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GirlsUnder30 (30.49)

Why is Westport is scary over $20/share?



April 27, 2012 – Comments (11) | RELATED TICKERS: WPRT , TM , CMI

Probably the most contraversial holding in everyones portfolio is WPRT. The city of NY shows significant adoption of natural gas running units in its public services and appear committed to using them in the future but I don't know if the rest of the country will make the same jump without a legislative push. The situation with Cummins is particularly troubling. It indicates a disrespect for Westport that I am uncomfortable with for a variety of reasons:

1. It appears that they don't fear legal recourse of what is a borderline patent violation of the Westport design. The take from this could be that the patents are not as strong as the market suspects. There has been substantial time now for engineers to have studied them in order to make this assessment.

2. Competitors will study the Cummins variations and use that information to crowbar their own designs past the Westport patents weakening their advantage further. Any legal wrangling that might occur will be distracting and an impediment to the speed of Westport market penetration which is really bad news.

3. Electrical motors and hybrids are improving every year and natural gas prices will not always be $2 and those facts keep me from sleeping too comfortably on a Westport pillow. Still, the potential is huge if the governmental pen hits the paper.

11 Comments – Post Your Own

#1) On May 02, 2012 at 11:08 AM, RallyCry (40.48) wrote:

Where do you derive your $20 valuation? There are no earnings but often companies in the high growth phase trade on some multiple of revenues. CLNE trades at 5.4 x trailing 2011 income, WPRT at 7.5x. 2013 revenue for WPRT is expected to come in at $550 million. Even if you apply a more conservative 5X revenue for WPRT that puts the stock at a market cap of 2.75 billion or $50 a share in the next 12 months, 66% above current prices.

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#2) On May 02, 2012 at 3:27 PM, GirlsUnder30 (30.49) wrote:

Valuation on sales is a faulty metric for several reasons which I won't outline here but those with a GAAP and GAAS understanding know why I say this. I make the $20 valuation based on my market penetration analysis. If growth and margins fail to remain at the market anticipated levels there will be a bloodbath of the kind you see in drug companies and it scared me out of this stock. It is completely plausable to see this stock hit the mid to low teens. I highlighted in the blog several scenarios that might bring this unfortunate situation about but will add another in this response. There are other companies making nat-gas engines as I write this and they have alot more street cred making motor vehicles than Westport. Time is the enemy here and every day that things don't happen increases the liklihood that it won't happen at all. The lockpin to success is really riding on a legislative initiative. Without it, I would rather put my money elsewhere. I am aware that this stock is a fool favorite and I do regret not holding the line but the risk/reward is unfavorable to me..

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#3) On May 03, 2012 at 11:21 AM, RallyCry (40.48) wrote:

One point you make is that CMI and others will find loopholes to exploit WPRT patents by changing the design slightly. Today there was a seeking alpha article that addressed the direct injection 15 litre engine and the CEO made no comment regarding the product as being a major part of the business going forward but referred to it with a wait and see mentality.     " We have you know as I mentioned in my ah my words people are customers are telling us they are interested in the product again we will see when we get there."

Under no circumstance does this sound like a homerun. Perhaps he is playing it cool or downplaying this product, but currently it does not seem to be a major catalyst. 

I also don't buy the logic that a ten year joint agreement is automatically a strategic business decision that is made to exploit and cirumvent a partner. Again, from Cummins CEO Tom Linebarger "And of course we have ah in our Cummins / Westport joint venture already ah we are already launching a 12-liter engine which has got enormous interest and the idea the 15-liter engine is as people continue to extend out the range from which they want to take natural gas engines ah that's a natural extension ah to the 15-liter so that's our logic."

To me it sounds like a way to diversify the buisness line so that they don't have the concentration risk of being tied exclusively to Westport for natural gas engines.

If competitors will study Cummins jailbreak and create their own designs what is the lead time on getting a product to market? It seems to me Westport has first movers advantage. Just because 100 other company's may try to make a better mouse trap, how does that change the demand for Westport engines in the near to mid term and how does that relieve the execution risk that the other engine makers have in demonstrating a better product at a better price, marketing it successfully etc.?

