Westport Innovations (WPRT) is a global leader in the large natural gas market. The upsurge of the number of vehicles shifting from petroleum and diesel to natural gas has significantly impacted the growth of Westport Innovations. Westport is a stock that is not followed by the major sell-side banks (JPMorgan, Goldman Sachs, Citigroup, UBS, etc) and was bought by top investors George Soros and John Griffin in the last reported quarter. In the blog Warren Trades I detail why it is important to track hedge funds holdings.
Westport Innovations is a global leader in alternative fuel, low-emissions transportation technologies. Leveraging a capital efficient business model to develop and commercialize natural gas engines in key vertical markets, Westport has grown substantially in revenue and stature. The company has strong fundamentals, strategic or powerful alliances, an efficient business model and a solid and shareholder oriented management team.
First I will describe the natural gas secular trend that will benefit Westport for the foreseeable future. In terms of strong fundamentals it is essential to remark that the natural gas vehicle (NGV) industry is a large and rapidly growing market. According to NGV America, as of May 2011 there are more than 13 million natural gas vehicles in use worldwide, including approximately 112,000 operating on U.S. roads. The International Association of Natural Gas Vehicles projects that there will be more than 50 million natural gas vehicles worldwide within the next ten years, representing approximately 9% of the world transportation fleet.
According to the Westport Investor Relations website, one of the primary drivers accelerating NGV adoption is the increasing price stability advantage that natural gas has over petroleum. As the relative price of diesel compared to natural gas increases, the payback period shortens, and the incentive to switch becomes more attractive. In addition, Datamonitor estimates the global medium- and heavy-duty vehicle market (consisting of vehicles over 3.6 tonnes) in 2009 was US$234.1 billion and is projected to grow at a 7.9% compound annual growth rate, or, CAGR, to US$343.0 billion by 2014. These engines consume large amounts of fuel and often operate in regions where LNG enjoys a significant cost advantage over diesel, providing favorable economics for natural gas use and a significant market opportunity for the company's products. Today only a fraction of these vehicles is powered by natural gas, presenting a considerable opportunity.
Westport leverages its proprietary technologies by partnering with leading diesel engine and vehicle original equipment manufacturers (OEMs) to develop, manufacture and distribute natural gas engines to a diverse group of global vehicle OEMs. Westport commercializes its technology in markets where demand for clean, low-emission engines is prevalent, including light-, medium-, and heavy-duty. Westport currently has strategic alliances with three of the world's top four engine producers.
Despite negative earnings there are several items from Westport's Q2 2012 report that are very attractive. I also think that these factors were analyzed by both Soros´ analyst team before investing in the stock. First, its light duty division achieved a positive EBITDA one quarter earlier than promised. Its partnership with Ford (F) to produce the popular Ford F150 with bi-fuel natural gas and gasoline engines is performing stronger than expected, and it is planning a similar partnership with Volvo cars in the near future. Westport Innovations is also developing another revenue stream. It is developing different technologies with Caterpillar (CAT) and Canadian National Railway (CNI) to develop natural gas driven locomotive engines. In addition to locomotives, there is a great deal of interest in natural gas powered equipment for mining equipment that the Westport-Caterpillar partnership intends to take advantage of.
Westport has strong growth prospects in the Chinese market. The company has partnered 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 key here is the introduction of the HPDI engine, which is expected to be rolled out in 2013.
I like to invest in companies that innovate and grow and Westport is one of that group. Westport has many technical advantages that moved it from a startup company to a market leader. The worldwide demand for Westport's products and solutions is increasing tremendously. In evidence of this trend, WPRT doubled the plant potential of China to generate near 40k engines per year. In addition, Westport has recently released the finalization of an assembly center in Kentucky with an annual generation capacity of about 20,000 Westport WiNG systems.
Westport has yet to turn a profit so its shares are truly volatile (beta of 1.94). I think that potentially explosive growth in natural gas production in the US makes Westport's products and its intellectual properties an attractive long-term investment opportunity.