Which Nat-Gas Innovator Should You Buy Today?

Welcome to "Stock Smackdown," where two of your favorite stocks go head to head in a battle for superiority. They'll be judged on a series of straightforward statistics, but we'll also dig into each company's key initiatives and long-term goals to determine how much upside there might be if all goes well. The winner will be the stock that racks up the most points at the end of the competition.

Now, let's go to ringside and meet our two combatants, Westport Innovations (Nasdaq: WPRT  ) and Clean Energy Fuels (Nasdaq: CLNE  ) .

In this corner…
These two companies are on the vanguard of a potential natural gas transportation boom. The Fool's covered the nat-gas industry from multiple perspectives, and many Fools predict long-term divergence between cheap natural gas and costly oil. Here are a few primers:

Westport Innovations is known for its natural gas engine conversions. It has key licenses and partnerships with some of the transportation and construction industry's largest manufacturers, including Ford (NYSE: F  ) , engine maker Cummins (NYSE: CMI  ) , and Caterpillar. It has yet to turn an annual profit, but revenue continues to grow rapidly as more companies express an interest in nat-gas fueling.

Westport may not get far without Clean Energy Fuels' proposed natural gas highway, which would create a national network of fueling stations for long-haul trucking. Clean Energy also indirectly supports Westport through its partnership with truck builder Navistar (NYSE: NAV  ) . The two companies aim to build nat-gas trucks using the Cummins-Westport engine. The natural gas highway, and its chain of fueling stations, makes Clean Energy a much more capital-intensive company than Westport, at least for the duration of its rapid build-out.

Baseline battle
We use many different numbers and ratios when talking about the value of a stock. Is the company profitable? Does it have positive cash flow? How much debt, if any, has it taken on to maintain or expand its operations?

We'll also examine management's faith in the company's future through the level of insider ownership. As a possible tiebreaker, we'll look at each company's gross margin, to see how much of each dollar has to go toward making the sale.

Our two competitors lock up:

Metric

Westport Innovations

Clean Energy Fuels

Profit Margin (29.1%) (25.1%)
Free Cash Flow Margin (28.9%) (57.9%)
Debt-to-Equity Ratio 0.2 0.5
Insider Ownership 19.7% 32.2%
Gross Margin 35.1% 33.1%

Sources: Morningstar, Google Finance, Yahoo! Finance. Winners in bold.

It looks like Westport takes this round thanks to lower debt and a better gross margin. How will it fare in the growth-rate battle ahead?

Growth battle
If we were comparing two steady dividend-paying stalwarts, we might look at things like dividend yields or payout ratios. But these two will face off with the growth-based metrics that the market often favors for momentum-driven investments.

How fast has the stock price grown? Has revenue grown as quickly? How about the bottom line? Have either of these companies shown a willingness to dilute your shares with secondary offerings? With the exception of share counts, the more growth we see, the better. These numbers will be calculated based on each stock's past three years of history -- or whatever history we can get, if it doesn't have that much to analyze.

Let's look at share metrics first:

WPRT Total Return Price Chart

WPRT Total Return Price data by YCharts

Each stock takes one point here. Let's dig deeper:

Total Growth Over 3 Years

Westport Innovations

Clean Energy Fuels

Stock Price 364.3% 31.0%
Revenue 110.3% 128.8%
Net Income (210.5%) (127.3%)
Free Cash Flow (391.7%) (929.4%)
Shares Outstanding 71.3% 44.6%

Sources: Morningstar and YCharts. Winners in bold. Growth calculated from 2009 annual result to trailing-12-month result.

It wasn't pretty, but Clean Energy Fuels takes the growth crown.

Sentiment battle
How do the world's most engaged market participants view these companies? Let's see what Wall Street's analysts expect from these companies, and what our Motley Fool CAPS community thinks.

Metric

Westport Innovations

Clean Energy Fuels

"Buy" Recs (% of Total Ratings) 64.7% 30%
Forward Growth Rate (2013) 45.9% 50%
CAPS Sentiment (% Outperform) 97.6% 96.6%

Sources: Yahoo! Finance and Motley Fool CAPS. Winners in bold.

