2 Reasons It's Time to Buy This Canadian Natural Gas Vehicle Company

Around 135,000 vehicles in the U.S. use natural gas, less than 1% of the 15 million natural gas vehicles worldwide. This is a product of relatively cheap gasoline, and the limitations of range and performance for natural gas versus gasoline and diesel. 

While natural gas vehicles aren't likely to become a major part of the U.S. private car market in the near future -- especially when hybrid and diesel-powered vehicles offer better range and power -- commercial transit and fleet operators can benefit from the reduced cost of natural gas versus its oil-based counterparts, without the limitations of natural gas having a negative impact on operations. For investors, this is what makes Westport Innovations  (NASDAQ: WPRT  )   such an attractive investment today. Let's take a closer look.

Growth at the joint ventures is massive
Westport has been on investors' radar for the past few years, as its technology -- the first to really break the performance barrier for natural gas in heavy-duty transport applications -- became widely available through its joint venture with Cummins. The "return to base" market of public transit, waste collection, and airport transportation has quickly adopted natural gas, with 20% of transit buses running natural gas as of 2012, and more than one-half of all waste collection trucks sold in 2012 featuring natural gas engines, per NGVC.org. Simply put, operators of fleets with known routes and limited range demands have quickly adopted natural gas (typically CNG) as their fuel of choice, and the 8.9 liter ISL G has been the engine of choice for both the refuse and transit industries. 

Over that period, however, Westport's bottom line hasn't reflected the enormous growth in sales at its joint ventures. Only income generated from the JV (not revenue) and shared between the partners reaches Westport's bottom line, and as the partners have been pouring the cash generated by the venture back into it to fuel expansion and growth, there has been no meaningful or apparent benefit for Westport investors. At least not yet.

The same thing has happened so far with Westport's JV with Weichai Power, WWI. With Westport's direct revenues and income from the JVs (which is what shows up on the income statement) only showing $114 million in revenue through the third quarter, a small decline from the year before, it makes it even more important for investors to consider the $573 million in sales for the joint ventures to better understand the growth that's happening. 

When factoring the very real growth of the JVs in, revenues are actually up 57%, to $684.6 million from $435 million in the year-ago period. So while it's not directly reflected in the company's bottom line, this is enormous growth, especially when the larger class-8 trucking market has yet to start adopting en masse. The key point? Sales at these ventures is growing at an immense rate. 

Major growth opportunity in need of a supporting infrastructure
The launch of the ISX 12G engine, particularly the 400hp version that fills a major need for over the road trucking, will open up a so-far untapped market in North America. This comes at a time when orders of Class 8 trucks are starting to pick up, with ACT Research reporting that both September and October orders are up, and that November orders were the highest in three years. Whether or not this translates to continued growth remains to be seen, but demand for the ISX 12G is expected to be strong in 2014. 

But this opportunity is only part of the equation, as the lack of engine technology matters little without access to fuel, which in the case of long-haul trucking will largely be LNG. Which is where companies like Clean Energy Fuels  (NASDAQ: CLNE  )  and TravelCenters of America  (NYSE: TA  )  come in.

Clean Energy Fuels' reputation as the supplier of choice for CNG to waste collection and public transit has been surpassed in the public eye by the company's ongoing buildout of at least 150 LNG stations along major trucking routes. To date, more than 80 of these stations have been constructed, but only a few dozen are actually in operation. As with Westport, Clean Energy has spent a lot of money over the past several years, and will continue to do so in order to meet the anticipated demand. While seeing continued losses has been painful for many investors, these major investments should begin paying off soon. 

TravelCenters may have the most to lose from this transition, and the least to gain, as fuel sales make up more than 80% of the company's sales. Even if the company is able to retain the majority of its fleet customers that shift to natural gas, its revenues will suffer due to the lower cost of natural gas versus diesel.  This is at the heart of TravelCenters' agreement this past April with Royal Dutch Shell to build "up to 100" natural gas refueling stations at TA and Petro locations over the next several years. 

Final thoughts: It's the long view and a major trend
While the market for natural gas vehicles has been growing for some time, the massive Chinese market and domestic Class 8 market have only just started picking up. IEA Executive Director Maria van der Hoeven, in July 2013, had this to say:

If [natural] gas can be substantially applied to heavy duty transport, the potential gains are massive -- this sector accounts for more demand than personal cars. But that requires LNG infrastructure, which is expensive ... But even in the medium term we will see 700,000 barrels per day of oil replaced by [natural] gas in transport -- a higher contribution than biofuels and electric cars combined. 

