Olivier Le Moal/iStock via Getty Images

Olivier Le Moal/iStock via Getty Images

In July this year, I wrote an article on Westport (NASDAQ:WPRT ) that was quite bullish; since then, the share price has fallen nearly 50%. This article will review what has happened and look at the investment again.

Since the last article, WPRT financials have gone reasonably well. Revenue appears to be trending higher, and the earnings line looks very positive. The balance sheet has remained strong, and the company has announced some excellent new orders, including one for 60,000 LPG systems into North Africa. However, the competitive situation has deteriorated significantly and this has removed buyers from the market leading to a declining share price.

Westport has reported some good results and if you use the Wall Street analyst's average earnings forecast and prepare a discounted cash flow, then it would appear that WPRT is a potential multi-bagger capable of a ten-fold return at its current price. (SimplyWallstreet use CAD$ for the share price for consistency I will do the same).

The fair value derived from levered free cash flow generated using the average of 6 Wall Street analysts. In millions, the figures per year are

Source: Author with data from SimplyWallstreet

If WPRT can achieve these numbers, then it is woefully undervalued.

Westport has solid finances partly due to the dilution of shareholders earlier in the year, its debt to equity ratio is 26%, and its balance sheet is strong.

Source: Author generated data from Seeking Alpha

In 2021 Westport earnings became positive for the first time, and its sales look good.

However, these positive-looking charts and numbers hide a problem. Westport has had an abysmal year from a Competitive Strategy viewpoint.

WPRT makes Natural gas-fueled bus and truck engines; they have a unique technology called HPDI which appears to be superior in every respect to the more normal spark-ignited natural gas engines. The product is good, it is reliable, cost-effective and has an excellent reputation. It is low carbon, and when running on renewable fuel carbon negative, it can provide similar performance to diesel engines and is easy to maintain. The product could and should be a market leader. WPRT management has pursued a strategy of signing with OEM's and having joint ventures to get the technology to market. Six months ago, this strategy looked like a slam dunk and helped to create my bullish standpoint; right now, it doesn't look quite as solid.

WPRT operates in the four major geographical markets for truck production, China, North America, Europe, and India. These four regions represent the vast majority of truck sales, and these regions will decide whether or not WPRT can hit its sales and earnings forecasts. In my first article, I expected all four of these markets to perform well in the coming years, that is not proving to be the case.

WPRT signed a deal with Weichai, the largest truck manufacturer in China, with huge sales and an excellent reputation. Weichai invested in having the HPDI engine certified for use and earlier this year increased the number of units that are part of the deal. In March, WPRT announced that the agreement would include 25,000 12L engines, rising +25%. Unfortunately, things are not going according to plan.

Weichai has not made any sales of the HPDI engines; indeed, they have not mentioned the product for several months. The deal seems to be caught up in the ongoing China Canada diplomatic relationship spat. When Canada arrested a Huawei exec following a US warrant, China jailed two Canadian business people. Relations continue to get worse despite the release of the business people.

Canadian government officials appear to make anti-China statements on a wide variety of issues regularly. The WPRT-Weichai deal may well be caught up in this for some time.

Huawei has recently been refused access to 5G in Canada. It is likely, in my opinion, that the Chinese govt. is actively asking its large companies not to deal with Canadian companies at this time.

WPRT execs were asked about this on the most recent earnings call and were a little evasive. They said that the hold-up was more of a marketing decision around the currently high price of Natural Gas in China. That doesn't make much sense, perhaps a smokescreen or a bit of groupthink.

WPRT relied on the Cummins Westport Joint venture for sales in North America, and that JV is ending this month. When I wrote my initial article, I thought there was a good chance the JV would be extended, but it has not. WPRT has been left behind; they do not currently have the sales platform in North America they need, and I cannot see a clear path to putting this right. At the recent earnings call, I hoped to get some positive news on the JV or the new direction. Instead, we got:

Currently, we are working with Cummins to wrap up the final terms for the conclusion of the joint venture. We expect engines with our HPDI technology to have an important role in the North American market, as they have had in Europe.

