If you’ve had enough of the market’s ups and downs this year, spare some sympathy for Westport Innovations’ shareholders. Over the past 12 months, its stock price has shot up from $29 to $48, then slid back down to $23, then jumped up to $40, and it now sits at $27.50. And, oh yeah, the company hasn’t turned a profit in more than 15 years. On Oct. 29, it cut its top-line growth forecast from 50% to 30%.
With no profits and extreme volatility, you might think that analysts would suggest staying far away. Not so. Mackie Research Capital has a Buy rating and a price target of $43; Jefferies Group, a Buy rating and a target price of $45; JPMorgan Chase, a target of $29.
Why such optimism? Vancouver-based Westport is a company in the right place at the right time. For years, it developed engine components that enabled trucks to burn natural gas instead of diesel. In its early days, when natural gas prices rose and fell in lockstep with oil, investors questioned its business plan. But with the shale gas revolution, the two commodities’ prices have decoupled. Petroleum prices are high, and natural gas is dirt cheap. As a result, a growing number of transportation companies, for example Waste Management Inc., are finally converting their fleets to natural gas from diesel.
Joint-venture partner Cummins, a leading engine manufacturer, and big-name clients such as GM, Volvo and Caterpillar give credibility to Westport’s technology, notes Mike Newton, senior vice-president and portfolio manager at Macquarie Private Wealth. And the firm has been able to grow revenue. It expects to take in $350 million this year, a 33% increase over last year (though $50 million below earlier projections).
But earnings will only materialize if two things happen. First, demand for natural gas vehicles has to pick up further. Newton, who doesn’t own the stock but has his eye on it, says investors have to believe that the U.S. will continue its push for energy independence and that natural gas prices will remain low enough to keep it a more cost-effective way to fuel up. “Westport is heavily weighted toward concept and hope,” he says.
Second, Westport has to cut its burn rate. Since 1995, the company has sunk more than $300 million into research and development. Some analysts believe that reinvestment could soon pay off. The company plans to start selling a 12-litre engine next year, which is a major upgrade from the 8.9-litre engine it sells now. “That will open up a good market for them,” says Rupert Merer, an analyst with National Bank Financial. Westport could also see benefits from its 35% stake in Weichai Westport Inc., which makes engines for the Chinese market. But investors are justifiably impatient.
Natural gas as a transportation fuel has huge potential, especially if the number of fuelling stations—currently 1,200 in the U.S.—grows and the long-haul trucking industry buys in. “The heavy-truck market is the holy grail,” says Merer. He thinks trucking companies are interested in Westport’s new engine, and predicts it will make a profit within five years.
Until that happens, Westport should be viewed as speculative, says Newton. He’ll jump in when the trucking industry—which was hurt by the recession—starts to improve and, most important, when the company starts posting a profit.