Most Green Sectors have shown an abysmal stock performance over the last couple of years. However energy efficiency and smart grid stocks have not been that badly affected. This is due to strong buying interest from the big electrical and industrial companies like GE (GE), Siemens (SI), and ABB (ABB) etc. Westport Innovations (WPRT) is not exactly an energy efficiency company; however it is close to one. The company's core competence lies in the construction of alternative fuel engines (more specially Natural Gas). The company is a direct play on the adoption of NG in the U.S. transportation sector. The recent shale gas boom and falling NG prices resulted in a sharp run up in WPRT stock. However, as NG prices have stabilized at ~$4/mmbtu (up more than 100% from its all time lows), WPRT stock has gone down along with other NG Transport stocks. The company also reported downbeat Q312 earnings in which it indicated that the adoption of NG infrastructure was slower than expected.
7 Reasons to Like Westport Innovations
- Natural Gas Engine Technology - WPRT is one of the very few companies in the world focused on NG technology for transportation. The company has tied up with big partners like Cummins (CMI) and Ford (F) to build NG engines for trucks. These engines will not only have a big market in USA in the future but also other international markets. Countries like India (TTM signed a JV with WPRT), Pakistan, Iran etc. already have huge NG vehicle fleets. A more efficient and economic engine will be a hot-selling item in these well developed NG markets. The company has the largest natural gas engine patent portfolio with 303 patents.
- U.S. Energy Security - The U.S. transportation sector depends mostly on oil for fuel. This leads to hundreds of billions of oil imports from politically unstable and despotic regimes such as Saudi Arabia. The U.S. can sharply reduce its oil imports by adopting NG for transportation. The recent Shale Gas boom has shown that the U.S. has huge deposits of untapped NG. While there are analysts who think that the prices of NG will rise much faster than anticipated, even then I think that NG will be competitive with the price of gasoline. A number of fleet operators, truck manufacturers and logistic companies have signed JVs with CLNE and WPRT. As NG adoption accelerates, no big company wants to get left behind.
- NG is more economic than Oil - Clean Energy Fuels (CLNE) mentioned that NG has an advantage of almost 40% in fuel terms over gasoline-powered engines. Even without considering the climate change angle, adopting NG makes a huge amount of economic sense. In our world today, the cleantech companies that have been successful are those that provide economic benefits rather than green benefits.
- CAFÉ Standards - The U.S. has been increasing the energy efficiency requirements of vehicles through the CAFÉ standard. Electric Vehicles and Hybrid Vehicles have not lived up to the hype due to bad economics. Different solutions will have to be found for meeting the emission standards and NG is one of the best candidates out there
- NG Infrastructure Falling into Place - CLNE has completed almost half of its LNG fuel stations project. Under ANGH, CLNE is building 170 LNG fuel stations across America and is relying on WPRT to equip vehicles with LNG engines. So without investing a penny, WPRT is getting a ready-made fueling infrastructure for its future NG vehicles.
- Partnerships - Westport Innovations has signed important partnerships with blue-chip auto related companies like Cummins (CUM), General Motors (GM), Ford , Tata Motors (TTM) and Caterpillar (CAT). The company is expanding offerings with new products being introduced with NG engines. In 2013, WPRT will be introducing NG versions of the Ford F-450 and F-550 heavy duty trucks. This builds on WPRT line up of F-250 and F-350 NG powered trucks.
- Takeover Target - Westport has got strong partnerships with engine makers Cummins and Weichai. The company's IP makes it an attractive takeover target for bigger engine companies. The company's JVs with these companies are already generating substantial revenue. These companies may decide that buying out WPRT may make more economic sense than simply having a JV.
- Slow rate of NG adoption - The company sharply lowered its 2012 topline guidance to 30% year/year growth from 50% y/y growth as NG adoption slowed. Its customers will not use its products unless they see a viable NG fuel infrastructure in place. If companies like CLNE go bankrupt for some reason, then WPRT could be in serious trouble as well.
- Not Profitable Yet - WPRT has not shown any profits for the past five years as it is primarily in the R&D and market creation stage. The company is not expected to turn profitable in the next couple of years so that is a headwind for the company. The company's GM also decreased slightly to ~33% (nine months YTD) from 35% a year earlier. The company has been sharply reducing the ASPs (down 22.4% y/y) to generate higher volumes and bring down the final cost for customers.
- Product Delays - WPRT is expected to deliver the 11.9-liter Cummins Westport engine and the 13-liter Volvo engine in 2013. Any product delay will have a negative effect on the stock price.
WPRT trades at almost 4x P/S and P/B. The sentiment toward WPRT has turned negative with some prominent brokerages reducing their buy ratings on the stock. We consider this positively as it gives a better entry point. The stock is currently trading at ~$26, which is almost 40% below its peak price reached early this year. The stock is not super cheap but given the potential, I think it's not a bad time to build a position. The company has been sharply growing revenue over the past few years and investing those gross profit dollars into R&D and marketing.
We had mentioned earlier that it might not be the right time to buy Clean Energy Fuels . However, in the case of WPRT we are more positive because it is more of a technology play rather than an infrastructure company. The company's IP has considerable value, which can been seen by its JVs with some of the top auto market players. While it is debatable whether a better entry point could be found, the fact is that a lot of the NG froth has gone after the sharp decline in the stock price. Like GT Advanced Technologies (GTAT), we think that large profits are still sometime away, however the technology advantage is indisputable.