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Summary

  • Westport Innovations missed on both top and bottom line estimates.
  • Westport's focus on product innovation to tap the growing natural gas vehicle market, and its partnerships with key players, should lead to strong growth.
  • Westport's fundamentals are in place with a strong balance sheet and terrific earnings growth projections.

The year has gone from bad to worse for Westport Innovations (NASDAQ:WPRT). When I last wrote on the company, its shares were down 7% in 2014, and now, Westport has lost almost 20% of its value this year. So, what has gone wrong for the company? Westport has been hurt as a result of weak second-quarter results, as it missed both the revenue and bottom line estimates.

Delivering solid improvements

But, even though Westport didn't perform as per analysts' expectations, the improvements that it delivered cannot be ignored.

For example, Westport's consolidated net loss declined to $26.8 million in the quarter from $37.3 million in the year-ago period. Moreover, the company reported an adjusted EBITDA loss of $17 million in the quarter, down from a loss of $27.8 million in the prior-year period. Hence, Westport was able to improve its performance, even though it didn't match up to expectations.

New products will drive growth

Now, looking ahead, Westport is set to profit from the growing usage of natural-gas powered vehicles. The company is aggressively investing in technology to meet the growing demand for vehicle technology that will reduce both emissions and fuel costs. In fact, the company has already delivered some solid products by way of its joint ventures with Cummins (NYSE:CMI) and Weichai.

Westport's latest products and partnerships include the Weichai Westport WP12 HPI system, the Westport WP580 engine management system, new models of Ford (NYSE:F) and Volvo vehicles, and the iCE PACK LNG tank system. Moreover, LNG tenders in the oil business are expected to deliver growth.

Westport is strategically investing with its OEM partners to develop a portfolio of new natural gas vehicle technologies and related systems and components. It has invested more than $239 million in these development programs since 2012. Three application areas have been the focus of its plans -- global trucking, automotive products, and off-road applications such as rail and large mine trucks.

Solid end-market growth in the cards

Now, all of these markets are expected to grow at a good pace going forward. For example, the market for natural-gas vehicles is already gaining steam, driven by the increasing age of the existing fleet of vehicles.

The average age of the class 8 heavy-duty fleet in the U.S. has increased to 11 years. In addition, the average age of cars and light trucks has also jumped to 11.4 years, which is a record. Now, natural gas' low cost and clean nature might encourage corporations and firms to add more natural gas vehicles to their fleet. This will help Westport to increase its addressable market.

Moreover, as per Navigant Research, the market for natural gas trucks and buses will grow at an annual rate of 12.6% and 6.4%, respectively, over the next eight years. Navigant estimates that there will be close to 1.9 million natural gas-enabled trucks and 1.8 million natural gas buses by 2022 across the world.

Aggressive focus on innovation

To tap this fast-growing market, Westport is investing in the development of a broad portfolio of vehicle components. It is looking at spark-ignited dual fuel and HPDI engine systems for applications from forklifts to locomotives. By delivering fully integrated and intelligent fuel supply systems for CNG and LNG applications to support the OEM natural gas vehicle program, Westport is moving in the right direction to tap this market.

Westport is further strengthening its position of having the largest Ford CNG product portfolio for the Ford QVM program with the expansion of its 2015 model year Ford vehicle lineup. Westport has expanded its vehicle lineup with the 2015 model year with dedicated bi-fuel CNG for the Ford Transit Connect. It has launched the bi-fuel CNG version of the Ford 150 that features the Westport WiNG Power System.

Westport is also accelerating the development of the Volvo HPDI program. The design of the new generation HPDI injectors with Delphi is also progressing at a rapid pace. Westport is currently engaged in developing detailed manufacturing processes and equipment plans for its dedicated HPDI injector production line.

During the second quarter, Westport delivered the second and third LNG tender to Canadian National Railroads, with the continued stationary testing of its first tender at EMD. Westport is exploring opportunities in marine applications with focus on inland waterways, offshore serve vehicles and LNG bunkering segments. The company has also completed the validation activities for the WP580 controller with the commencement of production for Tata Motors (NYSE:TTM).

In addition, Westport is also looking to improve the efficiency of its business. It has restructured the Beijing office with a view to improve training throughout the company. It has also completed the consolidation of the Ford business in Dallas, and has implemented lean manufacturing in Italy to improve operational efficiency.

Conclusion

Given the opportunities present in the end market, driven by the growth of natural gas vehicles, Westport's performance should improve in the future. The stock might have taken a hit after the latest results, but the fact that its bottom line is expected to grow at a CAGR of 30% for the next five years, better than the 24.21% industry average, cannot be ignored. It also has a pretty solid balance sheet with just $79 million in debt and $169 million in cash. So, investors should definitely consider making the most of Westport's recent drop by buying more shares.

Source: Why Westport Innovations Is A Buy After Weak Second-Quarter Results