Westport Innovations: A Must Own Secondary

Sep.26.13 | About: Westport Fuel (WPRT)

Very few scenarios occur where a stock drops due to an event that's a major positive for new investors. A secondary stock offering can be harmful to existing shareholders, but new investors get the advantage of a stronger balance sheet or a major insider reducing a position possibly overhanging the stock.

In the case of Westport Innovations (NASDAQ:WPRT), the company is busy developing technology to take advantage of the switch to engines that can use the suddenly abundant and cheap natural gas supplies. In fact, a joint venture with Cummins (NYSE:CMI) recently released the much hyped 12L engine needed for regional-haul trucks that don't daily return to the base of operations. As recently detailed in Westport: Joint Ventures Hide Major Catalysts, the release of this engine is one of several major catalysts that should propel the stock higher with one major catch at that point. That catch just happened to be the cash burn questions that he company solves in this offering.

Secondary Details

After the close on the 25th, Westport announced an offering to sell 6 million shares that would raise over $150 million based on the expected offering price. Prior to the open on the 26th, the company announced pricing the secondary at $25.39 providing gross proceeds of over $150 million. If the underwriters purchase the additional 900,000 share granted in the offering, Westport will receive gross proceeds of over $175 million.

The company ended Q2 with $134 million in cash so the net proceeds from this offering will push the balance to around $300 million. Investors might be unhappy with the perceived dilution, but the company and analysts expect loses to persist for the next couple of years. Even though both joint ventures detailed in the previous article should be clicking full speed ahead now making the large losses hopefully a figure of the past, a cash balance of only $134 million wasn't going to cut it with the recent cash burn level.

Rash Of Secondarys

It seems that a stock isn't hip these days without doing a secondary. Hot stocks from 3D printing to social media have done recent secondary offerings to raise cash or allow founders and venture capitalists to unload stock. Investors should make a huge distinction in whether the offering is being done at all-time highs to allow shareholders out or fund future expansion. Below are a few samples of recent offerings:

Zillow (NASDAQ:Z) sold 5 million shares at $82 in a secondary with over half the shares sold by selling shareholders. At the time, the stock was at an all-time high and the shareholders decided to cash out over $200 million. The stock went on to hit $100, but now sits only a few dollars above the offering price.

Pandora (NYSE:P) is another example where a selling shareholder wanted to unload a significant stake. The company did a secondary for 18 million shares at $25 where a shareholder sold 5.2 million shares for $130 million. The stock now sits right above the offering price.

Stratasys (NASDAQ:SSYS) sold 5.2 million shares at $93 in a secondary to raise $463 million. The stock currently sits above $100 making the offering a success.

The major failure of the recent secondarys has been ExOne (NASDAQ:XONE) that has seen the stock crater with the willingness of shareholders to unload 2 million shares at the offering price of $62. Not only was the price significantly below the recent $80 high, but the company is still early in the growth process with revenue not even expected to surpass $50 million this year. The stock now sits below $50.

All of these offerings should be red flags to investors with the majority having insiders wanting to cash out or in the case of Stratasys what appears to be a war chest accumulated to buy a company that doesn't want shares in the new combined venture.

Analysts And Investors Might Not Be Happy

Where Westport trades in the short term might be highly influenced by analysts and investors likely unhappy that the company did a secondary so quickly after the Q213 earnings call on August 1 where it denied any need to raise cash. The company was asked by several analysts about the cash burn and the management team steadfast discussed that increasing sales would lesson the cash burn and several projects requiring investments could be pushed back to help alleviate a cash crunch.

One specific question from the Goldman Sachs analyst was answered by the CFO, Bill Larkin, with the following:

Bill Larkin - Chief Financial Officer

We figure today, when we look at our business plans going forward and we reiterated that we expect being cash flow positive by the end of 2014. I think we have sufficient cash to fund our operations and we do have some levers to dial back that cash burn through reducing our investments in new programs or on the flipside is if we start seeing significant adoption or acceleration of adoption of this technology, we see opportunities to increase our cash flows.

The CFO clearly talks about having enough cash to reach cash flow positive by the end of 2014. Later in the call, the Northland Capital Markets analyst was able to narrow down the CFO to clearly state that the company wouldn't need any further working capital to reach breakeven.

Colin Rusch - Northland Capital Markets

And just so I am clear, it sounded like, you said, particularly that you don't think you are going to need an additional capital to lead to the breakeven point. Did I hear that correctly?

Bill Larkin - Chief Financial Officer


The point of reviewing these statements aren't to slam on the CFO or the company, but to rather point out how Wall Street might have a backlash on the stock in the short run. Though it would be committing corporate suicide for the company to state that it is running out of cash, analysts don't like being told the company won't need to raise cash to turn around less than two months later and do a secondary.


The trading could be sloppy on this secondary due to the denial of the need to raise cash. The market can tend to run with these scenarios thinking the worst that it is encountering issues that have increased the cash burn, increasing the need for quick cash. Ultimately, analysts shouldn't ask questions the company just can't answer in the public space. No company will ever obtain fair prices by announcing it needs to raise cash down the road so investors should take advantage of this offering. The company is at the forefront of the switch to natural gas as a transportation fuel just as Tesla (NASDAQ:TSLA) is leading the charge towards the electric vehicle. The stock has shown the ability to join the momentum scene and now with the balance sheet shored up it could have legs to revisit the previous highs around $50 once the dust settles on this deal.

With the stock breaking below the offering price in the initial hour of trading, it is clear that Wall Street doesn't like the surprise offering. Long-term investors should realize that this is one of the few offerings where the company is better off with the cash compared to the others where insiders cashed out at highs. Once the stock settles down in the next few weeks, it could eventually be the best performing offering of the group. With the Cummins 12L engine hitting full production during Q4, Westport has several catalysts and now the cash to push the stock higher.

Disclosure: I am long CLNE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.