Westport Innovations Inc. (WPRT), together with its subsidiaries, engages in the provision of low-emission engine and fuel system technologies that enable light, medium, heavy-duty, and high-horsepower petroleum based fuel engines to use natural gas and alternative fuels. The company designs, produces, and sells alternative fuel engines, systems, and components for automotive and industrial markets. It designs, engineers, and produces natural gas engines for urban buses, refuse collection trucks, and conventional trucks and tractors, as well as specialty vehicles. The company offers 15 liter natural gas engines for the heavy duty trucking market. It is involved in the engineering, design, and marketing of natural gas enabling technology for the heavy duty diesel engine and truck market. (Yahoo Finance).
This stock has ramped up from under $15 in early 2011 to its current price of $45.63 at Monday's close (March 26, 2012). This is a lot for a company that does not make money. Further, WPRT is not supposed to make money in FY2012 or FY2013. The average analysts' EPS estimates have been going down for the last three months as the stock has continued to go up. The EPS estimate for FY2012 has moved down from -$0.69 to -$1.08 over the last three months.
The FY2013 EPS estimate has moved down from -$0.08 to -$0.59 currently. A couple of key fundamentals seem to reinforce this negative movement. First the NatGas Act was rejected on March 13, 2012 by the US Senate by a vote of 51-47. No long after that on March 21, 2012, Cummins announced that it had begun development of a 15-liter Heavy Duty spark ignited natural gas engine to meet demand for on-highway applications powered by the cheaper, cleaner fuel. This engine will not involve WPRT in any way. It seems to be at least partially in competition with the 15-liter high pressure direct injection (HPDI) technology natural gas engine that Cummins (CMI) and WPRT are working on together in a joint venture. It is supposed to be out in 2014.
This is very bad news for WPRT, which has neither the manufacturing expertise/capabilities nor the strong customer relationships of CMI. WPRT is more of a designer. The HPDI JV engine is still expected to be a superior engine, but the recent CMI announcement of a competing new engine does seem to open the door to CMI producing its own natural gas engines without WPRT collaboration. The earnings information above is from Yahoo Finance.
All of this means that WPRT's profitability is going to be delayed at the very least. It would have gotten a big boost if the NatGas Act had passed. Instead WPRT's viability may be endangered long term. If a big engine manufacturer like CMI is given more time to develop a great natural gas engine on its own, it will do so. It seems to be making the starting move in this direction. This may eventually mean CMI will decide it does not need WPRT at all. CMI is the company with the big engine reputation.
It is the company with the great customer relationships. WPRT could easily become a small competitor casualty. WPRT has a technological advantage at the moment, but CMI has not been trying to make natural gas engines for very long. CMI's expertise will grow over time. It will take at least 3 years for WPRT to turn a profit. This could easily turn into 4-5 years. WPRT could possibly never turn a profit. WPRT does have a 10 year contract with CMI, but there is nothing that prevents CMI from manufacturing competing products.
On top of all of this the world economy seems to be weakening. Citi has recently said "the worst is yet to come in the EU". Italy's Monti has voiced worries about a credit contagion from Spain. Roubini's company is saying Portugal is about to follow Greece. Roubini's company is also recommending switching to credit instruments from equities. This doesn't sound like everything is okay. The EU recession is coming. If it turns out to be worse than many are expecting, it could easily push the US into recession. If both the US and the EU go into recession, China may have the hard landing so many have feared.
China has been the big buyer of heavy equipment and trucks in recent years. If it stops or significantly slows buying, this would impair WPRT's chances of profitability. The EU and US truck markets have still not recovered from the 2008-2009 recession. If China joins the group, truck sales, especially those with revolutionary technology, would be strangled. CMI would be okay.
It would be selling both diesel and natural gas engines. However, WPRT's future is completely tied to natural gas. The scenario described above would decimate it. This makes WPRT a very speculative stock at this time. It means a prudent investor should take profits in a stock that is backed by only hoped for profitability. This is especially true when some are saying to get out of all stocks except large cap dividend payers.
The two year chart of WPRT provides some technical direction for this trade.
click to enlarge
The slow stochastic sub chart shows that WPRT is close to over bought levels. The main chart shows that WPRT's price is significantly above both its 50-day SMA and its 200-day SMA. In fact it is 48% above its 200-day SMA. This is generally thought to be over bought territory. WPRT is roughly twice the distance above its 200-day SMA than it has been at other high points within the last two years. This provides a second confirmation that WPRT is over bought (over priced).
This information, when added to the fundamental information above, tells you that WPRT is likely a good near term short. When you consider that the overall market is over due for a pullback, this makes WPRT an even better near term shorting opportunity. When you consider that stocks are likely to under perform during earnings season this year, especially with regard to guidance, WPRT is an even better near term short. Earnings season is only 2-3 weeks away.
Technically, WPRT does not have any good support until it reaches the $30-$31 area. This is quite a fall from $45.63. With this in mind, shorting WPRT is an attractive prospect. The fact that as of Feb. 29, 2012 WPRT is short 16.5% of the float tends to confirm this conclusion. You should be aware that this is the last week of Q1. As such, there could be some "window dressing" buying.
If you decide to short, it may be a good idea to average in. In the positive vein for shorting, the Spanish Parliament votes on austerity measures on Thursday. A general strike is scheduled on March 29, 2012 in protest. With roughly 50% of the youth population unemployed, the possibility for rioting is great. Some even say that nearly 40% of the overall population is unemployed. They contend the offical government figure of 22.85% does not include aliens. Even the government figure has been rising, and further austerity is only likely to lead to a near term increase in unemployment.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in WPRT over the next 72 hours.