A lot of crucial updates are coming Westport Innovations Inc. (TSX:WPT)(NASDAQ: WPRT) investorsâ way on May 12 after market close, including Westportâs first-quarter numbers, its outlook for 2016, and an update about its impending merger with Fuel Systems Solution Inc. (NASDAQ:FSYS).
Westportâs guidance in particular is much awaited as the company didnât provide it last quarter, as is the status of the merger, especially after one of Fuel Systemsâ co-founders revealed his intentions to vote against the deal.
So what should investors expect from Westportâs report?
Two C’s to watch: Cartesian and cash
There havenât been too many developments since Westportâs last earning release late March, except one: Westport received US$6.3 million up front for a âderivativeâ sale of its ownership in its Hong Kong holding company to Cartesian Capital.
A derivative sale gives Westport the option to acquire ownership in the asset after a certain period of time. Without going into the details about the complicated transaction though, the cash that Westport received is the point to note here.
Rapid cash burn has been one of Westportâs biggest concerns in recent quarters, so any infusion is a life saver. Investors must therefore look beyond Westportâs top- and bottom-line numbers when it reports its Q1 earnings. Pay attention to two numbers in particular:
- How much cash in operations did Westport use during the first quarter?
- Where do its cash, cash equivalents, and short-term investments stand? Westportâs balance of US$27.8 million as of Dec. 31, 2015 was down a whopping 70% from Dec. 31, 2014.
If Westportâs cash balances continue to trend south, investors should consider it a red flag.
Remember, Westport is also banking on its merger with Fuel Systems to strengthen its balance sheet as the latter is a cash flow positive, debt-free company. However, Westport couldnât complete the deal in April as planned thanks to unexpected hurdles, the latest being strong opposition from one of Fuel Systemsâ co-founders, who holds 8.7% stake in the company.
Fuel Systems will open up voting to its shareholders on May 31, which will essentially decide whether the merger will go through or not. Needless to say, investors canât miss any update that Westport may provide in its upcoming earnings call about the merger.
You simply canât miss this number
Westportâs joint venture with Cummins is its most important key to profitability.
While Westportâs income from Cummins-Westport more than doubled to US$17.1 million in 2015, shipments in the fourth quarter slumped as global trucking markets weakened.
Another sluggish quarter could indicate deteriorating end-market conditions, which could push Westportâs turnaround back. Thatâs the last thing investors want to hear now, especially when uncertainty in China is already driving sales at Weichai-Westport lower. The two ventures are Westportâs key sources of income.
Given the backdrop, does Westport still expect to turn consolidated adjusted EBITDA positive this year? A positive answer is a must to re-instate investorsâ faith, otherwise the stock could give up whatever little it has gained so far this year.
