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Summary

  • Operational improvements aren't hitting the bottom line.
  • Analysts appear more negative despite the stock jump.
  • Westport remains a technology leader in natural gas engines, but shareholders may not profit.

It's really shocking to see Westport Innovations (NASDAQ:WPRT) surge 24% on the day following earnings to only find out that analysts have actually cut estimates for the current and next fiscal years. Sure, the stock was beaten down so some bounce back is possible based solely on first-quarter results being better than feared, but the trend isn't so encouraging.

Most investors probably already know that Westport Innovations, along with other industry players like Clean Energy Fuels (NASDAQ:CLNE), are pushing the advancement of natural gas as a transportation fuel to massive losses for shareholders. As of yet, Westport hasn't figured out the right formula between spending for the future and focusing on present operations, but is that about to change?

Transitioning To A Profitable Business?

The company forecasted a while back that adjusted EBITDA of the operating segments would reach positive by the fourth quarter. Even more important, the consolidated adjusted EBITDA that includes the corporate product development costs and very important joint ventures would reach adjusted EBITDA positive by the end of 2015. Even having this distinction between EBITDA totals is probably part of the problem with the stock.

In the below presentation slide, Westport made an impressive jump during Q1 '14 to an adjusted EBITDA loss of only $1.6 million.

The number was a huge improvement over the prior quarters that hit losses of about $8 million about every quarter. Importantly though, the company is highly focused on the joint ventures with Cummins (NYSE:CMI) and Weichai (OTCPK:WEICF). So whether the company calls it consolidated adjusted EBITDA or just the EBITDA number for the company, this number only saw a slight improvement and is still far from positive.

The consolidated number dropped to a loss of $22.1 million, compared to a loss of $26.3 million in the prior year period. Foregoing future development projects clearly seems logical when the company is producing substantial losses in the operating units.

Declining Earnings Estimates

Despite the jump in the stock to nearly $17 after trading below $13 prior to the Q1 '14 earnings report, analysts are actually reducing the earnings estimates going forward. Is the company truly making progress if the earnings estimates are falling?

Table - Earnings Estimates

(click to enlarge)

Source: Yahoo! Finance

The Vision

While detailing the financial negatives on the stock in this article, the vision of a natural gas future for heavy duty vehicles hasn't changed. The adoption is slower than expected, but that is partly the fault of the CWI joint venture delay in delivering the ISX 12G engine on time.

The potential for the market remains intact though the ability for Westport to benefit from the adoption of natural gas vehicles is the part in doubt. The U.S. remains far behind the global adoption of natural gas vehicles, but the expectations still exist that this country will finally gain some momentum. According to Navigant Research via a Westport corporate presentation, the U.S. is entering a decade of huge growth in the sector. The country, though, will remain far behind the rest of the globe in this sector.

(click to enlarge)

Ultimately, once the sector takes off, Westport is situated with the top technology in the sector. The company has far more patents than respectable firms like Caterpillar (NYSE:CAT) and GE (NYSE:GE) in the sector.

(click to enlarge)

Conclusion

Westport Innovations remains the unquestioned technology leader in natural gas engines, yet the company hasn't figured out how to profit off this advantage. Industry research firms still expect increasing adoption of natural gas vehicles, but the U.S. remains far behind the rest of the world in this area and Westport is suffering due to that fact. With this technology and a promising sector, the stock remains one to watch, but until the company actually turns around the financials, investors need to be careful with it.

Source: Is Westport Innovations Really Headed In The Right Direction?