock is becoming less attractive after the combined news from Clean Energy and Westport on the reality of building out a natural gas highway system and the delayed demand for Westport products until after the CWI 12-liter engine hits the highways in mass toward the end of 2013.
On the earnings call, the company shared how a new LNG fueling station only requires 20 trucks to become operational yet Clean Energy was clear that numerous completed stations have been unable to open.
As the domestic infrastructure becomes a reality in 2013 and beyond, the question remains whether the natural gas price will provide the cost advantage by then. Prices have already doubled from the lows and most of the projects being built to benefit from natural gas have yet to hit production. Will the market be ready for that surging demand?
Westport provides a very compelling product, yet the opportunity to invest is falling farther away. Whether the fiscal cliff, lack of infrastructure, or just a pause until the 12-liter engine hits production levels, the market appears to have hit a significant weak spot. The catalysts are compelling, but clearly too far away considering the company continues racking up loses.
Additional disclosure: Please consult your financial advisor before making any investment decisions.