You make asumptions about the price of natural gas but this seems like a speculative argument considering the expansion of fracking throughout the country. As long as the economy is depressed and shale gas drilling can bring jobs to states in desperate need of jobs and revenues, the supply of natural gas should continue to expand. I think the reliance of a government bill to endorse the technology is more of a bonus than a fundamental requirement for the technology to expand. As Linebarger metiones there is already tremendous interest for a 12 - litre engine.

In terms of valuation Price/Sales analysis is a common methodology for valuing companies with no earnings. Your inference that people who know GAAP accounting know this doesn't seem relevant. I think you may be trying to indicate that operating income may decline as the result of higher operating expenses but I don't see where the correlation is to earnings at present, since they probably won't hit breakeven until late this year or next year. I also threw in a competitors P/S valuation since that is another accepted method of valuing a stock.

Maybe you can expand on your thoughts more because I see a lot of speculation in your argument. I know I have speculated to a degree, but I feel my counterpoints are equally as valid as anything you have presented here.

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#4) On May 03, 2012 at 2:43 PM, GirlsUnder30 (30.49) wrote:

I don't know how you can interpret the conference call linked above as anything other than negative for Westport. 'Interest' in a product is no guarantee of buying into a new technology. To me, it sounded like a CEO fighting flopsweat the whole time he was answering questions. He even flubbed a fluff question that would have given him the opportunity to clarify the relationship with Westport with something more tangible than ...ummm-errr. No mention of production numbers or product mix?!

Please consider that moving to nat-gas requires a great deal more than just an eight hour retrofit. A committment to a whole infrastructure has to accompany it and many municipality officials will be reluctant to do it. Filling stations and tanks are just part of that expense. Retraining mechanics and other employees will also be required along with many other sundries that might turn up and surprise an early adopter. I'm not disputing the sales multiplier as a metric per se but I am disputing inferences which accompany that metric. Even if Westport does meet its sales number and the rest of the infrastructure doesn't keep up, the sales will stop and that is what I fear. I personally know of one huge potential client who was courted heavily and ultimately went with a diesel upgrade because of the infrastructure committment required for the functional adoption of nat-gas. It will be at least three years before this client can be approached again. If this is indicative of the kind of opportunities Westport will miss you cannot fault me for being hesitant at this price. As I stated, the time envelope for success is narrower than the market imagines. I have formulated a pretty good set of models which take into account statistical scenarios of public money spending and market share loss probability over time. I'm not saying Westport won't succeed but I would be too afraid to take that chance at current price levels. I know that what I say is disquieting to many investors and I really hate being the bearer of this news but as a responsible member of this community, I felt the need to present my point of view.

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#5) On May 04, 2012 at 9:29 AM, RallyCry (40.48) wrote:

I hope you are wrong but at the same time I don't fear that you are right. I think it is hard to apply the decision of one large client across an entire market for Westport's business.

The financial metrics of building out a liquid natural gas infrastructure are not the only driver at play. The argument transcends into one of national security. A vertically integrated energy source from shale to pump is really compelling. In a world where hundreds of billions are spent on defense each year, natural gas development is beginning to gain traction as a part of an overall defense strategy.

I think it is dificult to model or place a statistical scenario on the likelihood of adoption when national security and special interests are involved. As far as a window of opportunity, I think its fair to say the natural gas act will get done in some form in the coming months.


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#6) On May 04, 2012 at 5:03 PM, GirlsUnder30 (30.49) wrote:

Do you mean the 'National Security' of our financial well being or are you inferring that nat-gas is safer than liquid petroleum?

For the record, I never said there was only one instance of an important client failing to be persuaded, I said that I knew personally of one and believe me it was a big one both monetarily and strategically. You have the right to be fearless at around $30 just as I have the right to be fearful. For the record, WPRT has dropped >11% since I reduced my holdings and published this article and the volume was not enough to move it down 8^)

I believe the current administration is really unhappy with the oil industry as a whole and nothing would please them more than signing on to nat-gas so it sounds like you agree that some kind of legislative act may be necessary to force the proper conclusion for Westport but that would be one helluva fight! By the way, have you been tracking the oil futures and seeing the shuffling for gas properties? I think the oils consider nat-gas a serious threat to their future energy market share but it remains to be seen if they want the gas just to limit supply and keep energy prices high or endorse its use as an altenative to oil. If the former, that is one more potential stumbling block for Westport.

