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, Cory Renauer (20 clicks)
Biotech, healthcare, value, long-term horizon
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The market for natural gas as a fuel in trucking is here and now. That's evident in the explosive growth of revenue at Westport Innovations (NASDAQ:WPRT). Since 2004, the company has increased revenue at a compound annual growth rate of 22.7%, from $24.73 million in 2004 to $155.63 million in 2012. Based on the company's revenue outlook for fiscal 2013, it expects to continue growing revenue at a similar rate.

Also promising is the continued rollout of America's Natural Gas Highway by Clean Energy Fuels (NASDAQ:CLNE). During the latest earnings call, Clean Energy CEO Andrew Littlefair reported the completion of 70 LNG highway stations, and 62 core market stations that serve the refuse transit and airport markets. Royal Dutch Shell (NYSE:RDS.A) also announced recently that it is working with TravelCenters of America (NYSE:TA) to develop LNG fueling lanes at up to 100 existing travel centers along US interstate highways. The chicken and egg problem is practically solved for long haul truckers.

More good news comes from Westport's joint ventures. The partnership with Cummins (NYSE:CMI) is humming along, and production of the Cummins Westport ISX12 G engine began on schedule in April. Quarterly revenue for the CWI joint venture was down about 15% year-on-year, but that sort of "adverse lumpiness" isn't unusual. The partnership with China's Weichai is bursting. Year-on-year, WWI revenue increased 185% for the latest quarter.

Now for the bad news. Joint venture margins are getting squeezed. For the Cummins Westport venture, revenues came in at $44.7 million. Westport's recognized share of the CWI venture's net income for the quarter was an astounding $0.791 million, about 1.77%. Break out the champagne.

From the Weichai-Westport venture, during Q1 2012, Westport recognized $0.601 million from WWI revenue of $37.207 million, about 1.62%. Q1 2013 product revenue was about $105.9 million, Westport's realized net profit was $1.006 million, about 0.95%. It seem that in a few more years, Westport's recognized profit from the WWI joint venture won't be enough to buy a bowl of noodles.

Let's take a look at Westport's income statement.

2012

2011

2011

2010

2009

2008

2007

2006

2005

2004

Revenue

$155.63M

$226.54M

$148.06M

$121.65M

$96.49M

$69.50M

$52.43M

$37.36M

$28.47M

$24.73M

EPS

$-1.83

$-0.96

$-1.00

$-1.02

$-0.64

$-0.41

$-0.46

$-0.69

$-1.10

$-1.71

Avg. Shares

54.07M

47.93M

42.31M

34.13M

30.27M

25.17M

21.48M

21.21M

19.82M

16.87M

Net Income

$-98.77M

$-45.79M

$-42.14M

$-34.69M

$-19.34M

$-10.02M

$-9.80M

$-14.46M

$-21.67M

$-28.77M

Profit Margin

-63.47%

-20.21%

-28.46%

-28.51%

-20.05%

-14.42%

-18.70%

-38.71%

-76.11%

-116.32%

The first thing you probably noticed is that it looks like I've entered the year 2011 twice. In 2011, the company changed the end of its fiscal year from March to December.

You can see that revenue growth is outstanding. If you only look at earnings per share, the company's losses appear to be in control. Notice the increasing number of shares used to compute those EPS figures. The company's negative profit margin isn't as steady as the EPS figures would suggest. The loss of $0.63 for every dollar of revenue in 2012 is downright frightening.

Let's look at Westport's balance sheet.

2012

2011

2011

2010

2009

2008

2007

2006

2005

2004

Shareholder Equity

$336.08M

$152.59M

$181.09M

$96.71M

$48.28M

$28.95M

$9.21M

$8.36M

$22.02M

$25.98M

Long Term Debt

$52.16M

$65.58M

$10.01M

$12.74M

$8.99M

$0.01M

$11.95M

$0.72M

$1.28M

$0.79M

Debt/Equity Ratio

0.16

0.43

0.06

0.13

0.19

0.00

1.30

0.09

0.06

0.03

Outstanding Shares

54.07M

47.93M

42.31M

34.13M

30.27M

25.17M

21.48M

21.21M

19.82M

16.87M

Book Value Per Share

$6.22

$3.18

$4.28

$2.83

$1.59

$1.15

$0.43

$0.39

$1.11

$1.54

Westport continues to grow in a series of fits and starts that is anything but predictable. Equity growth over the past few years is impressive, but in the face of increasingly negative margins, I don't think anyone can confidently expect it to continue.

The case for outstanding growth of natural gas as a transport fuel is a strong one. I just don't think that Westport is a sound long-term investment until it can show some signs that it is heading towards profitability. Successful startups are supposed to become more profitable as they scale up. Since 2008, Westport's profit margins have become increasingly negative despite ballooning revenues. I very badly want to see this company succeed, but I'm considering a short position.

Source: Losses Growing Faster Than Revenues At Westport