The natural gas vehicles movement in the U.S. is to date largely tied to fleet vehicles, and that market has been much slower to adopt than many investors expected. Westport Innovations (WPRT -3.93%), Power Solutions International (PSIX 2.27%), and Cummins (CMI -0.12%) all have stakes in the engines side of natural gas vehicles.
Since Westport Innovations' stock peaked in March 2012, it's been a big loser. Cummins has also underperformed the market, while PSI has exploded:
But it's future results that matter. Which of these companies will be winners moving forward?
Engine makers in different niches
Power Solutions International shares are up more than 490% since March 2012 as its business has boomed, while Westport shares are down 69%. The thing is, Westport's poor stock performance isn't because PSI has taken market share or business from Westport. So far, these two companies have very little overlap.
PSI makes hybrid engines, as well as LP/natural gas and bi-fuel engines. Source: Power Solutions International
PSI's legacy is industrial engines, including power generation, forklifts, and purpose-built machines such as wood chippers and oil drills. PSI builds engines (or in some cases adapts engines made by others) that can operate on gasoline, natural gas, or LP, and then sells these engines to original equipment manufacturers like Hyundai.
PSI has just entered the on-road vehicle market, buying 4.8-liter and 6-liter engines from General Motors that it customizes to use natural gas and propane. Similarly, the company has an 8.8-liter engine that was designed internally but cast by a third party. So far, these engines serve vehicles in classes 4 through 7, essentially heavy-duty pickups up to buses and dump trucks.
PSI's 8.8-liter engine competes with the Cummins Westport 8.9-liter ISL G, the de facto standard for waste removal trucks and buses that use natural gas. Sixty percent of trash trucks in the U.S. shipped with this engine in 2013. What makes the PSI engine unique is its ability to run on multiple fuel types, while the Cummins Westport only uses natural gas. This could be attractive to fleet operators that want to maintain flexibility in fuel types or may not have consistent access to one fuel versus another. However, the success of the ISL G has been driven by the "return to base" model that most fleets use, which means predictable access to natural gas at the base.
Beware the Hedgehog 
Cummins' Mark Levett at the QSK95 unveiling. Source: Cummins.
Cummins dwarfs both PSI and Westport by a huge margin. Last quarter, Cummins did $4.6 billion in sales. PSI and Westport haven't done $4.6 billion in total sales as public companies, combined. Cummins engines can be found in every corner of the globe, and in just about every application. The one notable exception has been in so-called high horsepower -- the kinds of engines found in locomotives, the largest mining equipment, the largest remote power generating systems, and offshore oil drilling equipment.
However, this is changing with the release of the company's "Hedgehog" engines, the QSK95, and QSK120. Not only will these engines compete with those of General Electric and Caterpillar, but also with Caterpillar brand Perkins. PSI is an exclusive reseller of Perkins 4000 series engines in a number of markets and applications.
What makes the QSK95 and QSK120 unique in their category is that these engines -- while initially being launched as diesel -- were designed to run natural gas as well, and will be available in a natural gas configuration. This is the first engine in this category to be built from the ground up with natural gas in mind. And with a $100 million development cost, Cummins made a pretty big bet that these engines will sell well.
What will the future look like?
Marine, on-road, and locomotives are all part of the natural gas engine's future. Image sources: Cheniere Energy, UPS, Canadian National Railways.
PSI has a track record of taking a big share in every new market it enters. Already profitable (on an adjusted basis), management has indicated that the company will grow slowly and not use large amounts of debt or stock to fund new growth. The company's focus on fuel flexibility will likely remain a strength, as current diesel and gas users will be able to hedge any perceived risk of moving entirely away from conventional fuels.
Cummins' Hedgehog will not really impact revenue until 2015, as the first shipments are scheduled for the second half of 2014, and only on a limited basis in the power generation market. The major impact will happen as Cummins releases the engine for rail, oil and gas, and mining applications, and adds the natural gas version to the lineup.
Westport is shifting from a research and development focus to a manufacturer and OEM supplier, leveraging its intellectual property. Management has committed to its three operating units having positive adjusted EBITDA in 2014, and the same from the consolidated business in 2015. For long-term investors, this is great news. The early evidence supports the shift to natural gas ramping up in trucking, and that bodes well for Westport to achieve its goals.
Final thoughts
PSI shares have given back some gains recently, but the long-term story looks strong. Management has done an outstanding job of deploying capital effectively. Westport hasn't done nearly as well at capital allocation, which is a big reason why President and COO Nancy Gougarty -- brought on board last July -- is central to the company's future. Her experience at TRW will be critical to Westport's ability to keep growing, but start doing it profitably, and I believe that she will get it done. As to Cummins, this industry stalwart has a fantastic legacy of innovation and technical expertise. Adding a "game changer" like the Hedgehog to the mix makes the future look quite bright.
I see market-beating potential in all three of these companies. Do they make sense for your portfolio? That's your call.