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#7) On May 06, 2012 at 9:02 AM, RallyCry (40.48) wrote:

With over 300 billion in imported oil annually, I was referring to our financial well being but certainly there are other more nuanced positive outcomes resulting from a decline in our oil consumption.

Truth be told, short term WPRT looks like a broken stock. I could see it hitting low to mid 20's if Tuesday's report doesn't alleviate questions. As such I have acquired some puts that should help me manage my long position if it continues to take a hit.

I agree about big oil having a huge lobbying block and stake in the passage or demise of a natural gas act. We'll see if it gets through.

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#8) On May 09, 2012 at 11:39 AM, RallyCry (40.48) wrote:

I cashed out of my WPRT puts earlier today for a nice gain. I was thinking of adding to my position but I really like STX, V, and SAM  at these levels so thats where I am commiting new money at this point. GirlsUnder30 do you have any opinion on any of these companies? I wasn't sure if you use models across industries or you have specific knowledge of oil and gas.

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#9) On May 09, 2012 at 1:42 PM, GirlsUnder30 (30.49) wrote:

I'm really glad you were able to make fruitful my observations about Westport. The extraction industry has been my area of particular interest since 2008 but I try and keep abreast of everything. Here are my opinions on V, SAM and STX:

Visa is problematic for me because of the uncertainty around NFC. I like SAM but not over $80 and keep in mind the growing trend of health and sobriety in our culture. Seagate is doing well and should continue to do well as we transition to SSD but it's not the best bargain out there. In my opinion, the best technology play is Applied Materials, I have been accumulating AMAT and expect it to gain about $1/month for the next two years. You can read my opinion about it on my CAPS page.

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#10) On May 14, 2012 at 10:00 AM, RallyCry (40.48) wrote:

I like how in your AMAT pitch you referenced the character and quality of management and then when presented a quantitative argument against you, you basically opened up the floodgates with a pretty compelling technical explanation of how they will have a strong moat and increased demand for solar panels going forward.  Are they at risk from Chinese competition who could potentially steal their technology? How do you value AMAT to arrive at it increasing $1 per month for 2 years?

In regard to Visa, I think they have to be involved in the NFC area but with annual operating cash flows approaching 75% of NXPIs market cap and cash of over 4 billion, they could acquire the company or at least come to terms on a joint venture or licensing agreement.

I live in NY too but would dispute the movement toward health and sobriety among SAM drinkers, it is positioned as a beer that is a step above the Coors and Budweisers of the world in terms of taste and reputation. With a market cap of 1.3 billion they certainly have some growth ahead of them if you look at BUD sporting a market cap of 112 billion. I hope to retire in 30-40 years in part based on investing in shares of SAM.

STX is a huge bargain relative to current valuation. My pitch assigns fair value somewhere in the $60 range. I don't fear that EPS will fall off a cliff after 2013 like some people were predicting.

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#11) On May 14, 2012 at 2:03 PM, GirlsUnder30 (30.49) wrote:

I agree that the competitive arena has changed significantly in the storage industry since Western Digital and Seagate tasted earnings from increased margins but other players are emerging with solid state drive technology and cloud computing is still a huge threat so I'm a little frightened even at this seemingly bargain price for the long term.

There are many boutique beers that are arguably far superior to SAM beer by consensus (Grolsch comes immediately to mind but there are others) in both taste and quality and as taste or boredom increases, SAM's charm will be diminished. That is how I see it but I am not an expert on the taste of others so your view may prevail.

I don't believe VISA can buy NXPI since NXPI has targeted them as one of the main clients (or victims) of their technology. Please don't forget the very deep pockets of Philips and Sony that spawned NXPI and will likely shield them from this kind of disruption.

In retrospect, my AMAT pitch reply is a bit efflusive. There is a lot that can keep their price significantly lower than my estimates and the Chinese success in getting close at a $/watt ratio is one potential impediment. Another handbrake is the upcoming oil price weakness resulting from penetration of the alternatives which may cause slight delays in the continued adoption of solar but because AMAT is so well situated in three very important growing markets and so well managed (please note the excellent execution of their recent solar capacity downsizing at a cost of only $0.06) that I don't see a better technology play than them anywhere. 

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