Over the past year, I've seen a number of articles recommending Westport Innovations (NASDAQ:WPRT) as an investment in the natural gas engine business. While I hold great respect for many of the analysts making this call, I think investing in Westport is a mistake. Take a look at the chart below. I think Power Solutions International (NASDAQ: PSIX) has been and will continue to be a better investment. Here's why.
What's wrong with Westport?
At first blush, Westport looks like a winner. The company develops innovative technology in the growing natural gas engine market. Westport has multiple joint ventures to manufacture or install its engines and components across the globe and across different vehicle markets. Revenue is on the rise not only in the U.S. but particularly in China.
Unfortunately, for all this growth and potential, Westport doesn't produce profits. In fact, Westport doesn't project operating profits until 2015. The only business segments producing profits are its joint ventures with Cummins and Weichai of China. Westport owns a 50% stake in the Cummins venture and a 35% stake in the Weichai venture. More concerning, Cummins has indicated it can build natural-gas-burning engines without Westport. Weichai probably could, too.
A recent decision by Westport to consolidate some of its operations in Texas puzzles me. Westport acquired BAF Technologies, a Texas-based company specializing in natural gas vehicle conversions. This makes sense, particularly since the merger gives Westport increased business from Ford. However, conversion activities in two other plants will cease. Further, pricing on its future conversions won't be available until the second quarter of 2014.
This is harder to understand. Conversion orders are in the pipelines at Ford dealers, but Westport won't detail pricing for at least three more months? Two functioning conversion plants with their business relationships are closing? Marketing and sales personnel from Westport's WiNG Power program have been laid off at a time when the company needs all the sales it can get? Maybe we're catching a glimpse as to why Westport hasn't earned a profit, yet.
Power Solutions designs and builds natural gas vehicle engines that compete with Westport. Beyond that, Power Solutions builds other engines that may use a variety of alternative fuels. For example, go to an ice skating rink and the Zamboni that resurfaces the ice could have a Power Solutions engine. Same for all those luggage vehicles you see zipping around at airports. Warehouse forklifts, Power Solutions makes those engines, too.
One interesting remark made during the most recent quarterly conference call was that Power Solutions does not compete in the so-called Class 8 heavy-duty truck market. It sees Westport, Cummins, and Volvo already there, so Power Solutions focuses instead on the bigger light- and medium-duty truck market.
One big source of revenue is the natural-gas-burning generator market. Power Solutions indicated that sales of these generators to oil and natural gas exploration companies grew by 22% over the previous quarter. With bigger generators being developed and more stringent flaring regulations beginning in January 2015, Power Solutions forecasts even more growth in this segment.
Power Solutions has one joint venture in China. This venture focuses on forklift engines, a growing market that is almost 50% bigger than the U.S. market. Power Solutions signed an exclusive supply agreement to provide two different engines for forklifts. This forklift venture won't likely generate revenue until 2015.
Power Solutions operates in the black and has done so since 2011. Its latest quarterly report showed a loss due to the repricing of warrants. Without this non-cash charge, the company would have reported record quarterly earnings. Its gross operating margin improved over last quarter's due to sales of heavy-duty power generators and aftermarket sales.
Final Foolish thoughts
Westport Innovations continues to report losses and seems dependent on other companies to do most of its manufacturing. Its presence in the truck market seems precarious since Cummins indicates it will make its own natural-gas-burning engines and may not really need Westport. This is of concern since the Cummins joint venture is one of only two business segments generating profits for Westport.
Both Westport and Power Solutions share vulnerabilities to patent infringement in China. For Westport, this presents a significant risk since this joint venture is the other of its two business segments operating in the black. For Power Solutions, the prospect of gaining a foothold in a large forklift market is certainly appealing, but the company makes plenty of profits from its other business segments. That is, Power Solutions seems far less vulnerable to Chinese mischief.
To me, why buy Westport, which hopes to make a profit in 2015, when Power Solutions already operates in the black? Some see Westport's potential as worth an investment; maybe it will pay off. I say, invest in a proven profit producer that's paying off today.