After a very strong recent upward move in its shares (and a more than 200% gain since we recommended it back in early 2010), shares of Westport Innovations (WPRT) announced a secondary share offering and pre-announced recent results and forward guidance. The news confirms that likely continuation of strong sales growth for the firm—though also continuing losses as well.
Investors appear comfortable with that disconnect between top and bottom-line growth, and so do we. We’re keeping WPRT rated Buy on the Recommended List of our weekly InsiderInsights Newsletter.
Canadian-based Westport Innovations owns technology that allows heavy duty diesel engines to operate on cleaner burning natural gas fuels while preserving performance, fuel economy, durability, and reliability. Westport derives revenues through joint ventures and partnerships with the likes of Cummins (CMI: Nyse), Kenworth, Peterbuilt, Volvo, Weichai Power, General Motors (GM: Nyse), Shell, Clean Energy Fuels (CLNE: Nasdaq), and Beijing Tianhai Industry.
In light of the recent share price strength, Westport is “getting while the getting is good,” raising more than $200 million in fresh equity in exchange for 5.5 million new shares. That will boost the share count by about 12%. The final numbers will be determined if the underwriter’s over-allotment was exercised—which we assume will be the case considering that WPRT “only” fell 3.8% when the share increase was announced.
Westport isn’t hurting for cash. The company had $106 million in the bank at the end of September against roughly $100 million in debt. But the fresh injection allows Westport to boost R&D, make acquisitions and fund any other initiatives that can take sales to a higher plane than current levels.
Top line metrics are already robust, however. Westport pre-announced sales in calendar 2011 of $260-$264 million. That is a good $10 million more than the high end of previous expectations, and represents around 80% year-over-year growth. Sales guidance was further boosted for calendar 2012, with Westport now expecting to increase revenues at least 50%, to around $400 million. Full results will be released on February 29, and we’ll take a fresh look at the business trends at that point.
We assume that the forecast does not bake in passage of legislation that President Obama has recently proposed. If enacted, Westport’s sales would surely see an even higher jump. But waiting for the U.S. government to pass a logical energy plan has been like waiting for Godot. We aren’t expecting federal assistance for Westport’s products anytime son. More importantly, many commercial customers are already finding financial reasons to go the natural gas route when ordering new trucks.
There are some flies in the ointment that we’d be remiss not to mention. First, Westport’s joint venture partner Cummins (CMI: Nyse) has moved to restructure the relationship so that Cummins can enter the market on its own in five years. Indeed we’d be surprised if a growing industry doesn’t attract other new entrants as well.
In addition, Westport still suffers from low margins, and appears to be a number of quarters away from any GAAP profits. Indeed, like some high-tech “cloud play”, Westport’s per share losses have actually increased over the past several years despite the revenue growth.
The solid technical uptrend in WPRT is hard to square with the company’s current margin and profit profile. And that difficulty has led to a schism in opinion from sell-side analysts that tends to correspond with the U.S./Canadian border.
Jason Zandberg at Vancouver-based PI Financial Corp has a Sell rating on Westport’s shares. “I wouldn’t say the stock is priced for perfection,” offers Mr. Zandberg, “it’s priced for more than perfection.”
“They are very good at spending money and raising capital,” he continues. “But Westport has been around a long time, and the losses just keep getting bigger.” So while Mr. Zandberg also expects Westport to become profitable at some point in the several years, he can’t justify paying up so early for that potential.
Toronto-based Matt Gowing at Mackie Research only rates WPRT a Hold. “I like the future of natural gas as a fuel, but investors seem to have a love-in on this stock,” says Mr. Gowing. He’s also concerned that too much of Westport’s growth is coming from acquisitions. With these concerns, he also believes WPRT’s valuation is already very stressed.
I can confirm from our couple years of following WPRT that the U.S./Canadian border appears to separate opinions on WPRT’s valuation as much as it does the two nations. A more conservative approach to national finances in Canada compared to the U.S. over the past decade has certainly made our northern neighbors appear fiscally smarter. And there’s no percentage dismissing the possibility that the more conservative view on how to value WPRT in the Great White North could prove just as prudent in hindsight.
So if and when Westport’s stock falls afoul of a quarterly miss, or a general change in risk tolerance from the U.S., we can’t say we weren’t warned. But while Westport is still neither a growth nor value play given its present lack of profitability, WPRT seems much more than just a “story stock” given the firm’s excellent revenue growth, its unique position in a globally attractive market, and management’s sound business plan to make the most of both. This year, for instance, Westport will complete its range of natural gas engine offerings by launching a light-duty version in Ford’s F-250 and F-350 pickup trucks.
With unit sales growth, revenue growth, and (importantly) stock technicals still confirming our original investment thesis for Westport’s shares, the fact that the insider buying that first got me interested in this stock is long gone is irrelevant. We are maintaining our Buy rating on WPRT, but admit that we will be much more sensitive to protect our now substantial profits if and when this winner finally does break down below logical technical supports.
To view the old insider signal that first caught our attention at WPRT, Click Here.