In one of my earlier articles, I discussed how certain stocks, despite offering bright prospects, have been shorted in large quantities. In that article, I discussed the possibility of how Tesla (TSLA), the electric-car manufacturer and Sturm, Ruger & Co (RGR), the firearm manufacturer, can be short-squeezed. In this article, I have discussed the potential of Westport Innovations (WPRT) being another candidate for short-squeeze.
The company manufactures natural gas engines for light, medium and heavy-duty trucks. Given that the company deals in only natural gas engines, movements in the natural gas spot prices have significant impact on the stock price. In June 2008, no one would have thought that the gas prices would come so down that people will seriously start thinking of switching to natural gas as a source of fuel. However, the shale gas boom provided US with abundant quantities of natural gas and brought the gas spot prices tumbling down from $13 per million BTU in July 2008 to below $2 level in April 2012.
Truck users can save plenty of money by switching from diesel to natural gas. According to the head of fleet logistics at Waste Management (WM), each garbage truck, run on natural gas, will save the company at least $27,000 per annum in fuel. Even though the gas prices have rebounded from their lows in April 2012, still gas is much cheaper than diesel and gasoline. According to the Burner tip parity, price of a single barrel of WTI crude oil should be, at most, ten times more than that of the spot natural gas price. Currently, oil prices are 30 times more than spot natural gas price. Therefore, a violation of this rule means that natural gas is the cheaper source of fuel.
WPRT has established partnerships with most of the major OEMs operating in United States. In the light-duty category, the company is working with Ford (F) to produce engines for F-series trucks. Recently, WPRT also signed an agreement with General Motors (GM) to develop advanced engineering technology for engines in the light-duty trucks category. Further, WPRT provides natural gas engines to Volvo's V7 wagons. This allows WPRT to reach the European market as Volvo has 16% market share in Sweden and 1.5% in Europe.
The company is also increasing its presence in the heavy-duty truck engine market. A joint venture of WPRT and Cummins (CMI), a US-based truck engine manufacturer, serves the medium and heavy-duty truck market. Also, WPRT's 15-L High Pressure Direct Injection (HPDI) engines are sold in North America as Westport-branded LNG option for Kenworth and Peterbilt heavy trucks. Kenworth and Peterbilt are brand names through which Paccar Inc (PCAR), a US-based truck manufacturer, sells its trucks in the US market.
WPRT, through alliance with Weichai Power, one of the major suppliers of natural gas engines in China, has also penetrated the Chinese truck market. According to ACT Research estimates, China is expected to produce 1.3 million trucks in 2013 which is much larger than North America's current production rate of 323,000 trucks per annum.
WPRT's sales depend a lot upon the natural gas adoption rate in US. Despite the low natural gas prices, the adoption rate has been slower than expected because of a lack of fueling infrastructure present in the US. However, a network of fueling stations to feed natural gas-powered vehicles is rolling and will hit the roads over the next few years. Clean Energy Fuels Corp (CLNE), along with natural gas producers, is playing a vital role in the development of natural gas fueling stations. For example, Chesapeake (CHK) (US's 2nd largest natural gas producer) has allocated $150 million in CLNE to help build 150 liquefied natural gas (LNG) stations (70 in 2012 and 80 in 2013). This represents almost 14% increase over the existing 1,100 stations. Another example would be Shell (RDS) who signed an MOU with Travel Centers of America (TA) to build and operate LNG fueling stations in 100 of TA's 238 nationwide fueling centers. Between Shell, CLNE and other partners, I expect a significant growth in natural gas fueling stations and I believe that it will generate a strong demand for natural gas-powered trucks over the next 12-18 months.
Under Corporate Efficient Fuel Regulations (CAFE), Obama's administration has set a target of raising the average fuel economy of US from 28.6 miles per gallon (MPG) to 54.5 MPG by 2025. Under the new regulations, the users of natural gas-driven vehicles will be awarded with incentives. This will improve the natural gas adoption rate as well.
The stock has been given an "OK" status by Jim Cramer. Sell-side expects the company to make the first cent of profit in 2015. Morgan Stanley Analyst believes that the company's revenue will double in the next two years and triple in the next three years. Currently, 38% of the share's float has been shorted. The current short ratio of 14 means that it will take approximately 14 days for the short positions to clear out. The company is expected to make $101.9 million worth of revenues in the last quarter, which will be 80% more than the sales figure posted in the same period a year ago. Earnings estimates have improved from a loss of $1.30 in July to a loss of $1.14. For 2013, the analysts are predicting a growth of 35% in earnings. The third quarter earnings release will be an important catalyst. Also, with apparent non-inclination of Mitt Romney towards 'green' technology, results of Presidential Elections in November will serve as another important catalyst for the stock. Given expected growth in the company's earnings, I recommend the stock as a buy.