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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 (NASDAQ: 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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