Did Westport Innovations Just Run off the Road?

Typically when a company forecasts lower sales or profits, its stock usually takes a hit. It's not always easy to tell whether it's having a fire sale or burning down its own house. Maybe it is time to get out -- or maybe it's time to buy more!

Natural-gas-powered-engine maker Westport Innovations (WPRT -0.71%) gave investors a bit of a fright the other day when it said full-year revenues were going to come in below previous forecasts. A lack of sufficient liquid natural gas infrastructure was causing original equipment manufacturers to cut back inventories sharply, and customers were delaying decisions on completing orders. Revenues for 2012 would now be in the range of $340 million-$350 million compared to previous guidance of $400 million-$425 million.

The stock initially dropped 10% on the news, but it quickly bounced back and ended down just 1% on the day. But don't blindly follow those who are selling (or buying): You still need to do some research. We need to use the announcement as a jumping off point for additional research.

Westport Innovations snapshot

Source: FinViz.com. N/A = not applicable; Westport doesn't pay a dividend.

If you build it, will they come?
It comes down to the age-old question: Which comes first, the chicken or the egg? Do you first build the infrastructure necessary to support natural-gas-powered vehicles and hope someone comes along and actually provides the cars and trucks to use it? Or do you hope that demand for vehicles keeps pace with the stations required to refuel them?

Between Westport and Clean Energy Fuels (CLNE -2.15%), the two have been trying to create demand and infrastructure in tandem, but it seems initial demand outpaced supply of stations and now vehicle makers are scaling back their growth plans. Clean Energy's stock also pulled back, falling 8% yesterday.

Plans to have around 70 liquid natural gas roadside stations by the end of this year -- and more than double that number by the end of 2013 -- now seems a little too ambitious. Analysts have also contended there needs to be thousands of stations nationwide for the market to be viable.

Growth engine stalls
Vehicle manufacturers from Ford (F -1.66%) to General Motors (GM 0.12%), and heavy equipment manufacturers like Caterpillar (CAT -6.95%), have contracts with Westport to make engines for their cars, trucks, and commercial vehicles. But earlier this month truck-wheel maker Accuride (NYSE: ACW) reported orders were plummeting and it had to take production to a "screeching halt" after Caterpillar in particular cut back orders. The global economy is much weaker than it anticipated and its dealers are reducing inventories rather than place new orders so it will cut production until orders and inventories are aligned.

Less affected thus far is Cummins (CMI -1.30%), which is a partner with Westport in the development of nat-gas engines, but which recently decided to strike out on its own to manufacturer engines because the market looked so promising. Now that might not be so certain.

Running off the road
Analysts have cut Westport slack over the years on its inability to produce a profit so long as it was growing revenues while the industry grew up around it. However, now that its sales are contracting, the engine maker won't be getting any free rides from Wall Street as losses probably will explode.

I ended my hugely successful outperform rating on Motley Fool CAPS for Westport in September, when it seemed the market for alternative vehicles was contracting, whether it was from natural gas, electric, or other fuel sources. While that CAPScall might have been prescient, the 180,000 member-driven investor community provides a real-time means of testing out investment theories by translating informed opinion into stock ratings of one to five stars. The engine maker still carries a coveted five-star rating at the moment, but tell me in the comments box below if you think Westport Innovations will be able to jump-start growth anytime soon.