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Why Doesn't Canada Trust This Company?

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Heavy-duty vehicles running on natural gas have been gaining momentum, though not to the degree engine-tech innovator Westport Innovations (Nasdaq: WPRT  ) would like. The Canadian company has been unprofitable for the vast majority of its decade-plus existence. That hasn't stopped its steep ascent, something Toronto analysts are all too familiar with. American shareholders are up almost 200% since Westport's 2009 Wall Street debut, but investors north of the border have had a five-bagger on their hands since 2004.

You'd think Canadian analysts would be patting themselves on the back for the success of a native stock, but no dice. In contrast to Yankee bulls, the Canucks are widely sour on Westport's potential and have been for some time. What gives?

One Toronto analyst, MacMurray Whale of Cormac Securities, expects profits in 2014, an agonizingly long wait for shareholders if virtually all of them hadn't already seen substantial profits. Even then, the stock would be overvalued in his view. This beleaguered analyst freely admits that Westport's rise has made him look bad so far, but he remains firm in his target price of $11. Other Canadian analysts are similarly bearish, with a hold rating signaling rare optimism in a crowd of "sell" and "underperform".

(As an aside, "MacMurray Whale" would be a good name for a Scottish punk rock band.)

An American hold call is contrarian, as most analysts on Wall Street have issued buy ratings. Optimism abounds for Westport specifically and natural gas in general. Projections anticipating strikingly low natural gas prices for drivers have helped propel this optimism. One American analyst predicts profitability in 2013, based on Westport selling more than three times the engine systems it does today. That's closer, but still a ways off.

How high?
Even the optimists have taken note of Westport's high valuation, and the loftiest analyst price target is just $3 higher than where it sits now. But should nat-gas engines take off, Westport might seem cheap -- if the company can become profitable. At its current market cap, Westport would need to reach $170 million in annual profits to sport a modest P/E of 10.

By comparison, Cummins (NYSE: CMI  ) , Westport's major partner, is on track to earn about 10 times that much this year, but at a 10% profit margin, its highest in a decade. But Cummins doesn't have the same panache, does it? Westport might settle for a 25 P/E someday, far down the road. That would demand almost $700 million in annual revenues at Cummins-like profit margins, more than three times its expected take this year.

Ride the gravy train
It's hard to deny that Westport made major strides, striking agreements to provide Caterpillar (NYSE: CAT  ) (among several others) with engine technology. The Caterpillar deal, despite (or possibly because of) Cat's increasing reliance on emerging markets, could work out quite well -- China, Brazil, and Argentina all operate more nat-gas fueling stations than the U.S.

American nat-gas fueling infrastructure got boosts last year from refueling station provider Clean Energy Fuels (Nasdaq: CLNE  ) and driller Chesapeake Energy (NYSE: CHK  ) . Chesapeake invested $150 million out of $1 billion earmarked to promote nat-gas transportation into Clean Energy last year. All told, Clean Energy Fuels plans to build out 300 nat-gas stations across the U.S.

That'll get the national nat-gas station total into the low four figures, but just barely, and it'll be a drop in the bucket compared to the massive gasoline infrastructure that's developed over decades. It's hard to tell whether Westport or Clean Energy Fuels will wind up in a better position from nat-gas adoption -- Clean Energy is also unprofitable, but this is almost entirely due to the intense station build-out. That build-out, like Westport's efforts, may not see profitable results until 2014.

International skeptics
The Canadians aren't the only ones doubting the nat-gas promise. Japanese bank Mizuho initiated coverage on both Westport and Clean Energy Fuels earlier this month, rating the former a hold and giving Clean Energy Fuels the dreaded underperform. Yet at such heights, Westport almost certainly looks the more richly valued.

Will a technology purveyor in a crowded field win out over a fuel provider with relatively little competition? That seems to be the market's early judgment, at least in America. We do love our bubbles here, so there's no way to tell how far Westport will go before it's either fairly valued or left for dead. But for the time being, it might be worthwhile to approach this Canadian innovator with a dose of healthy Canadian skepticism, or at least the patience of a saint.

There's bound to be lots of news in nat-gas transportation between now and 2014, so keep on top of the situation and add these key companies to your Watchlist for all the updates you can shake a stick at. If you're looking for another company with big growth potential but proven profitability, grab a copy of The Motley Fool's brand-new report on 2012's top stock. Handpicked by our chief investment officer, this company could be the leader of a Latin American retail transformation. Reserve your free copy now while you can.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Cummins, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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