While not profitable, don't discount Westport's position today. All those losses have led to serious growth, and 2014 is the year management has promised to be adjusted EBIDTA positive in all business units. With companies like Clean Energy and TravelCenters building out domestic refueling infrastructure, and China's major commitment to reduce emissions, Westport's investments in growth look like they will be paying off big in the future.

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Read/Post Comments (13) | Recommend This Article (16)

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 December 09, 2013, at 2:37 PM, peter69 wrote:

    I am just rather curious of how the drivers of these C/LNG gas vehicles experience the difference between the old diesel trucks and these new C/LNG trucks.

    Is there any difference at all? Torque? Acceleration? Fueling? Service? Reach?

    Are they faster? More comfortable?

    Shortly: how are these gas vehicles perceived by the drivers?

    /Peter - Sweden

  • Report this Comment On December 10, 2013, at 12:55 AM, TMFVelvetHammer wrote:

    The challenge has been getting enough power and torque, as ng produces less energy per unit. This is one of Westport's key advantages and why Cummins and others like Volvo have partnered with the company.

    From what I've read and seen, the truckers say there's little to no difference now in terms of power and performance. However, the ng engines are substantially quieter than the diesel counterparts, which I would imagine is nice for the drivers, especially long-haul truckers.

    As to service, I think the ng engines do require a small amount more scheduled maintenance due to the difference in lubrication supplied by "wetter" diesel versus "dry" natural gas.

    But the feedback that I've seen from the trash truck drivers is that there's not really much difference that they notice besides being quieter.

    Again- I'm not a driver, and I've never actually been in one of the ng-powered trucks, so my opinions are anecdotal, but the data above is based on my research as well.

    Jason Hall

  • Report this Comment On December 10, 2013, at 7:18 AM, zippeit wrote:

    WPRT diluted all my shares and for what? To give it away in a hurry as a customer promotion? Well I am down 10K and sold 1/2 to staunch the hemorrhaging and it looks like no bottom in sight yet. In my opinion management broken. Squandering money instead of intelligently managing it. The "innovation" is not a new idea. NG vehicles are common in Europe and has been around since the 70's gas crises and to think I listened to these fools now I am the fool. I'll stick with it for 6 more months but I am tapering my investment if it declines more. All I see from MF is just wait and see what happens in six months or later in the year and I am sick of it. Also there is no investment information available in TD Ameritrade except to SELL or AVOID. This is crap! The only pertinent information is the web page and meeting minutes if you can find them. Is this another scam like HYHY to be tried in a Canadian court and lose all its value. I hope it isn't in any of the 3 MF mutual funds I bought.FREE GAS my @&& my VW TDI gets 40 MPG on diesel with clean air.

  • Report this Comment On December 10, 2013, at 1:37 PM, TMFVelvetHammer wrote:

    >>NG vehicles are common in Europe and has been around since the 70's gas crises<<

    With the drivers accepting significant impacts to range and power/performance. Fuel prices in Europe are significantly higher than in the U.S. so this is a straw man argument, honestly.

    Most importantly, note that Westport is focused on developing technology for heavy duty engines, which have not historically been able to run natural gas due to the power loss between diesel and ng.

    There's a reason why Cummins, Volvo, and WeiChai Power are partnered with Westport: Its technology makes the difference in being able to generate sufficient power for natural gas to be an option for heavy trucks and other industrial applications.

    Just look at the growth in the JV sales to see how the story is playing out. I'm sorry you've lost money. So have I. Sell if you want, but 2014 is going to be a very important year for the company.

    Best of luck.

  • Report this Comment On December 10, 2013, at 3:54 PM, jimjam wrote:

    IN 2001,

    Westport and Cummins formed a joint venture, Cummins Westport Inc. With confidence in Westport's expertise and potential, Cummins transferred its current spark-ignited natural gas engines and related technologies for on-highway vehicles, industrial, and power generation applications to the new joint venture. Today, Cummins Westport offers medium- and heavy-duty natural gas vehicle engines from 150 to 320 horsepower available in nearly 60 OEM vehicles and boasts over 28,000 engines in service worldwide.

  • Report this Comment On December 10, 2013, at 7:53 PM, TMFVelvetHammer wrote:

    jimjam-

    Yes, the Westport JV with Cummins has been around for a while.

    I think it's worth noting that in prior years, the JV was contributing pretty decent profits to Westport, leading up to 2011, when the JV did the following:

    $163 million in sales, on 5,465 units, and contributed $15.2 million directly to Westport's bottom line. In 2012, the JV was developing the 12L engine that was launched in 2013, and the profits were dedicated to the development of this engine.

