Morgan Stanley believes that the revenues of Westport Innovations (WPRT), a manufacturer of natural gas engines, will double in two years and triple in three years. The company is expected to grow exponentially as the divergence between natural gas and oil prices rises. The adoption rate towards gas-driven vehicles is expected to rise, as the fueling infrastructure improves in the U.S. With some important upcoming catalysts, partnerships with seven of the ten largest OEMs, and favorable energy regulations by the Obama administration, WPRT is expected to be a winner as the U.S. energy landscape evolves in favor of natural gas.
WPRT operates in three segments, namely Cummins-Westport (CWI), Westport Light-Duty (LD) and Westport Heavy-Duty (HD). Under CWI, the company produces natural gas engines in collaboration with Cummins (CMI). LD and HD engines are targeted towards light duty and heavy duty vehicles. The 15-L engine is a special patented product of WPRT under HD. The following table shows the segment-wise revenue breakdown:
However, what this table does not show is that the revenue percentage share of CWI is shrinking with the passage of time. This is because LD engines sales have picked up recently. In the last quarter, sales of the LD business rose by 182% on a YoY basis. This was more than the sales rise in CWI (up 78%), but less than the rise in the HD segment (up 411%), which was so considerable due to sales of the 15-L engines. On the LD side, the company also expects incremental sales from Ford (F)'s F-series pickups. This segment expects more than 500 units of the F-series to be sold this year, and it is already working on an order of roughly half that amount of engines from Ford.
HD is the only division that is making operating losses. The LD business started making profits in the last quarter. Also, a majority of CAPEX is directed towards the LD segment (52%), followed by HD (47%) and CWI (1%). This shows how much emphasis WPRT is paying to its LD business.
Three of the important catalysts are linked to the LD segment:
- Sustained profitability from the LD division.
- WPRT has recently signed an agreement with General Motors (GM) to develop advanced engineering technology for LD engines. Further details on this agreement will move the stock.
- More updates on the F-series pickup performance.
The company expects to make $400-$425 million in revenues this year, representing 50%-70% YoY growth in revenues.
WPRT's Presence in China
In order to penetrate the huge Chinese market, WPRT joined hands with Weichai, a Chinese company that is currently the world's largest manufacturer of heavy duty engines. This quarter saw a 306% YoY growth in revenues, as the units sold through this JV jumped by 222% YoY to 5,331 units. The capacity has reached 40,000 units per annum. The important catalyst from this JV is the introduction of the HPDI engine, which is currently undergoing road testing with OEM supplier Shaanxi HD automobile. The engine is expected to be rolled out in 2013.
WPRT and Volvo
WPRT is also working with AFV, a Sweden-based supplier of natural gas engines, to produce Volvo passenger cars. An important catalyst for the stock will be when Volvo cars fitted with WPRT technology reach beyond Sweden into the rest of Europe and China. Volvo's heavy duty vehicles, with WPRT technology, are also expected to be launched in 2014, which will be another important catalyst.
WPRT and CLNE - the future of natural gas in the U.S.
One of the main reasons why consumers have shown a reluctance to switch to natural gas-driven vehicles is the lack of fueling infrastructure in the U.S., as drivers might find themselves in the middle of a highway with an empty fuel tank. The natural gas infrastructure story has become a chicken and egg issue, as truck manufacturers are not willing to develop gas-driven models unless the fueling infrastructure is in place. On the other hand, giants like Exxon Mobil (XOM) and Chevron (CVX) are not willing to invest unless they see higher switching rates, which are not possible without the development of new gas-driven models. Clean Energy Fuel Corp (CLNE) has taken the first step in this matter. CLNE is actively working to develop fueling stations on what it calls the "American Natural Gas Highway." Our article on CLNE has discussed in detail how the company plans to go ahead with its target. CLNE plans to establish 70 stations in 2012 and 80 stations the next year. The establishment of this infrastructure will be one of the most powerful catalysts for WPRT.
Corporate Average Fuel Efficient (CAFE) Regulation
Under this regulation, the Obama administration has set a target of achieving almost double the current fuel economy in 2025. Obama wants to see the fuel economy rise from the current level of 28.6 miles per gallon (MPG) to 54.5 mpg. The new rules will grant incentives to consumers of natural gas-driven vehicles. WPRT will be one of the main beneficiaries.
WPRT is expected to start making profits in 2015. The company's recent strong performance gives a bullish signal to the market, as WPRT topped revenues and EPS estimates by a big margin. The sell-side expects revenues to expand by 100% in the next two years, and triple by 2015. Given that the divergence between natural gas and oil prices keeps on increasing, the stock is expected to go up, as important catalysts come into action.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.