Westport Innovations (NASDAQ:WPRT) has been decimated so far this year as shares are down 15%. The maker of low-emission engine and fuel system technologies using alternative fuels is facing threats from all angles as electric cars from Tesla Motors (NASDAQ:TSLA) gain steam, and the gradual adoption of fuel cell technology is another problem that Westport might face. However, is there any hope for Westport going forward, or should investors stay away from this stock?
Westport has gone through several changes as it has changed its strategy. Its new strategic plans are expected to put it in a high-growth phase. The components of this strategic plan are varied. First, transportation and energy, which are the world's two largest industries, are going through one of those once a century disruptions, where fundamental economic forces are driving change. The high cost of fuel for transportation has opened up an opportunity for a new energy source. The force driving this change is the quest for a lower-cost fuel.
Second, energy is also going through a technology-driven disruption in both oil and gas extraction and distribution. The fact to focus upon here is that the oil boom is about being able to extract oil from previously impossible or uneconomic resources. And the high cost of fuel is leading people to look at other sources.
Westport believes that it has created a breakthrough that has opened up staggering quantities of cheap natural gas. There's a tremendous global investment underway to bring that gas to market, and to make it a truly global energy source like oil. In fact, natural gas is seen as a primary fuel for transportation applications. Hence, the next area to focus on is where investors and companies should focus for the best returns, in what is now believed is going to be inevitable change. Accepting this foundation thesis at Westport, it focused on where the market is going to be, not where it has been or even where it is today.
A look at the markets
Westport is focusing on emerging markets, the upcoming market for fully developed, globally built OEM supply chain based products that are built and distributed to the same high quality that current products are, and using the traditional automotive industry channels. This is countering its competitor's strategy, which is doing very well supplying goods and services to the niche markets that have already embraced fuels like propane and natural gas.
Catering to the question of exactly where and how fast the breakthrough products would come, Westport has a pragmatic strategy and its plans are based on evidence in the markets that it is targeting.
It has global coverage emerging on the infrastructure side, and has highly capable and scalable supply chain developing. This has made the model of investment for infrastructure and ability breakthroughs in many markets very clear. A transition from market creation and technology demonstration to a more traditional business that's focused on customers and profits has made 2014 a transition year for Westport.
Westport has made the appropriate shifts in its business based on what is thought as the most important strategic opportunities, and getting an optimum mix of short- and long-term products. For 2014, it has strong leads on competition, and foresees considerable flexibility in its plans as the markets mature, in case things speed up or slow down.
2014 is seen as the critical breakthrough year in heavy duty trucks in North America. Westport expects to see 3% to 5% market penetration in class A trucks for natural gas this year, which is up from virtually zero in 2011. Westport would begin supplying components and HPDI kits to the Weichai and Westport JV this year, as it shifts its strategy from market creation to product sales through the joint venture in China.
On the automotive side, it is well-positioned for growth as its OEM customers expand their product offerings globally and as sales develop, and to its complete vehicle systems with Volvo and Ford. Westport also sees opportunity in the rail industry and is well-positioned to sell fuel tenders and engine systems in that market over the next few years.
Westport is investing in long-term product development at the corporate level. It is reviewing every project where it is investing money, and has established criteria to rank and evaluate the returns on its projects. This should help Westport gauge the efficiency of its investments and close down unprofitable ones going forward.
By the end of 2015, its corporate investment portfolio and other expenses, including long-term capital investments, will be covered by internal operating income, income from its joint ventures, expense recovery from its development partners and will generate strong financial returns.
So, we see that Westport has a number of plans in place to improve its business. However, it faces tangible threats from the likes of Tesla Motors. According to Tesla Motors CEO Elon Musk, 50% of new cars will be electric vehicles in 20 years. Elon Musk had said, "In 20 years more than half of new cars manufactured will be fully electric. I feel actually quite safe in that bet. That's a bet I will put money on."
In addition, Tesla recently announced that it will be building a facility known as "Gigafactory." According to Economist, "Due to start production in 2020, the giant factory will be the world's largest battery-making facility, producing, at its peak, 500,000 lithium-ion packs, more than the entire world's capacity today. That should be more than enough for Tesla's car production; the excess will probably supply not only some of its carmaking competitors but also such power sources as backups for neighbourhood grids and cellphone towers."
So, the mass production of lithium-ion batteries will lead to a massive drop in prices, and drive adoption of electric vehicles. As a result, this will prove to be a threat for Westport's engine sales going forward if truck owners shift to electric-powered motors.
No doubt, Westport is trying to turn its business around, but the company faces certain challenges going forward. However, investors with a higher appetite for risk can surely take a look at the stock since its earnings are projected to grow at 30% a year for the next five years, but they should keep in mind that it is not a sure-shot winning investment.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.