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Summary

  • Westport Innovations is growing rapidly, as its first-quarter results show.
  • Westport's joint ventures with Cummins and Weichai, and its partnership with Tata are key growth drivers going forward.
  • Clean Energy Fuels' build-out of natural gas fueling infrastructure is another reason why Westport's prospects look strong.

Shares of natural gas engine maker Westport Innovations (NASDAQ:WPRT) have shot up more than 10% in the month of May. The company benefited from a terrific first-quarter report that saw sales jump around 40% from the year-ago quarter to $41.9 million, and the bottom line improving to a loss of $23.9 million from a loss of $31.8 million last year. Now, going forward, Westport looks all set to sustain its terrific pace of growth considering the opportunity in the natural gas vehicle market. Also, with Clean Energy Fuels (NASDAQ:CLNE) rapidly building the fueling infrastructure for natural gas vehicles, the adoption of Westport's engines should increase.

Let's take a look at the various reasons why Westport should continue improving going forward, and why it looks like a good investment.

The opportunity

Westport has made good progress in its business, and it has shifted its focus from market creation to product and profit growth. The company has a strong product portfolio that is expected to deliver revenue growth of around 30% this fiscal year. In addition, to improve the bottom line performance, Westport has made certain changes over the past six months that have eliminated unnecessary costs.

There is huge opportunity in the market for natural gas-powered trucks. According to Navigant Research, the natural gas truck and bus markets are expected to grow at a compounded annual growth rate of 12.6% and 6.4%, respectively, till 2022. According to the research firm, there will be a total of 1.9 million natural gas-powered trucks and 1.8 million natural gas buses globally by 2022.

Westport is looking to take full advantage of this opportunity through its joint venture with Cummins (NYSE:CMI). Recently, the two companies had announced a 12-liter natural gas engine with a power output of 400 horsepower and 1450 ft-lb of torque. This engine is expected to address the needs of the long-haul trucking sector. This engine has already found good traction in the market. According to Sam Thomas, the chairman and CEO of Chart Industries (NASDAQ:GTLS), which sells equipment for the production, storage, and end-use of hydrocarbon and industrial gases:

This quarter also marks the introduction of the new 12-liter, 400-horsepower natural gas engine from Cummins Westport. We believe the engine is well-suited for LNG applications. Our LNG fuel system order rate in the third quarter indicates that the market is in agreement. As soon as this engine was put into production in August, we saw our order rates surge for truck LNG tanks. It's remarkable these orders were in fact higher in this one quarter than they were in all of 2012.

Westport is looking to increase its addressable market further, and its joint venture with Weichai of China is a move in this direction. Earlier this year, the two companies revealed the Weichai Westport WP12HPDI engine. This is China's first engine featuring Westport HPDI technology. According to Westport:

"The Weichai Westport WP12HPDI is China's first engine featuring Westport HPDI technology, delivering the power and performance of the base diesel engine, while replacing up to 95% of diesel fuel with cleaner burning, less expensive natural gas. Weichai Westport plans to release 30 trucks for customer validation through 2014 with factory production expected to start in 2015. The WP12 with Westport HPDI 2.0 will be certified to be compliant with China V emissions standards."

The Westport CEO is quite optimistic about this partnership when he says:

We are entering the largest market for natural gas trucks demonstrated by our joint venture with over 60,000 natural gas engines sold by Weichai Westport in the last two years, a growth of approximately 100 percent year over year. We have not only found common ground for success in China but are forging ahead with a second program aimed at making the benefits of advanced Westport HPDI 2.0 technology available on the majority of the natural gas engines sold by Weichai Westport.

Expansion and product moves

Apart from these moves, Westport increased its addressable market further after officially launching the WP580 system with Tata in February for bus and truck applications. In addition, Westport is co-investing with several OEM partners to develop a portfolio of new natural gas vehicle products, along with technologies, related systems, and components. Since 2012, it has invested roughly $215 million into various development programs.

A portion of this investment is allocated to advanced engineering and capital expenditures, but a major part of these investments is for specific products with specific partners. These products are expected to have a five-year development cycle from the start of development to product sales, which is expected to deliver high returns in the future.

A significant milestone under the investment portfolio of Westport is its joint development relationship with Delphi for HPDI 2.0 fuel injection systems. It has developed a joint strategy for developing second-generation fuel injection components for its HPDI systems that will be made in Delphi facilities under an agreement giving Westport control of key production equipment and tooling. This is expected to result in lower costs that can be passed on to its OEM customers. In turn, this will accelerate the adoption of natural gas trucks around the world.

Clean Energy's focus on infrastructure to benefit Westport

The adoption of natural gas trucks will also speed up because natural gas providers such as Clean Energy Fuels are aggressively investing in infrastructure. Clean Energy is building out its natural gas fueling stations at a good pace, and it is partnering with numerous companies to fuel natural gas vehicles. As reported by solidwastemag.com:

California-based Clean Energy Fuels Corp. has announced natural gas agreements with a number of companies in the industries of trucking, transit and waste collection.

For trucking use, Clean Energy Fuels is designing a liquefied natural gas (NYSEMKT:LNG) station for The Kroger Co, as the grocery retailer looks to switch over some 40 diesel trucks to LNG in Oregon. Another grocer, Cardenas Markets, has signed a deal with Clean Energy Fuels for 16 new heavy-duty compressed natural gas (CNG) trucks with the goal of converting its entire 50-truck fleet over the next several years.

Clean Energy Fuels is also working with courier service UPS as the company aims to retain one of the biggest LNG and CNG fleets in the US. Fifteen new trucks will be added under the new agreement.

On the transit front, Clean Energy Fuels is working with the Anaheim Transportation Network to design a mobile LNG fuelling station supported by multi-year operations, maintenance and an LNG fuelling contract. The fleet of 35 LNG buses serves the Anaheim Resort District.

Hence, as Clean Energy is building more fueling stations, a number of companies are being encouraged to adopt natural gas vehicles, improving the prospects of Westport, since demand for natural gas vehicles is increasing.

Conclusion

According to Yahoo Finance analysts, Westport's earnings are expected to grow rapidly going forward. In fact, they expect the company's earning to improve at a CAGR of 25% for the next five years. If we take a look at the opportunity in the natural gas market and Westport's moves, it is not surprising to see why analysts believe that the company will grow at a terrific pace. As such, investors should definitely consider Westport for their portfolio, as it could outperform going forward.

Source: 3 Reasons Why Westport Innovations Is A Potential Outperformer