As natural gas has changed the landscape on how Americans heat and cool their homes, companies are now looking to adopt natural gas as a transportation fuel. The hope is to reduce costs and transition to a cleaner burning fuel. The trucking industry has the most incentive to make this transition. The major problem behind this initiative is the lack of infrastructure in regards to fueling stations. The transportation sector is looking to undergo a revolution in the conventional way of doing business. As with any new industry, there will be winners and losers. The purpose of this article is to identify which companies are likely to benefit and which are likely to lose over time.
United Parcel Service, Inc. (UPS)
Dividend Yield: 3.00%
UPS just announced that it is increasing its investment in liquefied natural gas (LNG) transportation. The company is purchasing 700 LNG vehicles and building four refueling stations by the end of 2014. Scott Davis, UPS Chairman & CEO said:
LNG will be a viable alternative transportation fuel for UPS in the next decade as a bridge between traditional fossil fuels and emerging renewable alternative fuels and technologies that are not quite ready for broad-based long-term commercial deployment. When other shipping and logistics companies are talking about possibilities, we are putting alternative fueled vehicles on the highway. LNG is a good alternative to petroleum-based fuel for long-haul delivery fleets as it is abundant and produces reduced emissions at less cost. At UPS, we are helping to knock down some of the biggest hurdles to broad market acceptance of LNG in commercial transportation by continuing to establish vehicle demand, fuel and maintenance infrastructures.
Globally, UPS has more than 1,000 natural gas vehicles on the road. Of those, UPS has 112 LNG tractor trailers in the U.S. operating between fueling stations on Las Vegas, Nevada; Phoenix, Arizona; Beaver and Salt Lake City, Utah; and Ontario, California.
In looking at UPS, we see that it trades with a forward P/E of 14.65. Operating margins are 2.45% and return on equity is 13.63%. On the balance sheet there's $7.92 billion in cash to $12.92 billion in debt. Operating cash flow is $7.22 billion.
Over the past year the stock is up 7%. The company pays an annual dividend of $2.48 per share for a yield of 3%. Of the analysts that follow the stock, 8 have it rated as a Strong Buy, 8 a Buy, and 13 a Hold. Price targets on the stock range from $80 to $100 with $92 being the median target.
Cummins' Yield: 1.90%
Westport Innovations is the global technology leader in natural gas engines. The company has a joint venture with Cummins called Cummins Westport to manufacture natural gas engines. Their 100% natural gas engines are available factory-direct from leading truck and bus manufacturers. Over 35,000 engines have been manufactured by Cummins Westport. The 50/50 joint venture was formed in 2001 by the two companies. The joint venture produces engines ranging from 5.9 to 11.9 liters with horsepower from 195 hp to 400 hp. As more companies switch to natural gas as a fuel source, this joint venture will benefit from this switch.
In looking at Cummins' stock, the company trades with a forward P/E of 10.68. Operating margins are 11.18% and return on equity is 27.15%. On the balance sheet there's $1.62 billion in cash to $775 million in debt. Operating cash flow is $1.53 billion.
Over the past year, the stock is down about 5%. The company pays an annual dividend of $2 per share for a yield of 1.90%. Of the analysts that follow the stock, 4 have it rated as a Strong Buy, 9 a Buy, and 7 a Hold. Price targets on the stock range from $110 to $144 with $135 being the median target.
In looking at Westport stock, the company continues to lose money. There's no other way to put it. The company has a lot of valuable technology and patents and that is where the value is in the company. Cummins has been touted in the past as a possible buyer of Westport. However, with a joint venture already in place with Westport, why would Cummins buy them out? Furthermore, Westport has a current market cap of $1.62 billion. That's not a cheap buyout for a company that is maybe two years from being profitable. Westport in my opinion is a risky play in the space.
Clean Energy Fuels Corp. (CLNE)
Clean Energy Fuels supplies compressed natural gas (CNG) and liquefied natural gas for transportation. At the end of last year the company supplied 650 fleet customers with approximately 30,600 natural gas vehicles. According to Clean Energy, their goal is to create America's natural gas highway. The first phase includes approximately 150 LNG fueling stations with more than 70 anticipated in 33 states by the end of 2012 and the balance in 2013. Many will be co-located at Pilot-Flying J Travel Centers.
In looking at Clean Energy's stock, we see the same problem with Westport Innovations. Clean Energy is bleeding cash and will need further capital to fund operations. According to the most recent 10-K:
We will be required to raise debt or equity capital to fund the growth of our business. At December 31, 2012, we had total cash and cash equivalents of $108.5 million, short-term investments of $38.2million and $13.2 million in restricted cash for capital use. Our business plan for 2013 calls for approximately $186.2 million in capital expenditures. We may also require capital for unanticipated expenses, mergers and acquisitions and strategic investments. In addition, we have committed to significant future payments that we will be required to make in connection with our acquisitions of IMW and Northstar. At December 31, 2012, our future payments for IMW and Northstar totaled $25.1 million and $4.1 million, respectively. Our IMW future payment obligations are in the form of promissory notes, and such notes are secured by IMW's assets. As a result, if we do not make scheduled IMW future payments, the party to whom such payments are due may be entitled to accelerate the maturity of the notes and exercise other remedies available to a secured creditor. We are also obligated to pay up to $40.0 million as additional consideration related to our IMW acquisition if IMW meets certain performance measurements.
By looking at this statement, it has me concerned about Clean Energy. The market thinks so too with the stock down over 27% in the past year. In my opinion, it's a buyout candidate for Pilot-Flying J Travel Centers. The question is what will they pay for it? The current market cap is $1.16 billion, not a cheap price for another company losing money. And if they don't buy the company, Boone Pickens will be left to continue to fund Clean Energy and that will dilute existing shareholders. He will benefit, not current shareholders.
The primary beneficiary of natural gas as a transportation fuel will be the producers. As natural gas for transportation gains more commercialization, they'll have another customer for their gas. The two largest producers in the U.S., Exxon Mobil (XOM) and Chesapeake Energy (CHK) will greatly benefit.
Manufacturers like Cummins will win as more natural gas engines are sold. I would rather play the space with Cummins stock than with Westport Innovations. Cummins is in it for the long-term. Westport could run out of money.
End-users like UPS will benefit. They will achieve cost savings using cheaper natural gas over diesel. As the infrastructure is rolled out in the U.S., they will convert more of their fleet to running on natural gas.
The 2 losers in the space will likely be Westport Innovations and Clean Energy Fuels. Both are the prime innovators in the space and have done a great job of promoting natural gas as a transportation fuel. Unfortunately, I think they are ahead of their time and Wall Street will run out of patience before they turn a profit. That will be painful for current shareholders.