Stockhouse Short Report: Profits remain elusive at B.C. tech firm
2/23/2012 1:27:53 PM | Peter Kennedy
One U.S. analyst said he is concerned about the fact that Westport Innovations and a key engine supplier have altered the terms of a joint venture agreement
The road to profitability may be a long and winding one for alternative fuels technology company Westport Innovations Inc.(TSX: T.WPT, Stock Forum),(NASDAQ: WPRT, Stock Forum).
But lack of profits have proved to be no deterrent to investors in the Vancouver, British Columbia company, which has seen its stock price soar to over $47 this week from under $18 in April 2011, leaving Westport with a market cap of $2.13 billion, based on 48.4 million shares outstanding.
Still, after such an impressive run, some financial analysts think it may be time for investors to take some profits off the table.
“We reiterate our HOLD rating until we have a better understanding of the company’s prospects for achieving profitability,’’ said Jeff Osborne of Stifel, Nicolaus & Co. Inc. in Baltimore, MD.
A developer and marketer of technology and products that allow truck and bus engines to run on natural gas, Westport has attracted the interest of investors who are scouting for anything that benefits from low natural gas prices, observers say.
Westport fits the bill because the difference in price between conventional fuels and natural gas is a powerful incentive for transport companies to convert their truck fleets to enable them to run on lower cost fuels. (Critics say companies that do are making a long term bet on forces, including the price of natural gas, over which they have no control).
It clearly didn’t hurt when U.S. President Obama endorsed natural gas as a fuel of the future in his recent State of the Union address.
But Osborne said his concerns centre on the announcement this week that Westport has amended the terms of a joint venture agreement between itself and one of its main engine suppliers, Cummins Inc. (NYSE: CMI, Stock Forum) of Columbus Indiana. On February 21, 2012, Westport hosted a conference call to provide analysts with additional details about the amended relationship with Cummins.
After listening to the conference call, Osborne said it is a concern that Cummins will no longer provide its diesel engines to the CWI joint venture at cost.
“Instead, Cummins will now make a margin upfront on every engine block delivered to CWI and will then continue to split the joint venture profits 50:50 with Westport,’’ said Osborne.
To help the situation, Cummins offered Westport 75% of the profits on volumes achieved above an unknown target, Osborne wrote in a research update. “Management insisted that this should not significantly change the profitability of the joint venture moving forward, but we do not understand how that is the case,’’ he said.
“We imagine a significant portion of the CWI cost-of-goods sold is the engine block. If this is now being marked-up by Cummins, the question is how much is the mark-up and how much will this be taken directly out of the CWI gross margin moving forward?”
This was not quantified during the February 21 conference call. But Osborne says it’s likely that the CWI gross margins most likely peaked in 2011.
“The question is whether this gross margin peak is near term (two or three years) or permanent, and how much gross margins will contract in the near future, given the change in the CWI JV economic agreement?”
The Cummins-Westport (CWI) joint venture uses proprietary high-pressure direct injection technology to convert Cummins engines and sell them to companies that use fleet vehicles. In the first nine months of 2011, CWI accounted for 65% of Westport revenues.
News of the amended joint venture came at the same time that Westport raised its 2011 revenue guidance to $260 million-$264 million from $240 million-$250 million. But investors have also been warned to anticipate a 2011 fourth quarter net loss of
.32 cents per share.
That compares to the consensus estimate is a loss of
A perennial money loser, Westport posted a net loss of $45.7 million or
.96 per share for the nine months ended September 30, 2011, compared to a net loss of $26 million or 66 cents in the same period last year.
Observers attribute Westport’s lack of profitability to the view that sales volumes and subsidies from the California Energy Commission and others are not nearly enough to compensate for costs, including the $30.4 million that was pumped into research and development from 2007 to 2010.
In calendar 2010, 3,925 engines were sold.
However, the sales volumes that are required to make Westport profitable are much larger, a former employee said.
MacMurray Whale of Cormark Securities Inc. has a “reduce” rating on the stock and a target of $11. In a February 2nd interview with the Globe and Mail newspaper, Whale noted that Westport is unlikely to generate profits until 2014, and “that is way beyond any normal investor horizon.’’
When Stockhouse called Cormark this week for an update, Whale could not be reached for comment. But one of his associates said his target price remains at $11.
Westport expects to report its 2011 fourth quarter results after the close of trading on February 29.