    Also, consider that Westport's total direct revenue in 2011 was a whopping $19.9 million.

    So here we are, in 2013, and the JVs combined to do $573 million in sales. And the company's direct sales were over $110 million.

    Think about that for a minute. In 2011, $19.9 million and $163 million.

    2013, $110 million and $573 million.

  • Report this Comment On December 10, 2013, at 7:58 PM, TMFVelvetHammer wrote:

    Jimjam-

    Correction on the total revenue in 2011. I was looking at just one business unit. Total revenue in 2011 was $189 million. I had to go back and look because it seemed unbelievable.

    That's because it was. Glad I kept reading after I posted my reply.

    -jh

  • Report this Comment On December 10, 2013, at 11:41 PM, LesC33 wrote:

    CNG LNG sounds like a way to make money. Got frustrated waiting for WPRT to do it and opted out for companies that are: CUMMINS, GTLS, and CBI and not regretting it....yet.

  • Report this Comment On December 11, 2013, at 5:25 AM, jimjam wrote:

    elihpaudio, income (not total sales) generated from a JV investment not exclusively controlled by this management team could be meaningful depending on total up front investment made to the join the JV, when does the corporate year over year EBIT become the tool to measure this management teams business capabilities?

  • Report this Comment On December 11, 2013, at 8:47 PM, TMFVelvetHammer wrote:

    jimjam,

    Not sure if this answers your question or not, but management has told us all business units will be ebitda positive by the end of 2014. I think this is massive.

    The new COO has a background in the automotive business, as VP of Ops for TRW, a profitable auto parts supplier and manufacturer that does $16 billion in annual sales. She was brought in to help lead the change in operational direction from a development-stage company to a profit-making manufacturer and R&D company.

    Honestly, the company has performed essentially as management has told us it would, with few exceptions over the past few years, so I remain confident in them.

    The JV doesn't require funding from Westport anymore -- hasn't for years. As a matter of fact, it was paying out to Westport until the 12 liter engine went under development last year. The investment in ramp up has been made, so I expect 2014 to be a big year from this perspective.

    Hope this answers your question!

  • Report this Comment On December 12, 2013, at 8:32 PM, jimjam wrote:

    thank you, it helps

  • Report this Comment On December 13, 2013, at 6:18 PM, zippeit wrote:

    I have calmed down now and closed my position in WPRT in order to do some analysis.

    I understand about the joint venture between Cummins and Westport but I usually look at the EDGAR publication and what ever my brokerage service offers. I still own CMI as it is the kind of stock I am comfortable with.

    What I don't understand is how to mine reliable information. Is WPRT a broken company or a broken stock? I am familiar with the concept of investing money to grow a business but when WPRT issued a lot of new shares and the next news I see from MF in an email is about Free Fuel which tells me that WPRT is promoting new business rather than tool up to meet greater demand. I am always looking for the later.

    I haven't bothered with a patent search to see just how WPRT has designed multiple fuels injectors. I have relied on the implied approval of companies Volvo and Cummins since they seem to have put their company names on the line. So the parts themselves must be profitable for them providing WPRT can produce them and sell them at a profit.

    Apparently the WPRT Injection System scales from 4 to 12 cylinder engines with even more profit to all concerned. There are a lot of patents out there but certainly such company's like TRW would not be involved unless they are certain that there will be no violation of any preexisting intellectual property.

    So let's just get the ball rolling and make tons of money providing upgrades to existing engines and power train for all these different automobiles and big rigs. Oh, and by the way, we will give free fuel for a year to buyers of 10 or more just to make certain production lines reach "escape velocity" 24x7. How many "kits" have been delivered already?

    Unfortunately, I don't trust management that starts a new product line that will prove itself in 2013 back in 2012. Didn't you just say something similar for 2014?

    How many JVs have there been anyway? How many vehicles are going to get all that free gas? Can a profit be made with free gas? Think the gas won't cost much? Did the ramp up kind of get over done or just not done at all?

    Nice photo of a converted unit. Not that I am qualified to say much about it. Lots of shiny chrome though. How does it work?

  • Report this Comment On December 19, 2013, at 3:26 PM, johnnysnutsack wrote:

    Motley fool has amateur's rating stocks. It's awesome. Any sports fans out there? Ever been on Bleacher report? They have recent college grads that don't know how to write or dont know about sports. That is exactly MF's business model. Retards.

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