Should You Buy Shares of Westport Innovations?

A lot of trends are working in its favour, but there are problems too.

| More on:
The Motley Fool

Despite a big drop in share price over the last year, there is still many who believe that Westport Innovations (TSX: WPT)(NASDAQ: WPRT) will flourish in the longer term. The company, which sells natural-gas-powered engines, certainly has plenty of trends in its favour.

Despite a run-up in price over the past couple of years, natural gas is still much cheaper than oil in North America. It’s also cleaner. Meanwhile, alternative energies, like electric vehicles, are still too expensive for most people. As a result, industries like trucking and public transportation have begun to adopt natural-gas-powered vehicles at a rapid pace. Others, like mining, rail, and the marine industry are not far behind.

Westport is right in the middle of the action. The company has 327 patents related to natural gas engines, more than any other company — Caterpillar is a distant second with 201. So if this technology really takes off, Westport may be able to ride the wave without much resistance at all.

Not so fast

The main problem for natural gas as a transportation fuel is a lack of infrastructure. According to the U.S. Department of Energy, there are only 712 public compressed natural gas fueling stations in the U.S. This compares to about 120,000 gas stations.

This means there’s a catch-22 — without more infrastructure, there’s a disincentive to build more natural gas vehicles, and vice versa. This is made worse by the high cost of building a CNG fueling station — up to $1.7 million. By comparison, a traditional gas station only costs about $100,000 to build.

This is a big reason why CNG still hasn’t taken off in passenger vehicles like automobiles. However, it’s a problem for trucks too, something that’s been acknowledged by Westport CEO David Demers. Any growth projections for the industry must be taken with a grain of salt.

A high valuation

Westport’s shares are certainly a lot cheaper than they were last year; over the past 12 months, the stock is down more than 40%. It’s still a very expensive company, though.

Last year, Westport made $2.85 per share in revenue, yet the stock still trades at about $18. This is a very high price/revenue multiple by almost any standard. It’s even higher when looking at Westport’s bottom line, as last year the company lost $3.22 per share.

Management expects to break even by the end of this year on an adjusted EBITDA basis, so that would be an improvement from where the company is today. However, for Westport to justify its current stock price, it will probably need to meet every one of its goals for years to come. As an investor, this is a gamble not worth taking.

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 Benjamin Sinclair holds no positions in any of the stocks mentioned in this article. The Motley Fool owns shares of Westport Innovations.

More on Investing

calculate and analyze stock

Prediction: My 2 Top TSX Stocks to Beat the Market in 2024 and Beyond

Any investment is a prediction on the future of stock. Here are two stocks that should deliver predictably strong returns…

Read more »

Retirees sip their morning coffee outside.

Here’s the Average RRSP Balance at Age 71 in Canada

If you hold stocks like Fortis Inc (TSX:FTS) in an RRSP, you pay no dividend and capital gain tax until…

Read more »

Dividend Stocks

2 REITs to Buy to Earn Like a Lazy Landlord

Becoming a landlord and managing the property yourself may give you the most direct exposure, but it also comes with…

Read more »

money cash dividends
Dividend Stocks

Beat the TSX Immediately With This Cash-Gushing Dividend Stock

This dividend stock has already beat the TSX today, even from 52-week lows. But it could only be the beginning.

Read more »

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »

TFSA and coins

5 Canadian Stocks With a Real Chance of Tripling Your TFSA’s Value

TFSA balances can triple in value with five Canadian stocks that have delivered outsized gains in recent years.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »