Shares of Westport Innovations (WPRT, Financial) have fallen almost 70% since I first recommended selling the company back in June. With the stock down considerably this year, investors may be tempted into buying it. However, Westport has more downside to offer, and investors should continue avoiding the stock going forward.
Unprofitable
I have never been a fan of companies that have a history of loss making. Westport Innovations is facing worse problems as the company is not only reporting losses, but its sales are also falling.
Westport’s Q3 results were terrible as it missed the analysts’ estimates on earnings as well as revenue by a pretty wide margin. Not only did the company lose a lot of money in the last quarter, its sales also dipped a whopping 12% year over year.
Westport has not reported a positive EPS for the past five years. And now with sales falling consistently, investors shouldn’t expect the cash burn to stop any time soon. The company’s shares seem likely to fall 15% to 20% in the coming months.
Revenue will keep falling
Although natural gas prices have fallen considerably, sales of Westport’s engines seem likely to continue falling due to the steep drop in crude oil prices. Crude is currently hovering around seven-year lows. And with the recent OPEC meeting ending in a stalemate, I can see crude oil prices staying under $40 per barrel for months to come.
Cheaper crude is a big headwind for Westport as it restricts the widespread deployment of renewable energy sources. On an average, natural gas-powered trucks cost roughly $50,000 more than their diesel counterparts. With crude oil under $36 per barrel, a lot of buyers probably will not shell out an extra $50,000 on a natural gas engine.
Moreover, since crude oil prices are not likely to recover, Westport may soon run out of cash. Westport is losing tens of millions of dollars in cash every quarter. Westport ended the last quarter with $42 million in cash as opposed to a debt of $66 million. Given the rate at which Westport is losing money, the company’s cash position probably will deteriorate substantially in the coming quarters.
With the company bleeding money and crude prices expected to stay low, the risk of bankruptcy looms large on Westport. Investors betting on Westport’s turnaround should expect things to get worse as the company’s outlook looks pretty bleak.
Conclusion
Betting correctly on a company’s turnaround can be a very rewarding investment. However, Westport’s turnaround story is very weak. Despite Westport falling over 60% since my first sell call, the stock still has a lot of room to fall.
