The last six months were not kind to the shareholders of Westport Innovations Inc. (TSX:WPT)(NASDAQ:WPRT). Shares of the maker of natural gas engines have lost about 70% of their value.
There are a couple reasons for this decline. Back in the summer, the company posted results that weren’t exactly great. Management had promised that 2014 would be the year Westport finally became profitable — at least on an EBITDA basis. But numbers in July disappointed, and in October the company cut its full-year revenue guidance from $175 million to just $135 million.
That’s a pretty big miss.
The other thing weighing down the stock is the price of oil. As oil declined from more than $100 per barrel to recent lows of $45, natural gas became that much less attractive. The price of gasoline is below $1 per liter in most parts of Canada, and has sunk below $2 per gallon in many U.S. states as well. When gas is that cheap, it’s a tough sell to convince big trucking companies to make an expensive switch over to natural gas engines.
In the short-term, things aren’t looking very good. But what if we looked at Westport a little differently, from a value perspective?
The value proposition
After surging almost 17% yesterday on no major news, Westport’s shares currently trade hands for $5.32 each. At these levels, it’s easy to make the argument that they’re trading at less than the sum of all the assets on the balance sheet.
Westport has a book value of US$237 million, including more than US$130 million in cash and nearly US$45 million in receivables. It also has some debt on the balance sheet, to the tune of US$55 million. The company’s book value works out to US$3.75 per share, or $4.68 in Canadian dollars.
But is that book value telling the whole story? Normally, value investors will strip out goodwill and intangibles from a book value calculation, because they generally aren’t worth much if a company were to liquidate. With Westport, it’s easy to make the argument that the intangible assets are worth more than the $72 million that’s listed on the balance sheet. I’m not sure what they’re worth, but I’d take the over on that bet.
Not only does the company have more than 400 patents and new technology on the way, but it also has partnerships with Cummins and Ford. Both of these partnerships are easily worth more than just the value on the balance sheet. And the company’s new technology is so promising that many customers delayed purchases for a few months until the new engines came out.
Asia potential
As Canadians, it’s easy to scoff at the Westport story. Outside of big trucks and busses, I don’t know anybody who drives a natural gas vehicle.
In Asia, it’s a whole other story. Although natural gas in Asia is more expensive than what it is in North America — we’re essentially awash with the stuff, they’re not — it’s still cheaper than using gasoline or diesel. In South Korea, where I’ve spent the last few months, just about every truck, bus, or taxi runs on natural gas.
Westport knows this as well as anyone, and has entered into a partnership with Weichai, one of China’s largest auto parts manufacturers. Although only 11% of the company’s revenue comes from Asia (since Westport only has a 35% share of the joint venture there), revenue from the continent grew nearly 100% in 2013, and is on pace to grow an additional 25% in 2014. Management predicts the number of natural gas engines sold in China to more than triple by 2023, to 600,000 units.
It isn’t often a story with this kind of potential comes along that’s trading at such cheap levels. If you’re a believer that oil is headed back up to normal levels, it’s pretty likely Westport shares would be a good place to invest.
