2 Companies With Big Potential From Natural Gas Vehicles

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Includes: CLNE, FSYS, WPRT
by: Mitch Vine

Natural gas based vehicles are a dark horse in the push for cleaner fuels and some oil independence. In North America at least, every city already has filling stations. Check out cngprices.com. For trucks and light vehicle fleets, natural gas is already in use, and rapid growth is a possibility.

Take two companies, both creating engine components that will benefit from a shift to natural gas based engines for cars and trucks. Comparing the two – they remind me of the rabbit and the hare.

Fuel Systems Solution’s (NASDAQ:FSYS) components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. Westport Innovations (NASDAQ:WPRT) provides alternative fuel, low-emissions technologies that enable engines to operate on fuels, such as compressed natural gas, liquefied natural gas, hydrogen, and biofuels.

Sometimes it’s hard to understand what drive short term stock prices. Our two companies, similar in many respects, couldn’t be more different in terms of stock valuation ratios.

FSYS is the bigger company, founded in 1958, and has been generating significant profits of years, even through the recessionary 2008/2009 years. Revenue declined a little in 2010 after a solid 2009, but has picked up in recent quarters.

On the other hand Westport is more like a startup. Revenue jumped 75% in the June quarter, but over the last couple of years growth has been in the 20% per year range. Although cost of goods had been coming down, operating costs are very high resulting in big operating losses.

FSYS

WPRT

Business

Fuel Systems Solutions, Inc. engages in the design, manufacture, and supply of alternative fuel components and systems for use in the transportation, industrial, and power generation markets. Its components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. The company offers a range of fuel delivery components, including pressure regulators, fuel injectors, flow control valves, and other components to control the pressure, flow, and/or metering of gaseous fuels; electronic controls comprising solid-state components and proprietary software that monitor and optimize fuel pressure and flow for engine requirements; and gaseous fueled internal combustion engines. It also provides systems integration support and engineering services to integrate the gaseous fuel storage, fuel delivery, and/or electronic control components and sub-systems; auxiliary power systems for truck and diesel locomotives; and natural gas compressors and refueling systems for light and heavy duty refueling applications. In addition, the company designs, assembles, and markets ancillary components for systems operation on alternative fuels. It sells its transportation products primarily to automobile manufacturers, taxi companies, transit and shuttle bus companies, and delivery fleets; and industrial products principally to manufacturers of industrial mobile equipment and stationary engines through a network of distributors and dealers; and through a sales force that develops sales with distributors, original equipment manufacturers, and large end-users. The company was founded in 1958 and is based in New York, New York.

Westport Innovations Inc. provides alternative fuel, low-emissions technologies that enable engines to operate on fuels, such as compressed natural gas, liquefied natural gas, hydrogen, and biofuels. It partners with diesel engine and truck original equipment manufacturers (OEMs) to develop, manufacture, and distribute the Westport’s engines to various truck and bus OEMs. The company’s Light-Duty division focuses on light-duty automotive systems, components, and engines, including 2.4L engines for industrial applications, such as forklifts and oilfield service. It, through its joint venture with Cummins, sells a range of low-emissions alternative fuel engines for commercial urban fleets, including buses, refuse trucks, and vocational vehicles. The company, through its proprietary development platform, Westport Heavy Duty, engages in the engineering, design, and marketing of natural gas-enabling technology for the heavy-duty diesel engine and truck market. Westport Innovations Inc. was founded in 1995 and is headquartered in Vancouver, Canada.

Revenue (ttm)

376.62

167.44M

Net Income (ttm)

8.95M

-52.35M

Enterprise Value

315.48

1.20 B

Price / Sales

1.09

7.97

Price/Book (mrq)

1.17

7.26

Cash / Debt (mrq)

106.89 / 11.3

162.44M / 26.02M

Year Rev Growth 08-09, 09-10

18%, -5%

12%, 23.3%

Qtrly Rev Growth Q2 YOY

17%

75%

Yet FSYS, the profitable one is selling for about 1.09 times sales and 1.17 times book value, and WPRT is selling for about 7.97 times sales and 7.26 times book value.

Investors are implying that Westport will figure out how to be profitable and grow very rapidly for many years to come. They also seem to imply that FSYS hold its current profitability ratios, but grow at much more modest revenue growth rates.

We screen for companies by estimating future earnings, and comparing discounted future earnings to current stock prices.

To justify current valuations Westport needs to get profitable and grow revenue at about a 40-50% CAGR for at least 10 years. FSYS on the other hand could maintain their current percentage net profit and grow about 15% CAGR to justify their current profitability.

Another way to invest in the natural gas as vehicle fuel sector is to invest in distribution infrastructure. Clean Energy Fuels (NASDAQ:CLNE) is investing in filling stations.

Two companies, both expected to benefit from a shift to alternative fuel engines. One needs to grow very fast, one could just maintain lower but respectable growth. Which would you pick, the rabbit or the hare? We are thinking of going long on the rabbit and shoring the hare, but we'll probably wait for the next quarter's results before deciding.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.