- An enterprise value of 4.0 times 2015 sales would put the shares nearly 24% higher.
- Adoption of NGV has underwhelmed expectations but key drivers persist and it is only a matter of time before larger-scale usage.
- Average age of heavy-duty fleet and an improving economic picture may drive an upgrade cycle in vehicles.
The adoption of natural gas vehicles (NGV) has underwhelmed expectations over the last years and sent shares of Westport Innovations (NASDAQ:WPRT) tumbling from their 2012 high. The abundance of natural gas in the United States and increasing attention to environmental impact means that the greater use of NGV is only a matter of time. Westport restructured last year to take advantage of a shift in the industry and shares rocketed in May on strong revenue growth. The shares are still relatively attractive and the expectations for next year could see the stock continue higher.
Missed opportunity or just ahead of its time?
The boom in natural gas production in the United States pushed prices to historic lows and many were predicting massive conversions of cars away from gasoline to natural gas. The transformation would have driven a huge shift in the auto industry and one company has a virtual lock on natural gas engine technology.
Westport Innovations, the leader in NGV engines, saw its shares surge more than three-fold over the two years to early 2012, only to see the shares plummet by 70% since. It seems the market was ahead of the curve and the conversion cycle has not come just yet. But that doesn't mean it's not coming.
According to the Natural Gas Coalition, there are 130,000 natural gas vehicles in the United States and more than 2.5 million in the world. Considering there are roughly 143 million cars on the road, that puts the percentage of NGV at just 0.09% in the United States. While the conversion cycle may not have caught on in the States, it certainly has in other parts of the world. Colombians drive 300,000 natural gas vehicles against 7.2 million total vehicles for more than 4% of all vehicles. Italy has more than 1.5% of its 52.6 million vehicles using natural gas.
While the conversion cycle has not taken off yet, the next couple of years could bring the shift everyone has been predicting. The average age of the class 8 fleet (heavy duty) in the United States has jumped to 11 years on slower capital investment and sluggish manufacturing growth. The average age of U.S. cars and light trucks increased to a record 11.4 years at the end of last year. The improvement in the economy could have transportation carriers upgrading their fleets and looking to the future with more efficient NGV options.
More than 40 different manufacturers, including Ford (NYSE:F), General Motors (NYSE:GM), Toyota Motors (NYSE:TM) and Volvo (OTC:VOLAF) currently manufacture NGV vehicles. Last month, the company unveiled the only truck certified by the California Air Resource Board and the EPA in its Ford F-150, at the Alternative Clean Transportation Expo. Westport is hoping that California's progressive model on natural gas vehicles will carry to other states and drive industry growth.
First mover advantage in natural gas engines
Westport Innovations owns more than 300 patents for natural gas and fuel system technologies on an aggressive R&D program that spans the last 15 years. The company has partnership agreements with some of the largest companies in the transportation space, including Cummins (NYSE:CMI), Volvo, Ford and Caterpillar (NYSE:CAT).
Shares surged 24% in May when the Westport reported revenue up 39% against the same period last year and earnings nearly 10% above the consensus view. The 2013 reorganization to take advantage of the shift by original equipment manufacturers to develop NGV products in-house seems to be paying off. The company could reach positive EBITDA from operations by the end of the year on expected revenue between $175 and $185 million.
Cash on the balance sheet fell slightly to $184 million, though a recent share sale should provide the company with enough liquidity for capital needs this year and next. Westport also paid down most of its debt recently and holds just $64 million as of the last quarter. Shares are trading for an enterprise value of 4.4 times this year's expected sales. While the valuation does not make the company a screaming buy, it is cheap given expected sales and a leadership position in a new industry.
Short sellers have a $167 million bet against the company with 11.5 million shares borrowed to sell. On the current average 10-day volume, that amounts to more than 17 days of trading. Even without a sudden catalyst for an upside in sentiment, the improvement in sales and operations should see these shorts unwinding and support the share price. Shorts got squeezed on the last earnings call and investors may get another opportunity when second quarter results are announced.
Westport recently appointed Ashoka Achuthan as Chief Financial Officer, replacing Bill Larkin who will move to Vice President of Corporate Development. Achuthan has been with the company since late last year and has held CFO positions at several other companies, including at Siemens VDO Automotive. The fact that he was brought in just six months ago leads me to believe the changes were planned and Bill Larkin will likely stick around in his new role.
Sales are expected more than 40% higher in 2015 to $253 million on partnerships with manufacturers. On an enterprise-to-sales value of 4.0 times, the shares could be worth $17.93 or nearly 24% higher than the current trade. This is still a relatively cheap valuation for a company with a first-mover advantage in a growing industry. Be ready for a few bumps along the way, especially if natural gas prices increase significantly, but I think the shares are a good long-term bet from here.
Disclosure: I am long WPRT. 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.