Source: Westport Q3 earnings call

Without a clear understanding of the new North American market strategy, it is tough to make a judgment of future sales; it is fair to assume that sales will be significantly less than the 1,764 units recorded in the Q3 report.

One possible hope is Volvo, a significant long-term customer of WPRT, using WPRT engine technology in Europe, Australia, and South Africa. Currently, Volvo buys its engines in the US from the Cummins-Westport JV. Volvo US has recently started building a new engine testing facility at its Hagerstown manufacturing facility. There is a possibility that they intend to move to WPRT, but no news so far. Currently, the Volvo US truck website is still offering the Cummins Westport engine and one from Cummins. Volvo may decide to stay with Cummins alone; we will have to wait for news.

The former partner in the US, Cummins, is making some excellent progress in the US with sales of its engines that appear to be negative for Westport. Cummins launched a 15L natural gas engine into the North American market, giving it a significant advantage as the Westport 15L engine was withdrawn some years ago. 15L is an important engine size; it is needed for true heavy-duty long haul trucking. In a further blow to Westport, Cummins has signed a deal with Daimler to take over production of all of Daimler's medium duty engines. Westport had previously worked with Daimler on an MoU. Daimler has a significant market share in the US through the Freightliner, Western Star, and Thomas brands.

Here WPRT has excellent relationships with major truck manufacturers, Europe has more infrastructure for Natural Gas fueling, and Many European governments support the technology. Westport reported a 43% increase in sales from the European launch partner.

Volvo has been a customer of Westport since 2009 and has recently significantly expanded the areas they offer HPDI. In South Africa, Volvo has Natural Gas trucks running on the Volvo C13C engine. The technical specification for this engine reads like HPDI, but I cannot find any corroborating evidence. The specification is so similar that I am assuming that the Volvo engines in South Africa and Australia are using HPDI. This adds some confidence that VOLVO may be the route into the US market WPRT is working on.

Another big win for Westport: they have partnered with Maruti Suzuki in this market. The Indian market is growing quickly, with 2800 refueling stations already built and 10,000 expected by the end of the decade.

Sales volume there is substantial and growing, a very positive sign for WPRT.

The competitive situation has moved on since my last article. Sales in North America and China are currently shrouded in uncertainty. Sales to India, Europe, and the rest of the world are going well.

Westport can be a multibagger at these levels, but the market needs to see clarity on the US and China markets.

On the positive side, we have:

A solid balance sheet (admittedly due to shareholder dilution)

HPDI tech still appears to be the best available.

Sales in Europe are going very well and Volvo is expanding the use of Natural Gas-powered engines around the world and possibly into the US.

The Indian market is also going very well with a good partner.

On the negative side: the Weichai deal in china appears to have stalled, the engine has been certified but sales do not appear to be going ahead.

Cummins has become a serious competitor rather than a partner.

Plans for North America are unclear or perhaps not formalized yet.

The theory of expectation gives us a probability-weighted view of what the shares in Westport are worth.

The chart reflects my view of the chance of the two problem regions being resolved by Westport in the next 12 months. You may have a different perspective; however, my opinion is only a 5% chance that Westport manages to succeed in both the US and China markets and a 78% chance it fails in both. If it fails in both, the price is likely to continue its downward trend, perhaps another +30% fall to CA$2. I estimate that if WPRT manages to succeed in both a share will be worth CA$54, CA$34 if it succeeds in China alone, and CA$24 if it succeeds in the US alone.

Expected price= 0.05x54 + 0.1x34 + 0.07x24 + 0.78x2 = CA$9.34.

CA$9.34 against its current price of CA$3.06. I will wait for the first sign of some positive news about China or the US and will then be a buyer once again.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I write about the competitive situation of companies as I see them, I am a fairly short-term investor with a 1-year time horizon and my ideas are quite contrarian.