After three rounds, Westport's in the lead thanks to our CAPS players. But the next round is for all the marbles. Can Westport claim to have the best opportunities in the future, or will Clean Energy pull ahead with a superior business model and a smarter strategy?

Battle for the future
This is a very tough call, and you may very well disagree with me. Westport is a pure technology bet, while Clean Energy's promise has thus far been in infrastructure. Technology has so far attracted the market's interest to a much greater degree, as you can see from Westport's multibagger status.

We've been waiting years for Westport to turn a profit, but the same can be said of Clean Energy. Both have been bleeding cash to an even greater degree as their revenues grow, which raises the question: At what point does the nat-gas revolution become profitable? Both companies recently reported earnings, and both (Clean Energy's results here and Westport's results here) show a positive trend on the bottom line. It comes down to who needs whom more.

Without a natural gas highway, there won't ever be much demand for nat-gas engines. Patents are valuable, but they do expire, and Westport's been boasting of its strong patent portfolio since 1999, at the latest. On the other hand, infrastructure's only competitive advantage is location, and there's no guarantee a critical mass of nat-gas vehicles will ever develop to ensure a fueling station's profitability.

Westport will earn a very narrow edge in the end, based on its two-to-one victory in the hard numbers and because there's no reason it shouldn't become consistently profitable with fewer nat-gas vehicles on the roads than Clean Energy. Still, I'd keep my eye on the Cummins-Westport partnership, at least until other engine makers start producing Westport's engines in greater numbers.

Want to stay informed on the future of nat-gas transportation? The Fool's got a low-cost way: our premium research service covering Clean Energy Fuels. For less than the cost of your average trade, you'll get a full year's worth of updates on CLNE's major behind-the-scenes moves. Click here -- Clean Energy Fuels -- to get started.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Ford Motor and Westport Innovations. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Clean Energy Fuels, Ford Motor, and Cummins. 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 (3) | Recommend This Article (10)

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 13, 2012, at 1:08 PM, rustyvec wrote:

    Because these companies are two sides of the same NG coin, not sure it makes much sense to pit them against each other - they are too symbiotic. However, the article is helpful in clarifying the present status of each company and what makes each compelling...or not. For my money, both are disruptors - with all the attendant risk that goes with that - but demonstrating their commitment and abilities to harness the the enormous opportunities NG represents. Lots of risk, lots of upside. I'm long on both.

  • Report this Comment On August 13, 2012, at 11:40 PM, mountain8 wrote:

    "Patents are valuable, but they do expire, and Westport's been boasting of its strong patent portfolio since 1999. On the other hand, infrastructure's only competitive advantage is location, and there's no guarantee a critical mass of nat-gas vehicles will ever develop to ensure a fueling station's profitability."

    -----------------------

    One thing you don't explore is the value of tangible assets vs paper assets. If clean air blows it, they will at least have properties and solid assets they could liquidate. If Westports patent portfolio tinkers out, they have no massive buildup of solid assets to sell...Just air.

    For Westport, competition would jump in,with prototype in hand, the day after the patents expire. Any competition for Clean Air would still have to buy property, build stations, deal with bizillions of tons of legal crap, before they could even start being competition to a, then, well established business. I don't believe there are many companies out there taking the risk.

    I own Clean Air and would gladly buy Westport if I had the cash. As was pointed out, these two are actually siamese twins. One won't work unless the other does but if it does work, we will be eternally stuck with the ponderance, "Which came first, the gas or the pump?"

  • Report this Comment On August 15, 2012, at 3:18 PM, rustyvec wrote:

    Mountain 8 - Wesport's patents will eventually expire and they will face competition.. but they are way ahead of the game at this point and have the confidence (ie. partnerships) of major industry players in multiple market segments domestically and internationally. I think they are more likely a candidate for acquisition in any event.

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