As the most advanced designer of engines powered by natural gas, Westport Innovations (NASDAQ:WPRT) is a small company with a big goal: to lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition, and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has released a premium research report breaking down the company's opportunities, competitive advantages, and risks. Today, you can get a free sneak peek at the report, detailing the technology advantage of Westport Innovations. Enjoy!
Technology and Patents
Any business has to watch out for competitors, but Westport Innovations seems especially vulnerable. Since it leaves much of the manufacturing of its designs to joint venture partners, these partners have a lot of incentive to leverage their natural gas engine know-how to create their own designs, shutting Westport out of the market and capturing the full value of the engines for themselves.
Cummins (NYSE:CMI), Westport's most important joint venture partner, announced back in March that it would be producing a 15-liter natural gas engine entirely in-house. This looked set to compete with the 15-liter engine that the Cummins Westport joint venture had already announced, and Westport stock dropped over 10% on the news. However, Cummins' own engine will be spark-ignited and lack Westport's proprietary high-pressure direct injection technology. This means that while Westport engines have the torque to move heavy loads up steep inclines, as diesel engines do, Cummins' engine will not, severely limiting its use for cross-country applications.
This tale sheds light on the most critical factor for Westport's success: the superiority of Westport's technology and, by extension, the strength of its patent portfolio. Worldwide, Westport has filed over 400 patents related to its fuel injection system, cryogenically cooled LNG storage tanks, and combustion technology, making it by far the largest intellectual property holder in the natural gas engine space. Westport is dedicated to keeping its technological lead — in 2011 the company spent $53 million on research and development, over a third of revenue.
However, patents expire and existing technology can be surpassed. With manufacturing capacity basically limited to a small number of components, an investment in Westport is a bet on the company's technological leadership. So far, the fact that giants like Ford, Caterpillar, and Volvo have preferred to partner with Westport rather than compete suggests that Westport has a valuable and decisive engineering advantage. To realize value for shareholders, Westport will have to keep it.
We hope you enjoyed this sample of our premium research report on Westport Innovations, which also includes a breakdown of the most important areas investors need to watch, an analysis of the risks facing Westport Innovations, and three key reasons to buy or sell the stock. To gain access to the complete report and a full year of analyst updates, just click here to keep reading.
Fool contributor Daniel Ferry owns shares of Caterpillar and Westport Innovations. The Motley Fool recommends Cummins, Ford, and Westport Innovations. The Motley Fool owns shares of Cummins, Ford, 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.