That car in your garage should be running on natural gas. With
oil prices around $100 and unlikely to fall much lower in coming
years, and natural gas selling for less than $3 per thousand cubic
), the cost differential is far too big to ignore.
Consider this: $3 of natural gas gets you about one million BTUs
(British thermal heating units) of energy. It takes about eight
gallons of gasoline (or about $25 to $30 worth at current prices)
to get the same amount of energy. The gas price is wholesale while
the gasoline price is retail, but even on an apples-to-apples
basis, gasoline is at least five to six times more expensive.
So why is
the only major auto maker selling a factory-built natural
gas-powered car? Because Honda also arranges for consumers to fill
up their tanks in their own garage through expensive, specialized
devices. Simply put, if you buy one of these cars, you won't find a
natural gas filling station nearby.
In his recent State of the Union address, President Obama
appeared to tacitly support
a move to natural gas as a transportation source.
But as we know with Washington, even the most practical legislation
is nearly impossible to achieve these days. Indeed, there are an
array of natural gas users, most notably in the industrial sector,
that want natural gas to stay cheap and abundant, so they've
blocked legislation that would boost demand for natural gas at
Westport Innovations (Nasdaq: WPRT)
, which retrofits truck engines to run on natural gas, have been on
a tear, surging from $14 to $38 in the past year. The company would
be a clear beneficiary if Washington ever took action. But it's
unclear if that will ever happen, and investors may be
overestimating this company's potential success, considering it is
expected to be barely profitable in fiscal (March) 2013.
Meanwhile, a key rival has completely missed the rally.
Fuel Systems Solutions (Nasdaq: FSYS)
, which is similarly exposed to any upside that legislation may
bring, has fallen from $50 in late 2009 to $40 in late 2010 to $30
last spring to a recent $20. As a result, Fuel Systems is quite
undervalued compared to Westport Innovations, by a variety of
This means Fuel Systems has firmer downside support if natural gas
bulls see their hopes dashed if Congress again fails to pass the
NAT GAS Act. (Two pieces of legislation were proposed in Congress
last year, though neither made it to a floor vote.
You can read about them here
It also means that if Washington finally takes action, then Fuel
Systems may have significantly more upside.
Trucks, then cars
There's a reason investors are buzzing about Westport Innovations
while seemingly ignoring Fuel Systems Solutions. Wesport focuses on
trucks, while Fuel systems focuses on cars. President Obama's plans
appear to focus squarely on subsidies for truck makers and efforts
to build a network of natural gas-powered fueling stations along
Yet if that happens, then the viability for natural-gas powered
cars sharply improves. It would no longer be about automakers like
Honda providing refueling pumps right in garages. Instead, it would
enable consumers to fuel-up in-town, assuming they live somewhere
near an interstate highway.
A number of automakers such as Fiat, Volkswagen,
have said they're ready to supply the
with natural-gas powered cars when the infrastructure is in place.
Notably, Ford and GM have long-term contracts with Fuel Systems
Solutions to make that happen.
Yet as noted earlier, these two stocks are valued quite
differently. Westport Innovations has an
of about $1.6 billion, which equates to about seven times projected
fiscal (March) 2012 sales. Fuel Systems Solutions has an enterprise
value of about $300 million, which equates to less than one times
trailing 2011and projected 2012 sales.
Both companies have gross margins in the 30% to 40% range, so it's
unclear why a dollar of sales for Westport should be valued so much
more than a dollar of sales for Fuel Systems.
It's worth noting that Westport is expected to boost sales nearly
50% (to around $350 million in the coming
, while Fuel Systems is expected to see sales rise just 10% to
around $450 million. (Fuel Systems has operations across the globe,
not just in North America, hence the higher sales base.) Yet
roughly half of Westport's projected growth is coming from a pair
of acquisitions in Italy and Sweden.
To be sure, Westport is the company with momentum in the United
States, where natural gas is especially cheap compared with
gasoline. Yet with the enterprise value/sales ratios at a 7-to-1
gap, investors have clearly gotten carried away.
Risks to Consider:
Fuel Systems' sales mix is more heavily dependent on Europe.
Further economic weakness on the continent would likely restrain
the company's sales growth to an extent, even if the U.S. market
Action to Take -->
If legislation passes, then both of these stocks would rally,
although investors have already bid up Westport to astronomical
heights, while Fuel Systems has a huge valuation gap to close. If
legislation doesn't move forward, then Fuel Systems is likely dead
money, while Westport could be ripe for a huge pullback.
That sets up a perfect paired trade. You could go long Fuel Systems
and short Westport, essentially (and theoretically) negating the
effect of legislation and focusing on these two stocks from purely
a valuation standpoint. Or, after further research, you could
easily take one side of this trade or the other, provided you have
the risk tolerance for such a move.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F in one or more if its "real money" portfolios.