On March 3, Westport Innovations (NASDAQ:WPRT) and Delphi Automotive PLC (NYSE:DLPH) announced a joint agreement to develop and sell natural gas injectors to original equipment manufacturers, or OEMs. The market essentially yawned the day of the announcement, despite what could turn out to be one of Westport's most significant partnerships. However, news that President Obama's budget proposal backed up his words of support for alternative fuels like natural gas -- with a big increase in financial support for alternative fuel programs -- has pushed the stock up 10% since. 

What do these two big deals mean for Westport? Should investors take this as a reason to go big?

Delphi deal bigger than you think

Isx

The Cummins Westport ISX12 G is the only viable natural gas engine for heavy trucks, but that won't be the case forever. Source: Cummins Westport

Many have looked at Westport's deal with Cummins (NYSE:CMI) as a reason to take the Delphi deal with a grain of salt. After all, Cummins currently commands some 39% of the U.S. heavy-duty truck engine market, and despite strong growth, the Cummins Westport JV has yet to move the needle in any material way for Westport. 

However, to view the Delphi deal through this lens is a short-sighted way to look both at the Cummins Westport JV, and the kind of potential the Delphi partnership represents.

With more than $16.4 billion in annual sales, Delphi is one of the largest automotive and commercial vehicle suppliers in the world. The company supplies countless parts to many of the world's largest engine and automotive OEMs, and these parts are fully integrated into the final product. Delphi's Powertrain Systems segment, home of its fuel injector business -- generated 27% of Delphi's 2013 sales, some $4.4 billion, and routinely carries the highest gross margins of all of Delphi's segments; 18.7% in 2013 and 19.2% in 2012. 

Delphi Server Solenoid Injector Multec Diesel Injector

Delphi's Multec and Smart Injectors are part of complete integrated solutions. Westport's HPDI will soon be integrated into the family. Source: Delphi Automotive

The addition of Westport's HPDI technology to Delphi's offerings could be a big deal for OEMs, which all face increasing competition, and a need to quickly adapt to changing consumer demands, as well as government regulations on fuel efficiency and emissions. Having an easy-to-integrate system from a known quantity like Delphi drastically shortens the time -- and cost -- from product development to product launch. 

Delphi's Powertrain Systems segment has seen revenues fall from almost $5 billion in 2011 to $4.4 billion this past year -- a drop of 12%. Making the move to add natural gas injectors to its offerings is a smart play for Delphi, for two reasons. First, much of the company's strength in Powertrain Systems is in its ability to offer "end-to-end" systems that an OEM can integrate into an engine or vehicle. The benefit is that the manufacturer doesn't have to assemble a system out of components from multiple suppliers that may or may not work well together, and can simply choose a fully integrated fuel management and injection system that has been designed to work together. 

What Westport gets

Westport March

Westport's WiNG system is OEM integrated with Ford's F Series pickups. Source: Westport

Delphi and Westport are both getting something each needs -- a partnership that leverages its strengths and access to something it needs. Delphi will have access to Westport's HPDI technology, which has been shown to be the best way to get power and performance while burning natural gas in a traditional diesel engine platform. Westport's key product technology will be integrated into Delphi's end-to-end offerings, and become available to engine and vehicle manufacturers in every corner of the globe. According to the press release, the companies project a manufacturing capacity of more than 100,000 injectors annually in four years' time. This level of output would support 15,000 to 20,000 new engines per year, roughly. 

Most importantly, Westport will have almost immediate access to the global engine and vehicle manufacturer market, and with a partner with a history of smooth integration into final products. This is something that Westport could never replicate on its own. 

Budget process getting started
The budgetary process -- as anyone who hasn't been stuck under a rock the past half-decade knows -- is rife with political back-and-forth. What the final product will look like is anyone's guess, but the first pass does have some positives in it for proponents of alternative fuels. The Department of Energy's discretionary budget for 2015 gets a small 2.6% increase; but the DOE Office of Energy Efficiency and Renewable Energy -- EERE for short -- gets $2.3 billion in funding, and a 15% increase in EERE's funds designated for sustainable and alternative fuel technologies.  

For a natural gas vehicle industry that's just getting some momentum, additional government incentives could go a long way toward kick-starting the free market's ability to reach sustained long-term growth in NGVs. 

Final thoughts: Don't count on government action; OEM deals a sign of Westport's future
While it would be nice to see federal incentives to help kick-start the industry, in the long run it's not worth counting on government action to move the needle -- and probably a dangerously speculative way to invest. The current VETC fuel credits should be extended, but direct tax incentives for engines would probably delay the market's need for NG engine technology to be cost-competitive with diesel and gasoline to be viable in the long run. 

With that in mind, what the Delphi deal represents for Westport's future is huge. Westport says there are another seven OEM deals in the works, so look for more such announcements in 2014. Chances are, these are the sorts of deals that will lead Westport to profits and growth in the coming years. 

 

 

Jason Hall owns shares of Westport Innovations. The Motley Fool recommends Cummins and Westport Innovations. The Motley Fool owns shares of Cummins 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.