Westport: Hydrogen Champion

The most recent post on September 16^th, “Hydrogen as Renewable Fuel”, focused on the prediction of annual growth in excess of 10% through the rest of the decade for the hydrogen generation market.  Early on there were only a few heroes championing hydrogen as a viable energy source to replace fossil fuels.  One company that has been among ‘believers’ is Westport Fuel Systems (WPRT:  Nasdaq).

In 2008, when Westport first came on the scene in the U.S. as a public company, leadership detailed the company’s low-emission engine and fuel injection systems.  Westport entered the market with heavy-duty engines using compressed natural gas.  ‘Natgas’ is certainly an improvement over diesel, which leaves the air filled with pollutant gases and particulates.  Unfortunately, natgas is still a fossil fuel and emits plenty of greenhouse gas emissions.  Westport leadership made it clear they were ready to direct their gas-fueled engine technologies toward alternative gaseous fuels such as renewable diesel or hydrogen.

Westport has a strong technology base some of which is patent protected.  Their proprietary fuel pump technology is particularly distinguishing.  However, what may be more interesting about Westport is the company’s strong relationships with heavy-duty truck manufacturers and owners.  Even in Westport’s early days as a public company, leadership had solidified relationships with truck engine manufacturers Cummins and Weichai Power Company.  Fast forward to the current year, Westport reported a joint venture with Cummins, Inc. that generated a good share of the company’s 2021 revenue.  Sales in 2021 totaled $312.4 million, on which Westport earned a 15% gross profit margin. 

As originally planned Cummins has subsequently bought out Westport’s interest in the joint venture and intellectual property for $42.2 million.  Cooperation between the two former partners is not likely at an end.    Cummins has agreed to test Westport’s hydrogen high pressure injection system or HPDI system for use in Cummin’s hydrogen applications.  Thus, Westport leadership appears to have not preserved but expanded its ability to work directly with truck engine market participants, tapping into their direct knowledge of owner priorities and truck performance.

Westport is relying heavily on its HPDI technology.  In 2021, the company raised $121 million in fresh capital through the sale of common stock to supports its commercialization effort.  The funds will not be used on marketing or sales activities alone.  Leadership is also in the hunt for complementary or supportive technologies that could be acquired at a bargain.

Leadership already has one successful acquisition under its collective belt.  In May 2021, Westport acquired Stako sp. z o.o., a manufacturer of liquid petroleum gas fuel storage devices.  Based on Poland, Stako has over 1,000 models of liquified petroleum gas or LPG storage tanks, which are supplied to leading car and truck manufacturers.  Stako is considered one of the top position in the European liquified petroleum gas market.            

Of course, LPG is still a fossil fuel and does emit greenhouse gases.  However, the technology and knowhow that Stako has built up could be highly valuable to Westport when attempting a broader conversion of its truck fleet customers from natural gas to hydrogen.  Hydrogen can also be stored as a liquid as well as a compressed gas, giving hydrogen fuel a more marketable profile for some customers.  Indeed, hydrogen is already transported long distance in the liquid form in super-insulated, cryogenic tanker trucks.

Westport has a long history of innovation, continuously striving for more efficient, more environmentally-friendly fuels for its customers.  The company has suggested improvements to its HPDI fuel system will be game-changing.  Called H₂ HPDI, it is designed to convert diesel-powered engines to hydrogen.  The engine need not be switched out by owners and engine manufacturing and repair infrastructure can still be used.   Importantly, carbon dioxide emissions are near zero and that its trouble engine owners get 20% more power than diesel.  Westport’s new H₂ HPDI seems like the solution the commercial trucking industry needs to save on fuel costs while burnishing a ‘green’ reputation. 

Westport’s stock is trading below ‘a buck’ and that might put off some investors.  The price implies a multiple of 0.51 times each sales dollar over the last year and 0.70 times Westport’s book value at the end of June 2022.  For contrarian investors, those multiples are a siren call to grab a position. 

So, what does an investor get when taking a long position in WPRT?  

The company held $98.2 million in cash on its balance sheet at the end of June 2022.  Working capital was an ample $168.4 million.  Total debt was $80.9 million.  A strong balance sheet could be enough of a bargain to jump in with both feet.

However, there is another perspective that should be acknowledged.  Using financial performance in the trailing twelve months, the company’s return on invested capital (ROIC), is negative.  Ouch!  To make matters worse its cost of capital (WACC) has increased to the low double digits.  Ideally, ROIC is greater than WACC, demonstrating that a company is wringing more value from its capital than it costs to get that capital in the door.

In Westport’s defense, the company has not really had time to fully realize the value from its hydrogen technology investments.  True enough the company has been around for some years, but it is not operating in a mature sector.  Indeed, one could argue that the hydrogen fuel for the transportation market is only just starting out.  Thus, it might be too early to hold Westport up to the ROIC to WACC comparison.

For an early-stage industry, a strong balance sheet may be all that Westport needs to deliver returns for shareholders.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.