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"It is only in the mysterious equations of love that any logic or reason can be found", John Nash.
  • Barron's Misses On Westport In Article From 11/4/2012, “Stocks Finish Flat In A Storm-Battered Market”. 1 comment
    Nov 4, 2012 10:14 PM | about stocks: WPRT, CMI, CAT, DDAIF

    Note: Barron's article should be read first:

    http://online.barrons.com/article/SB50001424052748704377904578080732708957890.html?mod=BOL_hpp_mag#articleTabs_article%3D1

    Investors should not trade this stock without first understanding the difference between the two technologies involved in the Cummins relationship which are not mentioned in the article. CWI (the CumminsWestport joint venture) produces nat gas engines that use spark ignition. With the renegotiation of the JV, Westport secured high volume production for their 15 liter HPDI (high pressure direct inject) compression ignition engine out of the Cummins Jamestown, NY plant. Many feel Cummins got the better of the deal, but those that understand these two technologies know different. As liberal as some might say Westport is with R&D spending, they chose not to invest 50% of the development costs of the 15 liter CWI engine for what they feel will be a limited market and a distant second choice to their 15 L HPDI engine for heavy duty long haul trucking using LNG (liquid natural gas). This is the market Westport is after. If Cummins refused to supply Westport they would have risked being shut out of much of the heavy duty long haul truck engine market if the industry switches to LNG as I believe it will. There will be other companies with engines available using Westport's patented HDPI technology such as partner, Volvo and partner, Weichai in China and others that choose to partner with Westport in the future. I believe Daimler will join the list of those offering Westport HPDI technology for heavy duty trucking. The difference is the higher power and torque produced with the higher compression used to ignite the fuel. Similar to the difference between today's gasoline engine and the diesels chosen by truckers, miners and mariners, the spark ignited engine cannot compress the fuel to achieve the same level of power and torque. This makes going from diesel to HPDI much easier and more effective than from diesel to the spark ignited CWI technology. The choice is clear. The market for the CWI technology is mostly in smaller trucks and buses, hence Westport's decision to share development costs with Cummins to grow CWI at the other end of the engine displacement curve with the recent announcement of the ISB 6.7 liter spark ignited engine.

    Not to minimize the importance of the other technologies Westport is developing, Westport's HDPI is applicable virtually everywhere large displacement diesel engines are used today. The market is massive and includes trucking, mining, marine and rail. The companies that supply engines to these markets are also much bigger than Westport and highly motivated, as any company would be that stands to share a significant part of their current revenue with a small, up and comer, with a better mouse trap. Take Caterpillar for example. Their subsidiary EMD (Electro Motive Diesel) has been partnered with Westport to develop LNG locomotives for quite some time. GE's much larger market share was likely too rich a target to resist attacking with an LNG engine even though they would have to share it with Westport. Mining is a different story than rail for CAT, as they are the leader and likely would prefer not to share what they have with anyone. However, as customers learned that they can save millions by using LNG instead of Diesel, CAT had no choice but to listen and announced a new development program with Westport for mining equipment in June. For an idea of how much fuel this type of equipment can burn, CATs 797 series mining truck and its 3,400 HP diesel engine and 1800 gal. fuel tank consumes an avg. of 65 gal./hr and is usually run 24 x 365 being shut down only for maintenance. The fuel consumed per truck can be 500,000 gal. per year or more. The 797F has an even bigger 4,000 hp engine. The savings by switching to LNG are easy to calculate and huge. Last month, CAT announced its intentions to go "all-in" on natural gas at the HHP (high horsepower) Summit 2012. CAT has indicated that the 797 series of mining trucks will likely be high on the list.

    The article mentions its recent bearish call on Schiff Nutrition International which Bayer announced it would acquire at a 39% premium less than a month later. The thought crossed my mind that the column may have just made the same mistake with Westport, but I'm not so sure. The industry may be choosing to leave Westport alone. If natural gas is the future and one of the industry giants acquires Westport, the future for the others may not be as bright as it would be with an independent Westport that allows them all to draw water from the well.

    Disclosure: I am long WPRT.

    Stocks: WPRT, CMI, CAT, DDAIF
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  • Horace Dediu
    , contributor
    Comments (43) | Send Message
     
    I guess the confusion stems from the type of license deal Westport has made with Cummins and whether Daimler may join as well. When are the companies competing and when are they cooperating?
    5 Nov 2012, 03:13 PM Reply Like
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