Is Westport Innovations Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Westport Innovations (WPRT -0.35%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Westport's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Westport's key statistics:

WPRT Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q4 2010.

WPRT Return on Equity (TTM) data by YCharts

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
Things have taken a turn for the worse at Westport since last year, as the natural-gas engine specialist fails to muster a single grade out of a possible seven in its second assessment. The company's revenue growth has stalled out during the past year (the graphs may look buggy, but the numbers at the start and the end of our tracking period are correct), after enjoying impressive gains in earlier years. This slowdown has negatively affected almost every other metric, including free cash flow, net income, and equity-related metrics. Will Westport's shareholders be able to hold on until the company turns its fortunes? Will Westport be able to turn itself around at all? Let's delve a little deeper to find out.

Westport posted lackluster fourth-quarter earnings results earlier this year, primarily due to an adjustment related to the discontinuation of first-generation high-pressure direct injection, or HPDI, systems and some restructuring charges. However, last week marked the first sign of a turnaround that's been seen in more than a year of misery, as Westport's first-quarter earnings sent shares soaring on news of big sales growth. Fool industrials and energy specialist Jason Hall put together a good breakdown on Westport's quarter, and the results might be more mixed than they may seem at first glance. While sales are strong, Westport's margins remain rather depressed.

Westport continues to face a potentially serious threat from Capstone Turbine's (CPST) natural-gas powered trucks, which claim higher fuel efficiencies than existing trucks in the long-haul market. My fellow writer Tyler Crowe notes that Capstone recently partnered with PACCAR subsidiary Peterbilt to develop economically viable natural-gas engines. This is another wrinkle in the ongoing frenemy triangle between Westport and Cummins (CMI 0.65%), its longtime partner in heavy-duty engine manufacturing, just as demand for Class 8 trucks is surging in North America. Cummins has its own natural gas-powered engines on tap, which would constitute a real threat to Westport's natural-gas technology if it winds up serving the same functions as existing Cummins-Westport engines.

Jason Hall also points out that the Westport-Cummins joint venture has seen sustainable demand for the ISX12 G engines, but this engine alone can't drive the company's growth forever. However, Westport is also hoping to benefit from its partnership with Ford, which will place Westport's engines in America's best-selling truck, the F Series. Westport services the warranties on nat-gas components added by Ford dealers and distributors, and also works directly with dealers to supply replacement parts, which should be beneficial if adoption grows, as parts and service tend to be the most profitable parts of any auto dealership. To this extent, the company has teamed up with Delphi to improve Westport's high-pressure direct natural gas injectors, with the hope of reaching annual production capacity of about 100,000 injectors in the next few years.

Cleaner-burning natural gas prices have dawdled near rock-bottom levels for much of the last decade, which has sped up the return-on-investment timetable for many trucking fleets when it comes to converting from diesel to natural-gas engines. Westport Innovations also signed a deal with Canadian National Railway last year to build liquefied natural gas (LNG) powered locomotives, and delivered its first LNG tender, consisting of four locomotives worth $1 million each last month. At most, the locomotive industry could be worth approximately $30 billion if converted to natural gas, but a handful of engines do not yet constitute a sea change. U.S. government is also implementing strict fuel-efficiency standards for the upcoming decade, which gives automakers, and Westport, a big opportunity to fill with efficient engines burning cheaper fuel.

Putting the pieces together
Today, Westport Innovations has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.