From my apartment here in Medellin, Colombia, I can see the
sign to a local gas station. The price of gasoline has climbed to
$5.20 a gallon -- but there's another price listed just under
#-ad_banner-#For $2.68 per gallon equivalent.
That's the price for natural gas, and people down here love
The boom in natural gas production in the United States pushed
prices to historic lows, and many were predicting massive
conversions of cars away from gasoline to natural gas. The
transformation would have driven a huge shift in the auto
industry, and one company has a virtual lock on natural gas
Sentiment jumped in this game-changer, and this company's
shares surged more than threefold over the two years to early
2012. It seems the market was ahead of the curve, and the
conversion cycle has not come just yet.
But that doesn't mean it's not coming -- only that the game
isn't changing as quickly as investors had hoped.
According to the Natural Gas Coalition, there are 130,000
natural gas vehicles (NGVs) in the United States and more than
2.5 million in the world. Considering there are roughly 143
million cars on the road, that puts the percentage of NGVs at
just 0.09% in the United States.
While the conversion cycle might not have caught on yet in the
States, it certainly has in other parts of the world. Of the 7.2
million vehicles on Colombia's roads, 300,000 are natural gas
vehicles, accounting for more than 4% of all vehicles. More than
1.5% of Italy's 52.6 million vehicles run on natural gas.
Even coming off decade lows, the price of natural gas in the
U.S. is still up to five times cheaper than it is in other parts
of the world. The cleaner combustion of natural gas also means
lower maintenance costs over the life of the vehicle.
One of the biggest long-term drivers for natural gas
conversion is the environmental impact. Compared with
gasoline-powered vehicles, natural gas vehicles can reduce carbon
monoxide emissions by over 90% and reactive hydrocarbons by
While most of the U.S. still enjoys relatively clean air, take
a trip to the largest cities in the world, and you'll see a
different picture. Population and economic growth around the
world are going to be big drivers for pollution control over the
While the conversion cycle has not taken off yet, it could be
on the verge. The average age of the heavy-duty Class 8 fleet in
the United States has jumped to 11 years on slower capital
investment and sluggish manufacturing growth. The average age of
U.S. cars and light trucks increased to a record 11.4 years at
the end of last year. Improving Institute of Supply Manager data
for manufacturing points to a turnaround in production and
possibly positive sentiment at carriers to upgrade their
More than 40 different manufacturers now make natural gas
General Motors (NYSE:
But only one company is the runaway leader in natural gas
Westport Innovations (Nasdaq:
owns more than 300 patents for natural gas and fuel system
technologies on an aggressive R&D program spanning the past
15 years. The company has partnership agreements with some of the
largest companies in the transportation space, including Volvo,
Westport beat earnings estimates in its most recent quarter by
30%, which could signal an end to its trend of revenue and
earnings misses. After a drop of more than 70% off their 2012
high, shares trade at an enterprise value-to-sales ratio of just
3.7 times expected 2014 sales of $180 million. That is incredibly
cheap for a company experiencing double-digit sales growth in an
industry that is just getting started.
Cash on hand more than doubled last quarter to $211 million,
equal to nearly a quarter of Westport's market cap, which should
be enough to meet its capital needs this year and next. Westport
also paid down most of its debt last quarter.
Its strong cash position and positive cash flow from
operations in a young and growing industry could make Westport a
takeover target. Problems with Westport's execution at the
management level may attract private equity buyers on a
turnaround, while its growth and valuation could attract
strategic buyers from other transportation companies.
Short sellers have a $163 million bet against Westport, with
12.7 million shares borrowed to sell. On current average volume,
those short positions would take more than 10 days to cover. If
sentiment and the share price are close to a bottom -- and I
think they are -- then these borrowed shares will provide strong
support to demand and higher prices, and could even lead to a
Westport is due to report its first-quarter results in early
May, and any positive guidance by management could be a huge
boost to sentiment. Even on subdued growth expectations,
investors can feel comfortable that shares should rise
significantly over the long term.
I have a one-year target price of $17.85 per share on a
forward enterprise value-to-sales ratio of 3.5 and expectations
for 2015 sales of $260 million, after adjusting for $35 million
in cash burn this year. This represents nearly 40% upside, but
it's still an extremely cheap valuation multiple on a growing
Risks to Consider:
The adoption of natural gas for U.S. vehicles has
disappointed the market, and expectations for growth may still
come down further.
Action to Take -->
The price differential for natural gas compared to gasoline is
enough to make widespread usage in vehicles a reality in the
United States. The hot money has been shaken out of Westport
Innovations, and the shares are trading at a steep discount to
future growth. I would buy at anywhere under $15 a share.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.