As the most advanced designer of engines powered by natural gas, Westport Innovations (NASDAQ:WPRT) is a small company with a big goal: to lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has released a premium research report breaking down the company's opportunities, competitive advantages, and risks. Today, you can get a free sneak peek at the report, analyzing Westport Innovations' structure and business opportunities in various markets. Enjoy!
As an engineering and design company, Westport leverages its proprietary technology by partnering with manufacturers to produce its engines, leaving Westport an asset-light business that has few fixed costs and tremendous potential for profitability. However, this also leaves Westport highly dependent on its joint-ventures and manufacturing partners for execution. Westport works with many industry-leading engine-makers, and reports in four segments:
CWI Westport LD Westport HD Corporate Revenue (in millions) $109 $58.4 $19.5 $7.8 Revenue (as percent) 56% 30% 10% 4% YTD as of most recent quarterly report; total revenue of $194.7 million.
Formed in 2001 and operating as a 50/50 joint venture with engine maker Cummins, Cummins Westport (CWI) is Westport's most established and most profitable segment. Westport designs are manufactured at Cummins' plants and marketed jointly, primarily in North America. The venture has seen great success in fleet and return-to-base vehicles, like municipal buses and refuse trucks, with nearly 50% of all North American refuse trucks adopting natural gas engine technology.
Cummins Westport expects to launch a new 12-liter engine in early 2013, with launch partners including Volvo and PACCAR. This will grow CWI's addressable market to include regional haulers and distributors.
Westport Light Duty
Westport LD was originally known as Juniper Engines, a joint venture between Westport and manufacturer OMVL. Westport bought OMVL in 2010 and consolidated Juniper Engines as a wholly owned subsidiary, Westport Light Duty. The business is a leading global provider of engines and fuel systems for passenger cars, light-duty trucks, and other small vehicle applications, with manufacturing partners including Ford in North America and Volvo in Europe. Westport LD has also found a growing market providing components for aftermarket conversion of gasoline engines to CNG or LNG systems.
Westport LD is the company's fastest-growing segment, booking revenue for the first time as recently as 2010. The segment grew from 22% to 30% of sales from 2011 to 2012. The company sees significant growth potential in the bi-fuel gasoline/CNG WiNG Power System, which is being rolled out in the Ford F-Series Trucks. Westport is on track to hit its launch goal of 500 WiNG systems in 2012, and Westport is so bullish on the system's future that the company has completed an assembly plant with the capacity to produce 20,000 WiNG systems annually.
Westport Heavy Duty
Westport HD, a business unit 100% owned by Westport, is aimed at the heavy-duty diesel engine and truck market, designing and marketing natural gas enabled engines capable of powering Class 8 trucks and similar applications. Westport HD's 15 liter engines, LNG fuel tanks, and high-pressure direct injection systems are installed in big rig trucks by partners like PACCAR, which offers factory installation of Westport HD's proprietary technology in its Kenworth and Peterbilt brands.
While the segment is relatively small today, the North American long-haul-trucking business offers an incredible market for Westport HD. As partners like Shell and Clean Energy Fuels build out natural gas refueling infrastructure across North America's highways, trucking companies are increasingly able to reduce their fuel costs and more easily comply with environmental regulations by converting to natural gas engines. Currently, Westport HD experiences a low gross margin due to the unit's marketing expenses in trying to raise awareness of the practicality of natural gas adoption, but margins should expand as natural gas trucks gain market share.
China's Weichai Westport (WWI) designs and manufactures natural gas powered engines and specialty components for automobiles, buses, heavy-duty trucks, marine applications and power generation. The business is a joint venture: Westport Innovations has a 35% stake and provides engineering and design expertise; Weichai Power, China's largest heavy-duty-engine manufacturer, produces the engines and holds a 40% stake; and Hong Kong Peterson (CNG) Equipment holds the remaining 25%.
Weichai Westport is growing quickly, with engine sales increasing from 1700 units in the second quarter of 2011 to 5300 in 2012. However, the young venture is still incurring high production and sales costs as it grows. Since Westport Innovations only recognizes 35% of WWI's net income, corporate revenue from the venture remains very small: $1.1 million in the most recent quarter, only about 1% of sales.
However, with the expected launch of WWI's new 12-liter engine in 2013, Westport will also start recognizing revenue from the sale of engine components to the joint venture and sale of off-engine components to Chinese OEMs.
As something of a catch-all category, Westport Corporate includes all new-market investments, including Westport's high-horsepower applications. In 2012, Westport Corporate announced a deal with mining and construction equipment giant Caterpillar to co-develop natural gas technology for off-road applications. Caterpillar paid a one-time licensing fee for Westport technology, and plans to fund the entire development program. When the products reach commercialization, Westport will supply key components.
Corporate also participates in marketing campaigns to raise awareness of the benefits of natural gas conversion, often partnering with OEMs like Caterpillar, infrastructure providers like Clean Energy Fuels, and natural gas producers like Shell.
We hope you enjoyed this sample of our premium research report on Westport Innovations, which also includes a breakdown of the most important areas investors need to watch, an analysis of the risks facing Westport Innovations, and three key reasons to buy or sell the stock. To gain access to the complete report and a full year of analyst updates, just click here to keep reading.
Fool contributor Daniel Ferry owns shares of Westport Innovations. The Motley Fool recommends Paccar and Westport Innovations and owns shares of Paccar and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.