Wednesday, July 13, 2011

Will Westport Innovations Let You Clean Up?

Westport Innovations (NASDAQ: WPRT) -- the $1.1 billion market capitalization maker of technology that let engines run on natural gas or hydrogen that sells to 50 commercial vehicle makers in 19 countries -- has attracted institutional investment and the stock is rising. Should you follow the smart money into Westport?

The smart money has been buying up the stock. reports that 2.4 million net institutional shares purchased in the second quarter amounted to 7.46% of Westport's 32.2 million outstanding shares. And the stock is trading well above its moving averages -- specifically 14.6% above its 20-day moving average, 11.7% above its 50-day moving average, and 30% above its 200-day moving average. So far in July, the stock is up 17.7%.

Westport Innovations is a money-losing company but this momentum reflects two facts that appear to be fueling institutional interest:
  • George Soros has made this stock one of his biggest holdings, according to SeekingAlpha. This naturally attracts other big investors who assume that Soros will make money on the stock and they want to go along for the ride; and
  • Shifting focus to lighter vehicles. Westport is beginning to diversify from just selling to makers of big trucks to car companies. For example, Westport announced a project with General Motors (GM) to develop natural gas engines for light-duty vehicles opening up a big opportunity -- .GM sold 200,000 vehicles to commercial fleets in 2010. Wesport also could enter the large Chinese market for heavy and light vehicles through a joint venture -- Weichai Westport JV, reports SeekingAlpha.
But betting on Westport requires you to ignore its financial track record. Here are three negative elements:
  • Poor fourth-quarter earnings report. For its fourth quarter, ending March 2011, Westport's revenues rose 10.4% to $38.1 million while it lost $14.4 million ($0.31 loss per share) -- 23% more than the year before.
  • Long-term financial weakness. Westport has grown steadily while losing money and burning through cash. Its $152 million in revenues have increased at an average rate of 27.7% over the last five years and it lost $43 million in the last 12 months. And in the absence of selling $134 million in stock during the year ending March 2011, its cash balance would have been close to zero. Fortunately, its $10 million in debt is down from $12 million the year before. But Westport is clearly depending on its ability to sell stock to keep its lights on.
  • Under-earning its capital cost. Westport earned less after-tax operating profit than its cost of capital and it's getting worse. Westport's EVA momentum which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales was down 12%, based on fiscal 2010 revenue of $122 million, and EVA that declined from negative $31 million in fiscal 2010 to negative $46 million in fiscal 2011, using a 10% weighted average cost of capital. 
This stock is a classic momentum play -- it's rising on press releases about future deals and big-name investor involvement. Once Soros get out, all bets are off. So if you know the day before that he is going to dump his shares, get into the stock and sell when he does.

If you're like everyone besides Soros, be wary of Westport.


Blogger Sam Smith said...

I really think that Natural Gas Engines would be a win win situation.

8:23 AM  

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