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Overpriced or a great growth stock? Westport fuels both opinions

David Demers, CEO of Westport Innovations

JENNIFER ROBERTS/THE GLOBE AND MAIL

Depending on whom you pay attention to, Vancouver's Westport Innovations Inc. is a fabulous growth stock with a non-stop upward trajectory, or a vastly overpriced investment with profits still several years down the road.

The company, which makes technology that allows truck and bus engines to run on natural gas, has seen a remarkable runup in its share price. It has almost doubled in the last year, and is about six times the price it traded at three years ago.

Westport is essentially a play on low natural gas prices. With the spread between conventional fuels and gas, there is a strong business case for companies to shift their trucking fleets to run on the cheaper fuel. There are also environmental advantages, as natural gas emits fewer emissions than conventional fuels.

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Westport generates substantial revenue – $164-million (U.S.) in the first nine months of 2011, up 56 per cent from the year earlier period, but it still loses money.

That has some analysts concerned about its valuation, while others say that it is only a matter of time before the company is a big profit spinner.

There is also a national divide between the two camps. Most Canadian analysts are cautious about Westport's prospects, while U.S. analysts tend to be much more bullish on the firm.

Toronto-based analyst MacMurray Whale of Cormark Securities has a "reduce" rating on the stock and a target of $11 – less than one-third the current price. He said Westport is not likely to generate profits until 2014, and "that is way beyond any normal investor horizon."

While he understands that people who think natural gas prices will stay low tend to love Westport, "there is no way you can justify the premium," Mr. Whale said. The valuation is similar to what money-losing software companies were trading at during the 2000 tech bubble, he suggested.

Mr. Whale acknowledges that his negative view of Westport – which he has been following for a decade – has been at odds with the stock's actual movements for a long time. "My call has been terrible," he said, but is convinced that he will eventually be proved right.

Most U.S. analysts who follow Westport are much more positive about the prospects for a company that could benefit from low natural gas prices over the long term.

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They like Westport's innovative and proprietary technology, the potentially enormous market for converting truck engines, and the company's many partnerships with engine and truck makers such as Kenworth, Peterbilt, Volvo, Cummins, Caterpillar and General Motors.

The outlook for Westport shares is "compelling, as the shift to natural gas as a transportation alternative accelerates," Northland Capital Markets analyst Eric Stine said in a recent report. He has an "outperform" rating on the stock and a one-year target of $35. There is a "clear path" to the company becoming profitable, he added.

Chief executive officer David Demers said he's not surprised there are such polarized views of Westport's prospects, given that his company is "all about the future."

But he said he is puzzled that Canadian analysts seem so much less enthusiastic, when many resource companies that are not yet profitable are traded on the TSX and get strong valuations.

Some parts of Westport's business are already "spinning off insane amounts of cash," Mr. Demers said, and the others will follow suit in the years to come because "we're investing like stink."

In the burgeoning heavy duty truck market, for example, the company delivered 85 engine systems in the last quarter, and will break even when it hits 300 per quarter – some time next year, Mr. Demers said. "It is not too hard to predict five- to 10-year numbers that are pretty eye-popping."

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While the company's fortunes are dependent on natural gas prices staying low, he said that is a good bet because of new discoveries of geological sources of gas, along with the shift to generating renewable methane from landfills and other sources.

Overall, Mr. Demers said, "it is clear we are going to see a very large shift in transportation energy use to natural gas, and we are the global leader."

Analysts' divergent views of Westport Innovations

Canadian



Company

Rating

Cormark Securities

reduce

National Bank Financial

underperform

PI Financial

sell

CIBC World Markets

sector underperform

Mackie Research

hold

U.S.



Company

Rating

JMP Securities

market outperform

Jefferies

buy

ThinkEquity

buy

Craig-Hallum Capital

buy

Northland Securities

outperform

JPMorgan

neutral

Stifel Nicolaus

hold

Source: Bloomberg



Westport at a glance

Business: Makes engines and fuel systems that run on natural gas

Headquarters: Vancouver

Market cap: $1.6-billion

Biggest shareholder: California telecom executive Kevin Douglas holds about 17 per cent.

12-month stock appreciation: 99 per cent

Recent joint venture: Marketing deal with Shell to promote the use of liquefied natural gas as a transport fuel

Richard Blackwell

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More

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