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Westport’s stock gyrations signal Street’s valuation headache

While Westport expects to take in more than $400-million in 2012, profits aren’t expected for at least a couple of years.


Westport Innovations Inc. has seen its stock price ride up and down like a roller-coaster this year, zooming close to $50 at one point in the early spring, dipping below $23 a couple of months later, then wobbling up and down to its current level in the high $20s.

The gyrations underline how hard it is for investors to figure out the value of the Vancouver company, whose technology allows truck and bus engines to run on natural gas. Analysts seem equally puzzled, with 12-month target prices ranging from $11 to $55.

While Westport has substantial and growing revenue – the company expects to take in more than $400-million in 2012, 50 per cent higher than in 2011 – no profits are expected for at least a couple of years. This has made valuing the company a difficult, if not impossible, task.

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Chief executive officer David Demers acknowledges that his company is a bit of a "moving target" whose success will depend on a number of uncertain factors, including how quickly natural gas filling stations are built in North America and elsewhere. Also, while it is increasingly acknowledged that there will be a huge market for natural gas transportation technology, he said, there is a lot of new competition and Westport's future market share is an unknown quantity.

As for the short-term volatility in the stock price, Mr. Demers partly blames the large number of short sellers of Westport stock. Those shorting the stock "just don't believe we can do it," he says, while there is an even larger pool of investors who are enthusiastic about the company's prospects, and push the price up when positive announcements are made.

Indeed, the stock jumped 21 per cent one day in June when Westport announced a joint venture with Caterpillar Inc. to develop natural gas technology for off-road equipment, and then took another 9 per cent leap later in the month when it signed a deal with General Motors to work on advanced engines for light duty trucks, vans and SUVs.

Shawn Severson, an analyst at JMP Securities in San Francisco, said it is tough to set a value on Westport because you need to make assumptions about things like eventual penetration rates of natural gas vehicles, the size of international markets, and where gas prices will settle. "It is a very difficult task to put a specific earnings power on it and then to find a multiple," he said.

When you look forward as far as 2015 or 2016, "you can get a very wide variety of assumptions," he added.

Mr. Severson, who has a "market outperform" and a $53 12-month target on Westport, says his enthusiasm is based on the conviction that natural gas for transportation is going to be a huge market. "I believe it is one of those unique opportunities where you have specific economics that force adoption," he said. In essence, that means that if one trucking company switches to natural gas engines and is saving a lot of money on fuel, it will force others to do the same. "Once you reach this tipping point and the dam breaks on this, I believe we will have a very rapid uptake and adoption of natural gas."

Westport will face more competition as a result, Mr. Severson said, but it has "first mover advantage that will put them in a very sweet spot for at least a couple of years to come." One reason the shares have been relatively soft in the last few months, he said, is that the company raised $274-million in February, by selling 6.3 million shares, and that "soaked up a lot of demand."

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Near the other end of the valuation spectrum is Rupert Merer of National Bank Financial, who has an $18 target on Westport and an "underperform" recommendation. Mr. Merer said he likes Westport's long-term prospects, but his conservative valuation suggests the company is currently worth less than its trading price.

Mr. Merer says he is modelling Westport as a mature company, with the assumption that it will have a substantial market share in the United States and China by the time it starts to generate profits, but it will then no longer be a growth play. Some other analysts give the company a much higher multiple because they see it as a high growth company for many years, he said.

In the meantime, Westport stock is going to be volatile and driven by news events, Mr. Merer said. "Any hints of government support in the United States will typically take the stock up, or down if the hopes fade. And natural gas prices have been a huge influence on the stock."

Overall, Mr. Merer says he believes low natural gas prices are here to stay and there will be an increased use of the fuel – including in transportation. But he is cautious about Westport's price, because "a lot of things have to go in its favour for it to earn its current valuation. We recommend a little bit of caution."

Mr. Demers, Westport's CEO, says it will remain tough to project profitability because of the company's many partnerships, which are structured differently and generate cash in different ways. "Predicting the future is difficult," he said. but as Westport's financial position becomes clearer "the share price will start to stabilize."


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Evaluating Westport

Analysts put widely differing values on Westport Innovations. Here are two examples.

National Bank Financial

Rupert Merer projects an "optimistic scenario" for fiscal 2018, with about 150,000 engines and systems being sold, revenue of about $2-billion, and per share earnings of about $4.

He applies a four-times price-earnings multiple on the $1 of earnings from the more mature joint venture with engine maker Cummins, and a 10 times multiple on the $3 Westport will earn on higher growth divisions.

That gives a share price target of $34 in 2018. Discounted back five years, it works out to a 2013 share price target of $18.

Mackie Research Capital

Matt Gowing uses a sum-of-the-parts discounted cash flow approach, which projects the net income the company will earn in each division in 2015. He then calculates the net present value of the equity in each of those divisions.

That shows the NPV of the Cummins joint venture at about $807-million; other divisions add about $1.7-billion. With about $300-million in cash on hand, the total equity value of the company is about $2.8-billion. With about 55 million shares outstanding, that generates a 12-month target price of $50 per share.

Richard Blackwell

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