High gasoline and diesel prices, low natural gas prices, investor zeal for clean energy and a finger-in-every-pie approach – from pickups to trains – is putting Westport Innovations Inc. (TSX:WPT) stock into overdrive.
The Vancouver natural gas engine developer’s stock has nearly tripled in value in a single year: to $47 per share on February 21 from $16 on March 15, 2011. The increase has raised Westport’s market cap to $2.2 billion.
The company’s workforce has grown to more than 800 people globally from 135 four years ago. Approximately 250 of Westport’s staff are in the Vancouver area, and the company continues to hire new employees.
Despite that growth, Westport posted a $23.6 million loss in 2011’s first six months due to acquisitions and investment in research and development.
Comparisons have been drawn with Ballard Power Systems, the hydrogen fuel-cell innovator that appears to be perenially on the cusp of profitability.
Neither of Westport’s competitors in the U.S. gas engine space is making a significant profit yet.
Fuel Systems Solutions Inc. (NYSE:FSYS) made $3.7 million in 2011’s third quarter (down from $40 million in 2010), and Clean Energy Fuels Corp. (NYSE:CLNE) posted a $27 million loss during the same period.
PI Financial Corp. analyst Jason Zandberg said Westport’s only similarity with Ballard is that both companies are overvalued.
“The market’s very excited about this natural gas market, and they’ve bid the stock prices up quite a bit,” Zandberg told Business in Vancouver. “It’s not that I don’t like the company. The market cap is extremely high, and it’s got ahead of itself.”
Even in a best-case scenario, Zandberg said $23 per share is a more accurate valuation.
“If they hit every milestone that I think is possible, it still wouldn’t warrant a $46 price tag for the company.”
But Robert Brown, a senior research analyst with Craig-Hallum, disagreed. He recently set Westport’s share price target at $50.
Based on a rapidly growing demand for natural gas engines – especially in the heavy-duty transportation market – and Westport’s lead over other natural gas engine makers, Brown believes Westport is well on its way to profitability.
“We think transportation is in the early stages of a large-scale shift from diesel fuel to natural gas and evidence is mounting that the trend is accelerating,” Brown writes in a February 12 report.
In an interview with BIV, Brown said Westport is the U.S. market leader and makes two of only three certified natural gas engines on the road in the U.S.
Westport does not manufacture natural gas engines. It develops the technology then strikes partnership deals with manufacturers like Cummins Inc. (NYSE:CMI), Volvo and Weichai Power in China.
Westport WiNG, for example, is providing the natural gas “bi-fuel” engine for the Ford F-250 and F-350 pickup trucks, which will be able to run on natural gas when it’s available, and regular gasoline when it’s not.
In October 2011, Westport bought Alternative Fuel Vehicle, the Swedish company that makes natural gas engines tor Volvo, which also makes a bi-fuel car.
Westport is highly diversifed. It has business partnerships to cover the light-, medium- and heavy-duty markets and is moving into the high-horsepower sector with the development of a natural gas engine for trains.
With the help of a $2.3 million funding commitment from Sustainable Development Technology Canada, Westport is working with Canadian National Railway, Electro-Motive Diesel (EMD) and Gaz Metro on what would be the first natural gas locomotive in Canada. The marine sector is another potential market.
“In the long-term, there’s no doubt that our technology is capable of operating LNG [liquid natural gas] for large vessels,” said Darren Seed, Westport’s vice-president of investor relations and communications.
One of the reasons Westport has yet to turn a profit is that it has made a number of acquisitions and continues to invest heavily in research and development. Some of Westport’s divisions are profitable, Seed said, but its profits go back into R&D.
Seed added that the company also has some “favourable macro-economic winds” behind it.
Natural gas is far cheaper than gasoline or diesel. Its greehouse gas emissions are also between 21% and 27% lower than the other two fossil fuels. That has prompted governments to promote its use with incentives like a new tax break for natural gas vehicles being proposed in the U.S.
Brown predicts a 30% to 40% penetration rate for natural gas engines in the American transportation sector over the next three to four years. He said Westport is “clearly the leader in the market, and they have a technology advantage.” •
