Westport Innovations Should Make Investors Wary
by Peter Cohan | July 13, 2011 10:41 am
The smart money has been buying up shares of pollution technology maker Westport Innovations (NASDAQ:WPRT). Nasdaq.com reports that 2.4 million net institutional shares that were purchased in the second quarter amounted to 7.5% of Westport’s 32.2 million outstanding shares.
And the stock is trading well above its moving averages — specifically 14.6% above its 20-day moving average, 11.7% above its 50-day moving average, and 30% above its 200-day moving average. So far in July, the stock is up 17.7%.
Westport Innovations is a money-losing company, but the stock’s momentum reflects two facts that appear to be fueling institutional
- George Soros has made this stock one of his biggest holdings, according to SeekingAlpha. This naturally attracts other big investors who assume that Soros will make money on the stock and they want to go along for the ride.
- Shifting focus to lighter vehicles. Westport is beginning to diversify from selling to only makers of big trucks to supplying car companies. For example, Westport announced a project with General Motors (NYSE:GM) to develop natural gas engines for light-duty
vehicles, which opening up a big opportunity — GM sold 200,000 vehicles to commercial fleets in 2010. Wesport also could enter the large Chinese market for heavy and light vehicles through a joint venture – Weichai Westport JV, reports SeekingAlpha.
But betting on Westport requires you to ignore its financial track record. Here are three negative issues:
- Poor fourth-quarter earnings report. For its most recent quarter, Westport lost $14.4 million — 23% wider than the
- Long-term financial weakness. Westport has grown steadily while losing money and burning through cash. Its revenue has increased at an average rate of 27.7% over the last five years and it lost $43 million in the last 12 months. And in the absence of selling $134 million in stock during the year ending March 2011, its cash balance would have been close to zero. Fortunately, its $10 million in debt is down from $12 million the year before. But Westport is clearly depending on its ability to sell stock to keep its lights on
- Under-earning its capital cost. Westport earned less operating profit than its cost of capital and it’s getting worse. Westport’s EVA momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales was down 12%, based on fiscal 2010 revenue of $122 million, and EVA that declined from -$31 million in fiscal 2010 to -$46 million in fiscal 2011, using a 10% weighted average cost of capital.
This stock is a classic momentum play – it’s rising on press releases about future deals and big-name investor involvement. Once Soros gets out, all bets are off. So if you know the day before that he is going to dump his shares, get into the stock and sell when he does.
For everyone else, be wary of Westport.
Peter Cohan has no financial interest in the securities
- WPRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPRT
- 7.5% of Westport’s 32.2 million outstanding shares: http://community.nasdaq.com/News/2011-07/investing-101-green-stocks-being-snapped-up-by-institutional-investors.aspx?storyid=85027
- SeekingAlpha: http://seekingalpha.com/article/278235-analyzing-george-soros-s-top-holdings-part-2?source=msn
- GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
- Weichai Westport JV: http://www.worldnews.se/news/52252/westport-reports-fourth-quarter-amp-year-end-financial-results/
- 134 million in stock during the year ending March 2011: http://moneycentral.msn.com/investor/sec/filing.asp?symbol=wprt
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