By David Sterman
In any industry, investors weigh the relative merits of the best growth stocks versus the best value stocks.
And in the race to tap into the burgeoning natural gas vehicle market, the growth stock has typically ruled the day. Westport Innovations (NASDAQ:WPRT) has become quite well known among energy industry investors while rival Fuel Systems Solutions (NASDAQ:FSYS), a struggling value stock, disappeared off radars.
Back in April, I suggested that investors should give Fuel Systems Solutions a fresh look, as a solid near-term catalyst was in place: General Motors (NYSE:GM) was gearing up to launch new pickup trucks with Fuel Systems' compressed natural gas (or CNG) engines. And shares are up more than 30% since then. I still think Fuel Systems is a solid investment opportunity, but I also think it's time to give Westport -- the former industry high-flier -- a fresh look.
While shares of Fuel Systems have been surging, shares of Westport Innovations have been sliding. But for Westport, the rewards are starting to outweigh the risks.
Click to enlarge
As a quick primer, Fuel Systems is mostly focused on smaller natural gas engines suitable for cars and light trucks, while Westport Innovations is taking the big rig market. Truck engines can be up three times the size of car engines and, thanks to their complexity, can cost 10 times as much. Thanks to a recent acquisition, Westport is moving downstream as well with plans to build engines for Ford's (NYSE:F) F-150 pickup in early 2014.
At first glance, it might seem surprising that Fuel Systems has been the better stock. The company concedes that sales are likely to grow less than 10% to 15% in 2014, while Westport is guiding toward 50% top-line growth next year. And in years past, Westport has delivered solid growth, with sales rising from $37 million 2006 to more than $150 million in 2012.
Yet 2013 is now shaping up to be a very tough year for Westport as a pair of new engine programs are off to a slow start. The company's massive new 15-liter engines, which are optimized for heavy loads, are still being tested by key fleet buyers, and large orders have been slow to materialize. And the company's joint venture in China, while growing quickly, is not growing as fast as analysts had expected. Still, it's hard to see 133% year-over-year quarterly growth as a disappointment. Also, the company is seeing a sharp drop in customer-funded research and development compared with a year ago.
The real problem -- and the reason I have not been a huge fan of this stock -- is an inability to see a path to profitability. Indeed, we are at least a few years away from positive net income. But investors should pay closer attention to cash flow rather than profits. And on that metric, Westport is reaching an inflection point.
In each of the first two quarters of 2013, Westport generated an EBITDA (earnings before interest, taxes, depreciation and amortization) loss exceeding $25 million. And indeed, quarterly EBITDA losses are likely to exceed $15 million in the last two quarters of 2013 as well. But over the course of 2014, a resumption of solid revenue growth should sharply reduce the burn rate, and Westport may even generate positive EBITDA by the fourth quarter of 2014, according to some analysts' models.
And as long as investors see that trajectory starting to take root, they will refocus on what is likely to be a solid revenue growth story in coming years. Simply based on the current budding joint venture relationships, Westport is expected to see sales hit $250 million next year and $350 million by 2015.
Lastly, it's worth noting that Westport has been awaiting a catalyst that has yet to arrive. Several ill-fated congressional attempts to mandate a much higher use of cheaper and cleaner natural gas in our nation's trucking fleet have never been signed into law. Yet the issue still has bipartisan support, and if legislation is eventually enacted, this stock would take off like a rocket.
But legislation may not be necessary to get this stock moving higher. As the recent rise in crude oil prices and drop in natural gas prices again underscores, the lifetime fueling costs of natural-gas-powered truck fleets are considerably lower than those of diesel-powered fleets.
Risks to consider: Although Westport currently has more than $100 million in cash (thanks to a well-timed secondary share offering in 2012), shares would fall even further if the cash burn doesn't start to diminish as expected as investors would fret about yet another capital raise.
As investor perceptions have shifted from Westport as a great growth company into a stubbornly unprofitable one, shares have fallen more than 40% since peaking in early 2012. Yet it's precisely that pivot back toward growth perceptions -- once the burn rate starts to quickly drop, that should send this stock higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.