Westport Innovations (NASDAQ:WPRT) is facing a living nightmare as its rivals are giving a tough time to the maker of low-emission engine and fuel system technologies. Its stock has been down 15% this year. The company is facing tough competition from Tesla Motors, manufacturer of electric cars, which is gaining momentum in the market. In addition to this, the gradual adoption of fuel cell technology is another problem that Westport might face. Now, the biggest question for investors is what should be their call on this stock. Let us have a detailed look at this company.
With the increasing challenges that the company has to face, its management has made various strategic moves to bring the company back on track. It also has to tackle the fundamental economic challenges that the transportation and energy industry is going through. Because of the increasing cost of transportation fuel, demand for alternative energy sources is increasing, i.e. the world today is in need of a lower cost fuel. Similarly, energy is also undergoing a technology-driven disruption in both oil and gas extraction and distribution.
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But, according to Westport, it has found the solution to these problems with staggering quantities of cheap natural gas. Around the world, money is being poured into the R&D to bring that gas to market, and to make it a truly global energy source like oil. Moreover, natural gas is in fact a primary fuel for transportation. Thus, investors should not be misled by the historical statistics of the company but should focus on its future prospects.
Currently, the company is focusing on emerging markets where supply chain based products are built and distributed. This is countering its competitor’s strategy, which is doing very well supplying goods and services to the niche markets that have already embraced fuels like propane and natural gas.
Westport management has various strategic plans under its sleeve that would answer the present energy crisis. The company has global infrastructure coverage along with a highly capable supply chain. This has simplified the infrastructure investment in various markets. Thus, Westport sees 2014 as a transition year from market creation and technology demonstration to a more traditional business, which is focused on customer’s profit.
The company sees 2014 as a critical breakthrough year for heavy duty trucks in North America, as it expects around 3% to 5% class A trucks would turn to natural gas as source of fuel. This is a big leap for the company as this market penetration was zero in 2011. Keeping this in mind, Westport has entered into a joint venture with Weichai, as it is shifting its strategy from market creation to product sales through the joint venture in China.
Similarly, on the automotive side, it has a strong potential for growth as its OEM customers are expanding their products globally. In addition to this, the company sees the rail industry as another huge opportunity. Westport is well prepared to sell fuel tenders and engine systems in that market over the next few years.
From a long term perspective, the company is investing in product development at corporate level. In fact, it is reviewing all the projects where it has invested its money. After analyzing, it would evaluate the returns the company is able to get from these projects. Thus, it will be able to check the efficiency of its investment and close down unprofitable projects. Management expects that by 2015, its expenses will be covered from its internal operating income and the income from its joint venture.
As already mentioned, going forward, Westport has various strategic plans under its sleeve. However, the company has to face tough competition from electric car maker Tesla Motors. According to Tesla Motors CEO Elon Musk, “In 20 years more than half of new cars manufactured will be fully electric. I feel actually quite safe in that bet. That's a bet I will put money on.”
In addition to this, Tesla has announced the development of a facility by the name Gigafactory. Economists are of the view that this facility, which is due to start its production in 2020, will be the world’s largest battery-making facility. At its peak, it can produce 500,000 lithium-ion packs, which is more than the entire world’s capacity today. This would be sufficient for Tesla’s car production. Due to this mass production, Tesla will be able to achieve economies of scale and its prices will drop. In fact, this is exactly what Westport’s nightmare, that going forward trucks would shift to electric powered motors.
We have seen all the steps that Westport is taking to bring the company back on track, but we cannot neglect the challenges it has to face. As far as investors are concerned, Westport would be a high risk investment. Although its earnings are projected to grow at 30% a year for the next five years, but if its nightmare comes true, then it would be an extremely tough situation for the company.