Westport's Surge After Its Q1 Report Is The Beginning Of A Solid Run

| About: Westport Fuel (WPRT)


Westport reported a blowout quarter and shares rose almost 25%.

Westport's joint ventures are doing well and the company recently inked a partnership with Tata to tap the Indian market.

Westport's product innovation is also quite smart and should help it benefit from the natural gas vehicles market.

Although Tesla could be a threat for Westport in a decade, investors shouldn't worry about it too much now.

Westport Innovations' (NASDAQ:WPRT) struggles have probably ended. The company's shares had taken a beating so far this year, but the company's blow-out first-quarter report put all doubts to rest. Earlier, it was expected that electric vehicle maker Tesla Motors' (NASDAQ:TSLA) moves will upset Westport's growth strategy, but investors can now relax.

A terrific report

Westport shares gained a massive 25% after the company reported terrific growth in its results. Westport's revenue increased almost 40% year over year in the first quarter to $41.9 million. In addition, Westport's consolidated net loss and net loss per share in the quarter decreased to $23.9 million and $0.38, respectively, from $31.8 million, and $0.57, respectively, in the prior year period. Also, Westport's Adjusted EBITDA loss from operations declined a massive 81% year over year.

Now, looking ahead, there's no stopping for Westport. The natural gas engine maker saw solid growth in the first quarter, and now it has gained strong momentum to do even better in the future.

The reason behind Westport's success has been its strategic moves that it had outlined last year. Moreover, Westport is expecting 2014 to be an year of solid growth, driven by strong product development moves.

The road ahead for Westport

The company is looking to take advantage of high oil prices and the need for a new energy source. As such, Westport expects its natural gas engines to gain steam going forward. Though an increase in natural gas prices might upset Westport's growth in the short run, it expects global investments that are being made to bring down natural gas prices in the future to act as tailwinds.

Westport has a pragmatic strategy, under which it is focusing only on those key targets which can drive growth in the future. The company has great expectations from its joint ventures with Cummins (NYSE:CMI) and Weichai. The performance of these joint ventures was impressive during the last quarter, with revenue from Cummins Westport increasing 80% year over year and Weichai Westport reporting 7% year over year gains.

Moving forward, Westport is focusing worldwide to improve its profitability through product innovation. The company is looking to tag along with major vehicle manufacturers that are introducing new products. For instance, for the North American market, Westport has launched the first automated transmission spark-ignited natural gas engine. Westport expects its innovation moves to attract more customers, driven by unique features that give a competitive edge to the company.

Westport is expanding its addressable market in a smart manner. It has entered into a partnership with Indian automotive giant Tata Motors (NYSE:TTM) and recently launched a new spark-ignited natural gas 3.8L turbocharged engine featuring the Westport WP580 Engine Management System. Westport's WP580 engine management system is also scheduled to be applied to Tata's 5.7L engine targeting medium-duty applications in late 2014.

According to Rajendra Petkar, Head Power Systems Engineering, ERC of Tata Motors --

"India has one of the largest natural gas light-duty vehicle fleets in the world, and we see an enormous opportunity for natural gas trucks and buses with the development of fueling infrastructure. By expanding our portfolio of natural gas engines, we are focused on increasing our market share of the natural gas vehicle and engine market."

So, this move will open up a huge market for Westport to grow its business going forward.

More catalysts

For Fiscal 2014, Westport is applying a selective approach as it is focusing on strategic opportunities in a bid to obtain an optimum mix of long term and short term products. In this way, Westport is trying to diversify its risk. In America, with the growing market of class A pickup trucks, Westport is estimating 3% to 5% penetration for natural gas in 2014.

Moving on, Westport expects the Chinese market to be another growth driver. The company will supply components and HPDI kits through its joint venture in China after massive success last year. In 2013, Westport's joint venture sold 38,000 engines. This number is expected to rise once again in 2014, primarily driven by sales for trucking applications that are expected to account for 70% of sales in China.

In addition, the company is shifting its strategic focus from market creation to product sales through joint ventures, as we saw above. Given the competition in the domestic market, Westport is focusing on the automotive market across the globe, and its venture with Tata Motors is a great example of this fact. Westport is well-positioned for growth as its OEM customers are expanding their product offerings globally, leading to higher demand for Westport's solutions.

Don't fret about Tesla yet

Moreover, Westport's solid growth so far signifies the fact that Tesla's claim that 50% of new cars in the next two decades will be electric cars shouldn't be taken too seriously. According to Tesla CEO Elon Musk, "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."

Tesla is looking to make this claim a reality by building its "Gigafactory" in two states. This would become the world's biggest battery-making facility and could produce 500,000 lithium-ion packs at its peak, which is more than the existing global capacity. The mass production of these batteries could result in a significant decline in battery costs and lead to adoption of more electric cars, thereby reducing the market of natural gas engines.

However, it is a long road ahead for Tesla, as there are execution hurdles expected. According to Bloomberg, Panasonic (OTCPK:PCRFF), the primary supplier of lithium-ion cells for Tesla's electric Model S sedans, hasn't committed to investing in the Gigafactory project yet. Bloomberg says:

"Joining Tesla's "Gigafactory" battery project would raise investment risks, Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo. Tesla, which announced plans for the facility in February, said it's reviewing potential sites in four southwestern U.S. states. The plant may require as much as $5 billion to build and employ about 6,500 people by 2020, the Palo Alto, California-based company said."

Panasonic president Tsuga goes on to state that:

"Our approach is to make investments step by step. Elon plans to produce more affordable models besides Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger."

Hence, investors shouldn't make much of the Tesla threat right now as the company's factory is still some time away and in the meantime, the growth of natural gas vehicles should lead to better times for Westport.

Fundamentals and conclusion

Westport isn't profitable yet, so it doesn't have an earnings multiple to value the stock. However, the company seems to have a strong balance sheet with a cash position of $210 million. Also, its debt of just $66 million indicates that Westport can make aggressive investments in the business to bolster its position.

The company's earnings are expected to grow at a CAGR of 30% for the next five years, so it is well-positioned to deliver growth to investors as the market for natural gas vehicles evolves. So, investors should definitely consider an investment in Westport as it is well-positioned for long-term growth.

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.

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