Even before oil collapsed, Westport Innovations Inc. (TSX:WPT)(NASDAQ: WPRT) was struggling.
Sure, the company was having success convincing some big trucking outfits to replace their fleet’s diesel engines with the company’s natural gas burners, but progress was slow. And sure, natural gas is cheaper and burns cleaner, but it’s hard to convince people to switch away from a system that currently works pretty well.
Add in a couple of earnings misses, disappointing numbers from its joint venture with Cummins, and reports that customers aren’t happy with its newest line of engines, it’s easy to see why shares are down 75% since the beginning of 2014 and a whopping 88% from the 2012 peak.
And then there’s the decline in energy. Natural gas prices are cheaper, but so are diesel prices. Trucking companies are enjoying the lowest cost of fuel in years and many companies have switched to rail transport wherever possible, saving costs that way as well.
In short, things aren’t looking very rosy for this once market darling. But as the old saying goes, it’s darkest right before the dawn. Could this actually be a buying opportunity?
The bull case
There are two main things Westport has going for it. There’s potential in Asia, and it owns a lot of great technology that might be interesting to automakers.
Let’s tackle the second point first. For a car manufacturer interested in natural gas as an alternate fuel, this would be the perfect time to acquire the company. Shares are cheap and the technology is currently unloved.
But a big investment in natural gas also means a big investment in natural gas infrastructure. Filling up your car with gasoline is easy; filling it up with natural gas is almost impossible, at least in North America. Most service stations don’t stock it because there’s no demand. It’s a big catch-22 situation.
Still, it’s obvious some people would get behind it. Natural gas is better for the environment and cheaper than gasoline. And there’s still the potential to sell engines for large trucks and buses, which are less sensitive about the lack of fueling stations.
In China the company’s partnership with Weichai, the largest maker of auto parts, is growing like a weed. Revenue jumped from $109 million in 2011 to $425 million in just the first 9 months of 2014. That’s good, and Westport is sharing in some profits, which it’s immediately reinvesting into the next phase of engines. There’s still plenty of potential for the partnership to keep growing in China.
But is it enough?
In 2014 Westport had a cash flow of negative $107 million, and that was with oil close to $100 per barrel during the first half.
That doesn’t bode well for 2015. The company exited 2014 with just $94 million in cash. Unless something changes quickly, it looks like it will either have to sell more shares or raise debt to keep operations going. I think they’re capable of getting the cash, but likely at a steep price. Issuing shares close to decade lows is not a good idea, especially if the cash is just being used to keep the lights on.
The company is much more optimistic. Management has gone on record forecasting an EBITDA profit by the end of 2015, and has plenty to say about long-term growth, including a projection of total engine sales tripling to 600,000 annually by 2023 in China.
The company has only scratched the surface in North America too. Management figures that annual sales will increase 29% per year through 2020, which would give it just 20% of the natural gas engine market. That doesn’t factor in getting any additional customers to switch from diesel.
There is potential in Westport; that much is obvious. And shares are very depressed. But until management can show that the company is a little closer to profitability, it’s a very risky stock.
