Are Westport Innovation Shares Poised to Surge?

Westport Innovations’ stock has slumped over the past year. Can the company snap out of it?

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Over the past year, shares in electric auto manufacturer Tesla are up more than 400%. Investors around the world can see the potential of the company’s electric engines, its superior battery life compared to competing cars, and the direct-to-customer sales model, which bypasses dealerships and uses the power of the internet to connect the company to its customer directly.

During that same time period, shares of Westport Innovations (TSX: WPT)(NASDAQ: WPRT) are down more than 46%, even though the company took numerous strides forward in 2013. While natural gas engines might not be as sexy as spiffy new Tesla vehicles, Westport still managed to get its market share in truck engines up to almost 2%, ship 38,000 engines in China, get orders for almost 900 engines in public transport vehicles in North America, and launch a test project with four CN Rail locomotives.

The company’s potential in China looks particularly bright. Westport, along with its two joint partners, expects 2014 engine shipments to go from 38,000 to more than 100,000 units. China is the only division of the company which is currently profitable, as Westport’s share of the profits was about 1% of revenue. Those aren’t great margins, but investors should see improvements as shipments increase.

While Westport has joint ventures with many different car companies around the world, the company is the most intertwined with Ford (NYSE: F). The current partnership with Ford has the company supplying natural gas engines for more than 10 Ford models — including the bestselling F-150 truck line — and offering conversion services at more than 150 dealerships across North America. The company recently consolidated all its Ford operations to one plant in Texas, streamlining operations and reducing expenses.

The other huge potential grower is Westport’s joint venture with Cummins (NYSE: CMI), which gives customers the ability to either convert existing large truck engines to natural gas or buy vehicles already converted. Revenues of the joint venture grew from $198 million to $310 million over the past year, an increase of 57%. The company hopes to grow its market share in natural gas engines from 2% currently to anywhere from 3-5% in 2014, which represents at least a 50% growth in year-over-year revenues. There’s huge potential for growth if the company can pull it off.

One of the issues with natural gas vehicles is the absence of filling stations. It’s one thing for a company to install the infrastructure to fuel an entire fleet, but how is a regular customer supposed to fill up their natural gas-powered car?

Encana has stepped up in a big way in the past few years as the company converted its fleet to natural gas, building fueling stations across western Canada. Encana has plans to build more, adding to the 80 that are currently across the country. It’s not happening overnight, but as more filling stations show up, customers will start to look harder at the cost savings of a natural gas engine.

There’s still huge potential to convert city transit buses to natural gas. Fortunately for the company, the cost savings alone make it pretty easy to sell a municipality on a fleet of natural gas-powered buses. Calgary is running a pilot project with two natural gas-fueled buses, which cost $40,000 more to purchase, but will save $11,000 per year in fuel. Plus, natural gas buses are cleaner and idle more quietly.

If the future looks so bright for Westport, why has the stock declined so much? First off, the company still stubbornly loses money, and doesn’t predict profitability until 2015. There’s enough cash in the bank to cover operations until then, but investors are growing weary. The other main factor is the increase in natural gas prices. Spikes in natural gas prices lower the difference between the cost of fuel between a natural gas-powered vehicle and a traditionally powered one.

Foolish bottom line

Even though Westport has many promising divisions, the company still isn’t profitable, and hasn’t done anything exciting to appease impatient investors. If it can manage to get a huge order or find a way to become profitable earlier than expected, there’s potential for the stock to have a huge move. Patient investors will be happy they held on once the company moves past this lull.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no positions in any company mentioned in this article. Motley Fool Co-founder David Gardner owns shares of Ford and Tesla Motors. Co-founder and CEO Tom Gardner owns shares of Tesla Motors. The Motley Fool owns shares of Cummins, Ford, Tesla Motors, and Westport Innovations. CN Rail has been recommended by Share Advisor Canada.

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