Buy, Sell, or Hold: Westport Innovations

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether it's possible upside outweighs its risks. Let's take a look at Westport Innovations (Nasdaq: WPRT  ) today and see why you might want to buy, sell, or hold it.

Headquartered in Vancouver, Canada, and having a market capitalization around $2 billion, Westport Innovations is a smallish company operating in a promising arena: It designs low-emissions engines (and related systems and components) that run on natural gas and other alternative fuels, often by converting diesel engines. These engines can be found in urban buses, tractors, heavy-duty trucks, garbage trucks, and other vehicles. Its stock is up 67% over the past year.

That company description alone should give you some sense of why you might want to buy into Westport. There's great interest in alternative energy, especially as the price of oil has soared in recent years. The low price of natural gas, meanwhile, has spurred interest in technologies that use it.

Westport's success is attractive, too. Its five-year average annual revenue growth rate tops 30%. In its recently reported second quarter, revenue surged 136% above year-ago levels, while the net loss shrank by 66%.

The company has been signing deals and partnering with some significant players in the vehicle and engine world, including Ford, General Motors, Caterpillar (NYSE: CAT  ) , and Cummins (NYSE: CMI  ) . With Caterpillar, it will develop natural-gas technology for off-road equipment, while its General Motors partnership will focus on light-duty vehicles. With Cummins the company has long had a partnership, dubbed Cummins Westport, where Cummins builds engines that Westport designs. This business has done well: Westport reported that Cummins Westport's revenue in the second quarter was up 78% over last year.

Finally, note that the company's stock has been rather heavily shorted, meaning that many investors are betting against it. This can actually be a good thing for Westport, if it ends up succeeding, as these shorts would eventually decide to cut their losses and cover their positions, buying shares and thereby driving the stock price up further -- via a "short squeeze."

A significant strike against the company is the fact that it's not yet turning a profit. Its cash from operations has been negative (and declining) over the past few years. Net income is also negative.

Then there's competition. There are some concerns about Cummins, which has announced plans to do some designing of natural-gas engines on its own. Meanwhile, truck maker Navistar (NYSE: NAV  ) has partnered with natural-gas specialist Clean Energy Fuels (Nasdaq: CLNE  ) to develop natural-gas-powered trucks. (It seems that Navistar intends to use Cummins Westport engines, so this isn't the kind of bad news it might have seemed at first.)

Dilution is another concern. The company's number of shares outstanding has roughly doubled over the past four years. If that kind of dilution is maintained, existing shareholders will see the value of their shares shrink as each one ends up representing a smaller and smaller piece of the company. It's not necessarily crazy to issue more shares to raise money to keep operating or pay down debt. In the long run, it may work out well. But at the moment, it's a red flag worth noting.

Wesport's business model is also worth weighing. As it primarily designs engines and partners with others for manufacturing, it's not that capital-intensive, which is good. But it does depend on deals with others, which leaves aspects of its operations not entirely under its own control. Partnerships gone sour can hurt it.

Finally, a considerable risk for the company is that the price of natural gas might rise strongly one day. Much of the company's promise depends on the spread between the prices of oil and gas. If oil becomes more attractive, then the appeal of Westport's offerings will dim.

Hold (or hold off)
Given the reasons to buy or sell Westport Innovations, it's not unreasonable to decide to just hold off. You might want to wait for its bottom line to turn from red to black. You might also wait to see its share count stop rising significantly, too.

Furthermore, it may be best to wait for some favorable developments from Washington. There's an effort in Congress to offer companies tax incentives to buy natural-gas-powered vehicles. If that's enacted or decisively killed, it will have an impact on Westport and its peers. The winner of the upcoming presidential election could make a difference, too.

The verdict
I'm holding off on Westport Innovations for now. It may perform spectacularly in the coming years, but there are plenty of compelling stocks out there. Everyone's investment calculations are different, though. Do your own digging and see what you think.

If you're intrigued by the idea of natural-gas-fueled vehicles, check out our brand-new premium research service that will keep you updated on Clean Energy Fuels as it reviews opportunities and risks facing the company and its industry.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Ford Motor, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Ford Motor and Westport Innovations. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Ford Motor, Cummins, Clean Energy Fuels, and General Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2012, at 2:37 PM, bobdacosta wrote:

    I'm surprised at this recommendation on wesn happtport based on an earlier Motley fools newsletter as westport being your number 1 buy I bought 1,000 shares at an average price of $23.51 and have been very happy since it is $39 - 40. per share. should I sell now? b. dacosta

  • Report this Comment On August 06, 2012, at 3:26 PM, TMFSelena wrote:

    I can't tell you what to do -- reasonable cases can be made for buying or selling. Perhaps click into some of the articles I linked to, for further opinions and perspectives?

    Best wishes,


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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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