Westport Innovations: Weighing the Pros Against the Cons
Westport Innovations (WPRT) shares have remained flat on the stock market in 2015 as the stock has lost the momentum that it had gained in the earlier part of the year. In fact, Westport shares have dropped 36% in the last three months as the drop in oil and natural gas prices has hurt its EBITDA margins, operating cash flow, and free cash flow. This is because low oil prices have kept customers from switching to natural gas-powered trucks.
A look at the positives
However, there are certain bright spots for Westport as well.
Moreover, the company's effort of rationalizing its product portfolio, selling non-core assets for cost reduction, margin improvements, and investment in the HPDI 2.0 program will allow it to improve its financial performance in the long run.
In addition, Westport has deferred its investment in products with its commercial OEMs due to uncertainty in the market. This is a good decision as it will reduce its cash burn rate further. Moreover, the company has identified more than $50 million of non-core assets that it plans to divest. At present, it is actively engaged negotiating asset sales. Upon execution, these sales will help it generate more cash and improve its liquidity position. For example, Westport burnt about $24 million each quarter throughout the fiscal 2014. Going forward, it plans to achieve break-even in mid-2016.
Westport is investing heavily in the HPDI 2.0 technology. The company expect this program to come online at the beginning of fiscal 2016. The HPDI 2.0 technology will allow OEMs to effortlessly convert their diesel engines into natural gas engines. It plans to use this technology in natural gas systems for railway locomotives and cars. Meanwhile, Westport is also building a strong relationship with OEMs such as Ford and other JV partners to equip them with its clean and inexpensive natural gas engines.
In addition, Westport should benefit from its joint venture with Cummins and Weichai since it will be able to target more markets. Westport is at the advanced development phase for the introduction of its HPDI engine as a part of the Weichai joint venture in China. It plans to launch this technology at the beginning of calendar year 2016.
However, the company faces another headwind as more and more vehicle making companies are moving toward the electric car concept, while Westport is focused on transitioning diesel engines into natural gas engines. The electric car concept is more environment friendly as compared to natural gas. But, since electric vehicles are more expensive as compared to natural gas vehicles, Westport might have an advantage.
Westport is certainly a risky investment for the short run as the uncertainty in the oil market continues. However, the company looks well-positioned for the long run on the back of its portfolio improvements and cost reduction moves. In fact, analysts expect its earnings to grow at a CAGR of 30% for the next five years, which is higher than average industry CAGR of 18.3%. Hence, Westport's drop looks like a buying opportunity in light of the points discussed above.