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Introduction

Westport Innovations (WPRT) is a global leader in alternative fuels and low-emission technologies, which allows engines to operate on clean-burning and cheaper fuels such as compressed natural gas, hydrogen and biofuels. The company is based in Vancouver, Canada, and has facilities in France, Sweden, Italy, China, Australia and the USA.

WPRT has clearly established itself as the leader in the alternative fuel frontier, and its technologies are applicable to virtually every kind of gas and diesel-fueled vehicle. Although it's not yet shown a profit, the upside potential is enormous, if not astronomical.

In my view, the company has developed a coherent global business model that it's successfully executed upon. Since 1995 WPRT has spent nearly $400,000,000 on R&D, and it now appears that the reaping of the rewards is nearby.

Its shares have had a 52-week high of $50.19 and a low of $21.93. During the past week investor interest has apparently been re-kindled, which moved the stock from $26.70 to $30.25, and it made this impressive 13%+ move on increased volume. At the time of this writing (2/13/2013), shares are moving in tandem with the market and they're off $.90, which is great for those looking to get on board.

As discussed below, I believe the company has reached a critical turning point in its corporate history, and it's positioned for continued growth...with profitability.

Overview of the Positives

There's a variety of reasons why investors should take a very close look at WPRT for both the short term and the long term:

  • Analysts following the company project earnings growth next year of 25.57% and a 5-year earnings growth rate of 27.5%.
  • Its business structure of developing Joint Ventures with deep-pocketed OEMs is advantageous, unique and it's been successful
  • Its strong "First Mover" advantage has reduced the prospects of serious competition
  • Development lead times in its sector discourages entry of new competitors
  • The capital intensive nature of the model is a barrier for new entrants
  • Its significant portfolio of 325 patents has created an economic moat
  • The argument of using natural gas as an alternative fuel is compelling

Overview of its Partnerships & Alliances

Its business structure of developing joint ventures with deep-pocketed OEMs has not only been successful, but it brings a grand number of advantages to the company. For example, its strategic relationships with OEMs provides it with access to the OEM's manufacturing capacity, supply chain and global distribution networks without incurring the considerable investment associated with these assets.

It currently has strategic alliances with three of the world's top four engine producers, and supplies or has strategic alliances with six of the world's top 10 truck producers. In the light-duty market, WPRT has strategic relationships with seven of the world's top 10 automotive OEMs.

In addition to its OEM joint ventures and strategic alliances, the company has various forms of business relations with:

  • Natural gas fuel and infrastructure providers
  • International government agencies
  • Universities and research laboratories
  • Industry-related organizations and alliances

The Cummins-Westport Joint Venture

WPRT's first and most significant joint venture is with Cummins Inc., one of the top diesel engine manufacturers in the world. Founded in 1919, its participation with WPRT has added credibility to WPRT's technology and business plan, and has impressed investors.

Revenue Growth of The Cummins-Westport Joint Venture

YearRevenues
2007$66,000,000
2008$93,000,000
2009$102,000,000
2010$117,000,000
2011$164,000,000
9 Months 2012$155,000,000

The Weichai Westport - The China Connection

In China, WPRT was again successful in attracting substantial partners. The 40% partner is Weichai Power Co. Ltd., China's largest heavy-duty engine manufacturer, and a 25% participant, Hong Kong Petersen Equipment Limited, which develops, manufactures, and sells advanced, alternative fuel engines for use in automobiles, buses, heavy-duty trucks, marine applications and power generation. WPRT's equity in the JV is 35%.

Revenue Growth of The Weichai Westport Joint Venture

YearRevenues
2008$10,000,000
2009$19,000,000
2010$44,000,000
2011$109,000,000
9 Months 2012$165,000,000

Further Comments on The JV Prospects

In addition to the obvious benefits of funding, distribution, expertise and spreading the risk, another possibility could be the prospect of unlocking shareholder value in the future by taking a JV public. Such a move could unlock significant value for shareholders and WPRT itself. Such a strategy has not, to my knowledge, been addressed by WPRT, but I think it's worthy of consideration since such deals are not uncommon.

Growth Through Customer Cost Savings

The cost savings of switching to natural gas for trucking companies is a powerful incentive. Obviously, it will be difficult for truckers using expensive diesel to compete with those running on cheap natural gas. WPRT's patented fuel injectors squirt in a mix of 5% diesel and 95% nat gas, providing the option to run on diesel alone when necessary. While a hurdle is the build-out of the natural gas refuel network, natural gas fueling stations are currently being built along major corridors in North America and throughout the world.

Multiple Markets for Growth

The natural gas vehicle (NGV) industry is a large and rapidly growing market. According to NGV America, as of May 2011 there were more than 13 million natural gas vehicles in use worldwide, including approximately 112,000 operating on U.S. roads. The International Association of Natural Gas Vehicles projects that there will be more than 50 million natural gas vehicles worldwide within the next 10 years, representing approximately 9% of the world transportation fleet.

One of the primary drivers accelerating NGV adoption is the increasing price stability advantage that natural gas has over petroleum. As demand for oil rises, price increases and/or fuel shortages will result, thereby enhancing market conditions for adoption of cheaper alternative fuels such as natural gas. As the relative price of diesel compared with natural gas increases, the payback period shortens, and the incentive to switch becomes more attractive.

In the medium- and heavy-duty vehicle market (consisting of vehicles over 3.6 tons) the compound annual growth rate is projected at 7.9%, which translates to a market of $343 billion by 2014, and today only a fraction of these vehicles is powered by natural gas, presenting a considerable opportunity.

In the so-called light-duty segment, the replacement of petroleum-based fuel with natural gas falls into three target markets: forklift engines, oilfield engines and fleet vehicles. The market for alternatively fueled industrial forklift engines was estimated in 2008 at 62,000 engines per year in North America, according to the Industrial Truck Association. The market for light-duty fleet vehicles consists of business-owned fleet cars, taxis and delivery vans. Natural gas substitution could yield significant cost savings and emissions reduction as fleet vehicles travel more miles on average and are replaced more frequently than privately owned cars.

Conclusion

As mentioned in the introduction, the upside potential of WPRT's model is enormous, if not astronomical. The company has spent a decade on R&D and in developing its joint ventures and strategic alliances. I believe its exemplary efforts and its R&D will soon translate to ROI. As a result, I highly recommend WPRT as a "Buy" and a long-term "Hold."

Source: Westport Innovations: R&D Will Soon Translate To ROI - It's A Buy