Months after reiterating its revenue and earnings guidance for the rest of the year, Westport Innovations (WPRT 0.45%) just lowered both, and in a big way. As I write this, the stock of the alternative fuel technology specialist is getting killed. Again. After having already given up over 80% of its market value from its March 2012 peak.
So here we are, fellow shareholders: bloodied and embarrassed. Let's cut to the chase: is it time to get out, or is there any reason at all to stay invested? For those of you who haven't yet bought, did you just dodge a big bullet, or is this really a good time to buy? Are natural gas vehicles a dead idea in the U.S, or is the market missing something? Let's take a deeper look at what's going on.
What happened?
In short, Westport Innovations' management really screwed this one up. On the most recent earnings call, executives were very positive that business would be good in the second half of 2014. Even though sales were below the previous earnings guidance in the first half of the year, management still reaffirmed its full-year guidance, indicating that it would make up the shortfall from the first half of the year and that its three operating segments would achieve adjusted EBITDA positive results.
Barely two months later, we get a major revision, with projected revenue dropping from a range of $175 million-$185 million to $130 million-$140 million. That's a whopping 26% reduction in sales for the full year. Furthermore, management said this means the company won't reach that adjusted EBITDA positive target in its operating segments. No surprise when you slash revenue by 26%.
Who screwed this one up?
In fairness, certain developments in Europe and China might have been hard for management to predict, but what looked like a very capable and confident management team in July just lost gobs of credibility. I've been a big fan of people like President and COO Nancy Gougarty and CFO Ashoka Achuthan -- both of whom have extensive backgrounds in manufacturing, and with large automotive OEM suppliers -- but this sort of misstep is exactly the kind of action that was supposed to stop happening under their watch.
While I'm not blaming either of these two talented and capable leaders on the miss, it's imperative that they learn to better manage the company's pipeline of business, and if they're not 100% certain, better to underpromise and overdeliver. Let's hope this is just a bump in the road and not an indication of a management team that is out of touch.
What does this mean for natural gas for trucking?
I don't think it's even close to being dead. The biggest hindrance to adoption has been the premium cost, and if Westport's HPDI 2.0 system will cut the premium for natural gas engines, it makes sense that OEM partners are switching over from HPDI 1.0. Westport probably can't name any names, but I'd guess this was behind Volvo's (NASDAQOTH: VOLVY) decision this spring to delay its HPDI engine until late 2015.
There was one part of the announcement that has less of an effect on trucking than most people realize:
...a Westport customer who placed a significant order for Westport iCE PACK LNG Tank Systems has been unable to provide sufficient comfort to Westport that it will be able to meet its obligations and requirements in respect of such orders, and as such Westport does not intend to ship product to this customer until such comfort has been received.
There is only one major customer that's been identified by several news sources -- Universal LNG Solutions -- with a "significant order" of iCE PACK systems. It ordered 900 iCE PACK systems in 2013, and the order was to be filled in 2013 and 2014. The thing is, less than half of those systems were to be installed on heavy-duty trucks. The majority of the systems were to be used to fuel off-road engines for applications such as power generation. This stinks for Westport, but it doesn't look like it's tied to natural gas truck demand at all.
Furthermore, Westport Innovations doesn't derive any direct revenue from its joint venture with engine maker Cummins (CMI -0.25%), nor do the profits from the JV flow through the operating units. In short, we have every indication that it's "business as usual" with sales of the ISX12 G engine for heavy-duty trucks.
Most importantly to the natural gas trucking story, the large majority of Westport's direct revenue is not tied to heavy-duty trucks, but to components it sells to passenger car and truck OEMS in Italy and the rest of Europe, as well as China. It also does a decent business with its "WiNG" conversions of Ford F-Series pickups and Transit vans.
If you're an investor in Clean Energy Fuels (CLNE -1.75%), this is good news, because it indicates that the market for natural gas heavy trucks is pretty much where it was expected to be a few months ago. After all, the ISX12 G is the only large, high horsepower natural gas engine available for truckers in the U.S., and there's every indication that what Westport is telling us has nothing to do with that engine, or the adoption rate of natural gas engines by truckers in the U.S.
Long-term implications for Westport
My past refrain -- that the business is stronger today than it was a few years ago -- might ring hollow in your ears, but I don't know that it's any less true after this guidance revision. Let me explain why.
The company's core business today is supplying parts for passenger vehicles in Europe and Asia, but developments like HPDI, locomotive and marine applications, and the just-announced enhanced spark-ignited system for medium-duty engines, will lead to a more diverse business with revenues from multiple distinct sources. Today, Westport counts on collecting big percentages of its sales from a handful of buckets, and when a couple of those buckets (iCE PACK and European results in this case) are dominated by a single customer or country, it doesn't take much for things to get ugly.
The market today is ignoring Westport's efforts to build markets beyond its core business and grow to the point at which a single customer can't have such a big impact on results. For patient long-term investors, that could be the most important part of the announcement. The fact that several OEMS have committed to HPDI 2.0 is fantastic news, and certainly more important to Westport's future than temporary softness in Europe.
What to do?
Charlie Munger said the most important part of investing is remembering to do nothing 99% of the time, and on days like this, it's certainly the hardest thing to do. However, my analysis tells me that essentially nothing has changed with either Westport's long-term prospects, or with the prospects of companies like Clean Energy Fuels.
And while I'm not selling, I'm also not buying just yet. This could turn out to be a bottom, or the stock could fall farther. However, I'm more interested in seeing what the business does over the next few quarters, and how management handles things, before committing more capital, or deciding to move on.
