At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
It's high noon for Westport Innovations
Is America ready to start cooking with gas (and generating electricity, and powering automobiles with the stuff, too)? Lots of folks think so, and some think that Westport Innovations (Nasdaq: WPRT ) , inventor of a new technology for running cars on natural gas, is the best way to profit from the nat-gas revolution.
This verdict is far from unanimous, however. Up on Wall Street, Bank of America announced Friday that it was initiating coverage of Westport with a "buy" rating. But just a day earlier, JPMorgan Chase had said it was downgrading the stock -- and, in fact, recommended that investors sell Westport. So who's right? Is Westport a buy, or is it a sell?
Just the facts, ma'am
Let's start with the facts behind the upgrades and downgrades. The cost of natural gas is at historic lows, with analysts at The Wall Street Journal suggesting we could see nat-gas selling for even less in the near future as storage facilities overflow and companies have to get rid of the excess. These price dynamics recently forced nat-gas poster boy Chesapeake Energy (NYSE: CHK ) to curtail gas production to limit its losses, while Sandridge Energy (NYSE: SD ) , another major player, is focusing its efforts on the more-profitable oil production. But low gas prices are definitely good news for anyone who wants to use nat-gas as a transportation fuel ... and good news for Westport in particular.
As customers increasingly invest in nat-gas as an alternative fuel source (see Chesapeake'smulti-million dollar investment in Clean Energy Fuels' (Nasdaq: CLNE ) network of nat-gas fueling stations, or Cheniere Energy's (AMEX: LNG ) even bigger investment in nat-gas export terminals), Westport is raking in ever-greater revenues. Last week, the company confirmed that revenues rose 80% year-over-year in 2011, and predicted a further rise of over 50% in 2012.
B of A's bulls versus JP's bears
So that explains B of A's new bullish stance on Westport. The macro picture looks promising for natural gas as an alternative fuel, and Westport's revenue report shows it benefiting from the trend in particular. But how then are we to explain JP Morgan Chase's less-than-enthusiastic response to Westport's news?
For one thing, Westport isn't earning any profits yet from all these new revenues it's bringing in. Sales may be up 80%, but in 2011 Westport also estimated its net loss rose to $1.27 per share. That's about a 25% greater loss than Westport incurred in calendar-year 2010.
Cash-burn also remains a problem. Westport experienced negative free cash flow of $58.9 million over the past 12 months, in line with GAAP losses of $59.3 million. With only $18 million net cash remaining on its balance sheet last quarter, and a quarterly burn-rate of $15 million or so, the company would have been just about down to zero net cash by the time it released earnings (due out Wednesday evening). Which brings us to the next negative (or positive, depending on your perspective) for Westport: A dilutive share offering.
The company has confirmed a plan to sell as many as 6.3 million new shares this week, hoping to raise some $274 million in gross proceeds. If all goes as planned, this should give the firm enough liquidity to continue burning cash for an additional four years ... and diluting existing shareholders out of 13% of their stake in the company.
If you ask me, 13% dilution actually sounds like a small price to pay for keeping Westport solvent for another few years -- giving the stock a chance to pay off for investors, and giving the "natural gas revolution" more time to prove itself viable.
That said, I can't help but notice that out of the five nat-gas plays discussed above – Westport, Chesapeake, SandRidge, Clean Energy, and Cheniere -- not a single one is currently generating a single cent in free cash flow from this "revolution." To the contrary, three are in the red, and they're all burning cash like crazy. Personally, I'd have more confidence that there's a future for natural gas, and natural-gas stocks like Westport, if I could point to at least one company that's actually making real money off this stuff.
For the time being, I can't. And until I can, I won't invest in any of them.
On Motley Fool CAPS, Rich's skepticism has served him well, and racked up a record of 72% outperformance over the S&P 500 -- but not everyone's so skeptical. If you think natural gas does have a future, check out this one stock that you might want to buy before the Nat Gas Act of 2011 becomes law.