Why Westport Innovations Is Set To Soar Higher

| About: Westport Fuel (WPRT)


Westport's strong balance sheet should allow it to tap the natural gas vehicles market aggressively.

Westport is tapping key markets such as China, the U.S. and India with joint ventures.

Clean Energy Fuels is building fueling infrastructure in China and the U.S., spurring adoption of natural gas vehicles.

Westport Innovations (NASDAQ:WPRT) has had an indifferent year so far. The company's shares have declined almost 7% so far this year. However, after reporting its first quarter results in early May, Westport shares have taken off remarkably. In the last two months, Westport shares have gained close to 40%, and it looks like the company is set to get better due to the growing adoption of natural gas vehicles (NGVs). Moreover, as the likes of Clean Energy Fuels (NASDAQ:CLNE) continue building fueling infrastructure for natural gas vehicles, Westport's prospects should improve.

Westport's joint venture with Cummins (NYSE:CMI) and Weichai, and its partnership with Tata Motors (NYSE:TTM), are expected to drive its growth.

Tapping China for growth

The joint venture with Weichai looks like a lucrative one. Weichai is a state-owned Chinese company that is engaged in the research, development, manufacture and sale of diesel engines.

Together, Westport and Weichai have developed a powerful natural gas engine that should serve the needs of NGVs in China. According to a Westport press release:

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.

Now, the Chinese NGV market is huge. In fact, it is reportedly growing at a faster rate than the United States. According to a report on fuelfix.com:

In the last five years, China has added 1,500 refueling stations for vehicles running on natural gas, with half of those added in the last year, said Heather Hausladen, senior research analyst for IHS, speaking during the IHS Energy CERAWeek conference in Houston.

The United States, by contrast, added 84 compressed natural gas stations last year, according to IHS.

Roughly 70,000 trucks in China run on natural gas, with 30,000 added last year, she said. About 112,000 total vehicles in the United States are powered by natural gas, and 14.8 million worldwide run on the fuel, according to the U.S. Department of Energy.

Since natural gas prices at Chinese refueling stations are way below that of diesel, the growth in NGVs in China is expected to continue. Westport is tapping this market smartly by partnering with Weichai. The new engine released by the two companies is expected to go into production next year, and this should drive Westport's performance going forward.

NGV adoption is strong

Moreover, the NGV market is expected to grow at a healthy pace in the future, and this will be helped by an aging fleet of current vehicles. The average age of the class 8 fleet (heavy duty) in the United States has accelerated to 11 years, and that of cars and light trucks has increased to a record 11.4 years. Due to the low-cost and clean nature of natural gas, there's a possibility that companies will now opt for NGVs going forward, opening up an opportunity for Westport to increase engine sales.

According to Navigant Research, the natural gas truck and bus markets are expected to grow at a CAGR of 12.6% and 6.4%, respectively, through 2022. The research firm has estimated that there will be around 1.9 million natural gas-powered trucks and 1.8 million natural gas buses globally by 2022. Westport's strong product portfolio is expected to help it tap this growing market and deliver revenue growth of around 30% this year. Additionally, its new products such as the WP580 engine management system and the iCE PACK LNG system should help it increase its penetration.

More catalysts in the cards

Westport's joint venture with Cummins is another important catalyst to note. Recently, the two companies announced a 12-liter natural gas engine with a power output of 400 horsepower and 1450 ft-lb of torque. In addition, Westport is now the largest player in the Ford QVM program with more than 70% market share.

In addition, its Volvo Car business has delivered significant improvement in Sweden. Westport has strengthened its relationship with Volvo to work together and deliver volumes through its traditional dealer channels in Europe.

Also, it has entered into a partnership with Delphi to develop HPDI 2.0 fuel injection systems. This second-generation fuel injection system for HPDI will be produced in Delphi facilities under an agreement giving Westport control of key production equipment and tooling. Westport is initially planning to produce around 100,000 injectors per year, which will be enough to serve 16,000 trucks annually.

How Clean Energy benefits Westport

In addition, Westport should benefit from Clean Energy Fuels' initiative of building natural gas fueling stations, both in the U.S. and China. Clean Energy has 96 truck-friendly fueling stations in the U.S., which is four times more than its nearest rival. The company is continuously entering into deals with companies to fuel their NGVs, and it is also present in China through its subsidiary, IMW Industries.

As I mentioned in a previous article on Clean Energy:

The company is expanding deliveries of LNG and CNG by way of new station construction, expanded use of existing stations, and customized mobile fueling solutions, so as to support fleets in the heavy-duty trucking, transit and refuse market segments.

Clean Energy has entered into a partnership with Kroger, one of the largest grocery retailers in the U.S., to fuel its fleet of NGVs. Kroger has placed an order for its first 40 LNG trucks that are supposed to be fueled at Clean Energy's gas station. Also, Clean Energy is expected to serve Kroger's Fed Meyer and QFC grocery chains in Oregon and Washington.

Clean Energy will also benefit from the fleet additions of United Parcel Service (NYSE:UPS). It will be fueling 15 additional heavy-duty UPS trucks, taking the total to 230 UPS trucks across the country.

In addition, Clean Energy signed an agreement with a leading California-based super market chain, Cardenas Markets, to fuel its CNG truck fleet. Cardenas will be deploying nearly 15 heavy-duty CNG trucks in its private fleet, fueled at Clean Energy's network in California and Nevada.

Hence, Clean Energy is making good progress and the company's moves should encourage adoption of NGVs, thereby improving Westport's prospects as well.

Solid fundamentals to aid growth

Apart from having solid prospects, Westport has impressive fundamentals as well. The company's balance sheet is impressive, with cash of $184 million and debt of just $64 million. Additionally, Westport's bottom line is expected to grow at a terrific rate of 30% per year for the next five years. The company has solid opportunities in the natural gas market, and it can continue investing in new technology due to its strong balance sheet. So, investors should remain invested in Westport as it looks like a solid long-term bet.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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