Has Westport Innovations Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Westport Innovations (Nasdaq: WPRT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Westport Innovations.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 36.4% Pass
  1-Year Revenue Growth > 12% 78.7% Pass
Margins Gross Margin > 35% 35.7% Pass
  Net Margin > 15% (21.7%) Fail
Balance Sheet Debt to Equity < 50% 20.7% Pass
  Current Ratio > 1.3 4.63 Pass
Opportunities Return on Equity > 15% (28.8%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 9

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Westport Innovations last year, the company has kept its five-point score. The continuing plunge in natural gas prices has provided even more incentive to produce technology that takes advantage of gas, although there's still a long way to go before everything is in place for the company to benefit fully.

Put simply, Westport designs engines that run on natural gas. For more than a decade, the company has worked alongside Cummins (NYSE: CMI  ) in a joint venture to manufacture natural-gas engines. The venture has been successful in attracting interest from other industry players, with Navistar and Clean Energy Fuels (Nasdaq: CLNE  ) choosing to use Cummins-Westport engines in its partnership to try to get the trucking industry to convert to natural gas.

After a red-hot start to 2012, though, the stock pulled back. An overreaction to news that Cummins would develop its own nat-gas engines is partially to blame, but there's also the very real challenge of transforming not just vehicle designs but also making sure the fueling infrastructure to serve nat-gas vehicle owners is in place.

Still, Westport is fleshing out alliances with other companies. For instance, Caterpillar (NYSE: CAT  ) will work with Westport to develop ways to power its off-road heavy equipment, including big trucks used in mining operations. A partnership with Ford (NYSE: F  ) to create a bi-fuel system for its F-series trucks could be an even bigger source of long-term revenue if it pans out.

Falling oil prices, though, could reduce incentives to convert to gas. For Westport to improve, it needs to see the disparity between oil and gas stay relatively high, in order to motivate the other pieces of the nat-gas infrastructure puzzle to fall into place. If that happens, Westport could move toward perfection sharply in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Westport is an interesting way to play the energy space, but we've got another stock you should also look at more closely. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.

Click here to add Westport Innovations to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Westport Innovations and Ford. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Clean Energy Fuels, Cummins, and Ford, as well as creating a synthetic long position in Ford. 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 Fool has a disclosure policy.


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  • Report this Comment On June 27, 2012, at 11:19 AM, emptorski wrote:

    Perhaps one should wait for a company to turn a profit before considering its stock for the coveted, elusive title of "Perfect"...

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