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José Mathieu didn’t quite know what he was getting into when he became CEO of Railpower Technologies Corp. (TSX: P) in late 2005. The Quebec-based company was seen as a promising clean tech play with a unique product — a hybrid-electric switcher locomotive known as the Green Goat, which supposedly reduced emissions and cut down on fuel costs. Since 2000, Railpower had manufactured and sold 65 Green Goats and scored a lucrative contract with Union Pacific to build 98 of its next generation locomotives.
Things changed shortly after Mathieu left his job as vice-president of Bombardier Transportation to join Railpower. “Everything started to go bad,” he says. The Green Goat had a serious design flaw: its lead-acid batteries were mounted incorrectly and would eventually leak, potentially causing the locomotive to burst into flame. Railpower recalled all 65 of them, a move that has so far cost upwards of $20 million. “It was quite a surprise. Not even the board was aware,” Mathieu says. The orders for Union Pacific were delayed, and Railpower eventually sold the locomotives at a loss.
Over the next two years, the company’s cash supply dwindled, its share price plummeted, and bankruptcy did not look far off. Railpower has since found a saviour of sorts in the Ontario Teachers’ Pension Plan, which made two private placements in Railpower this year totaling $55 million in exchange for convertible debentures. (The arrangement could allow OTPP to eventually own the company.)
But even the investment from OTPP did little to restore faith in Railpower as far as the market is concerned. The stock languishes at around 50 cents today compared to more than $6 just over two years ago.
Oddly enough, the market conditions for Railpower couldn’t be better. Companies everywhere are struggling (or soon will be) to find ways to reduce emissions, and high fuel prices are eating away at corporate earnings. Railways are no exception. Canadian Pacific Railway fingered high fuel prices today as one of the reasons why its quarterly profit sunk by 40% year over year.
With drivers like these, why is Railpower still a penny stock? The turnaround, if management can successfully engineer one, is going to take time. Railpower is still in the process of repairing the recalled Green Goats, about two-thirds of which should be fixed by the end of the year.
“They’re spending a lot of their engineering expertise on retrofitting the old product, so it’s hard for them to spend time and effort on new products,” says MacMurray Whale, an analyst with Cormark Securities in Toronto.
Even so, the demonstration models of its latest locomotive tested by a handful of railways in California have performed well. The railways reported this month fuel consumption reductions of up to 45% — between $400 and $500 a day — and the company says the locomotive cuts back on nitrogen dioxide emissions (a chemical that damages the respiratory systems of humans and animals) by up to 90%.
But Railpower has yet to turn a profit, and it needs to get more orders. Mathieu says it has booked around 10 orders so far this year and he expects the company to be in the black in 2009. Whale argues that’s doubtful unless Railpower sells at least 60 or more locomotives this year. “They always say every quarter they have a bid or they’ve had people ask for quotes,” he says. “But every quarter goes by and there’s nothing new.” He maintains the company has a good chance of snagging orders in the future, however.
High fuel costs and increased environmental regulation will continue to pique customer interest. In fact, stricter emissions legislation for the rail industry will be implemented in the U.S. in 2010. (Canada does not have a similar policy in place, but generally follows the U.S. on such matters.)
The lack of competition also boosts Railpower’s prospects. Only one other company currently produces eco-friendly locomotives, and Whale says the railways will likely tap both companies for products rather than relying on one exclusively. And starting next year, Railpower will manufacture its own products for the first time. The company previously sub-contracted manufacturing, and Mathieu says that resulted in excessive costs and a lack of quality. The first phase of the manufacturing plant, located in Quebec, will be completed next year and should allow the company to keep production costs down.
But for now, customers are waiting for more information on how Railpower’s locomotives perform (especially after the Green Goat fiasco) and investors will have to wait until at least 2010 before the Railpower starts to see any momentum, according to Whale. “If you can withstand the ups and downs, it’s a good opportunity,” he says. Mathieu believes it could be a big year for Railpower, as the U.S. emissions standards are in place and the company’s manufacturing facility ramps up. “We expect our market will improve dramatically starting then,” he says. “We’ve got to get ready for that.”
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