After hitting new lows month after month, Westport Innovations Inc.’s (TSX:WPT)(NASDAQ:WPRT) stock is suddenly on fire. It’s up a whopping 32% in just the past five trading days, taking its year-to-date gains to a mind-boggling 70% as of this writing. What’s the excitement all about?
At company level, this week is an exciting one. The big news hitting headlines is Westport’s announcement to introduce its WiNG Power System on 2016 model for Ford’s flagship F-150 pick-up trucks. Westport expects the 2016 F-150, equipped with compressed natural gas, to be commercially available as early as this summer.
Remember, Westport’s Ford-dedicated WiNG program is a high-potential business and is considered to be its trump card, especially for the U.S. market. With the recent drop in oil price hitting demand for WiNG products, investors perhaps see the 2016 F-150 adding some sheen to Westport’s numbers. More importantly, this news appears to have brought relief to investors who were getting jittery about Westport’s prospects, given its widening losses in recent quarters with no signs of a turnaround whatsoever.
What about Q1 earnings estimates?
With Westport set to report its first-quarter numbers this Thursday after the market closes, is the market’s high expectation also sending the stock higher? Not quite. In fact, analysts don’t foresee any improvement in the company’s year-over-year losses. Worse yet, they expect its revenue to decline nearly 36% from last year. For a company that’s still in the red, growth on the top line is imperative.
On a positive note, Westport has initiated aggressive cost reductions in recent months, the benefits of which should reflect in its numbers this year. That’s also going to be a key point in the company’s upcoming earnings release. Any improvement in margins backed by lower costs should be a big boost.
At the same time, investors should keep an eye on the performances of Westport’s joint ventures with Cummins and China-based Weichai, which currently account for whatever little income the company earns. Both ventures delivered remarkably good numbers in the fourth quarter, and it’s essential that the trend continues for Westport to be profitable. Another positive quarter from the standpoint of the ventures could confirm better days ahead for Westport.
Why the stock could fall again
That said, the only reasons why the momentum in Westport’s stock could sustain this week are lower losses and better visibility about profitability. Of course, the rally in oil prices in recent weeks has also played a major role in pushing the stock higher because low oil prices reduce the cost benefit that natural gas vehicles enjoy versus diesel or gasoline, thereby hurting Westport’s business prospects.
But no one can confirm whether oil prices have bottomed. More importantly, a rebound in oil prices doesn’t necessarily mean higher demand for natural gas engines. The adoption of the alternative fuel is moving at a painfully slow pace. Meanwhile, Westport is burning cash at an alarming pace, even as it struggles to shrink its losses. If its sales don’t improve, it may have to raise fresh capital to run its business.
In short, challenges are real and plenty, and one new product with Ford doesn’t justify the sharp jump that Westport shares have already seen this week. The stock was probably oversold, which is why any bit of positive news can trigger big price movements. But it’s more of speculation-driven rally, and the stock needs stronger fundamental catalysts to continue. Look for these catalysts in the company’s upcoming earnings report, while you stomach the volatility in the stock.
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