Lights Out at Fuel System Manufacturing Facilities

In mid March 2020, in response to a government directive Westport Fuel Systems (WPRT:  Nasdaq) has shut down production at facilities in three different communities in Italy.  The Italian government has ordered the entire country into home quarantine along with full stop to commercial activity as well as public gatherings.  The company’s announcement of the shutdown suggested that the suspension was only through April 3^rd, but that it could be extended to comply with government orders if necessary.  Indeed, the Italian prime minister has extended the lockdown through at least Easter, leaving the country’s 60 million citizens sequestered at home.

Of course, Westport is among many having to turn the lights off at otherwise busy facilities.  Lights are off on the company's stock price as well.  The question for investors is not unlike the conundrum that many face:  is the stock a tempting bargain or smelly baggage?
Westport’s Cherasco operation is a leading producer of state-of-the-art fueling systems for conversion of gas engines to liquid or compressed for natural gas.   Known as OMVL in Italy, Westport acquired the operation in 2010, incorporating its extensive distributor network into the Westport marketing and sales strategy.  In Cherasco, Italy OMVL occupies several modern buildings for its headquarters; research, development and manufacturing activities; and sales, shipping and warehousing.

In Brescia, Italy Westport operates Emer, S.p.A., a provider of compressed (CNG) and liquefied natural gas (LNG).  Acquired by Westport in 2011, the operation has a well established presence in the market with customers among major manufacturers such as Fiat and Volkswagen.   Emer even has customers in India and South America.  While the customer base is impressive, in a compromised trade situation even a finely tuned global business may still not be able to deliver results.

Italy operations contributed $26.6 million to Westport’s pre-tax income in the year 2019, helping to cover up a significant loss in Canada and corporate expenses.  A protracted outage in Italy could be noticeable in Westport’s next financial report.

Investors probably have little to worry about Westport’s Italy operations  -  for the time being.  The shutdown is likely short term and not indicative of a permanent loss in earning capacity in Italy.  At the end of December 2019, Italy facility assets were valued at $22.5 million on Westport’s balance sheet.   Over the last three years the company has already written off $3.0 million for impaired assets, leaving $118 million in gross asset value or $58.9 million net of depreciation. 

It is not the Italy operations that have Westport management on alert.  In the company’s annual report filed just days before the Italy plant closures were announced, management noted that potential risks in the company’s new HPDI business.  Westport’s proprietary High Pressure Direct Injection (HPDI) system with its cryogenic pump is aimed at the heavy-duty trucks.  The company is the first to offer a solution for converting heavy duty truck engines to natural gas, but the HPDI system has yet to gain enough traction in the market to deliver a profit.  Westport management had been guiding for a significant increase in HPDI sales in 2020, which could lead to economies of scale and higher profit margins.  Work stoppages to deal with the coronavirus outbreak may have changed the prognosis.

Indeed, when Westport filed its year-end 2019 financial report, management indicated they did “not see a material impact to its business” related to COVID-19.  They left open the possibility of supply chain interruption or reduced demand as a consequence of deteriorating economic conditions resulting from the coronavirus outbreak.  The subsequent days and weeks appear to have delivered both threats. 

Westport has $48.9 million in debt to service.  Nonetheless, the company has some cushion before a work stoppage will cause pain.  The company had $46.0 million in cash and equivalents on its balance sheet at the end of December 2019.  Working capital totaled $53.6 million.

Management sunny outlook and plump purse have not been enough to assuage shareholder anxiety.  Westport shares have traded down by 68% since the beginning of February 2020.  The sell-off has made WPRT look deeply oversold.  Some traders might be tempted by the low share price. 

Certainly Westport is well positioned with a strong reputation in the alternative fuel market and a highly competitive product in its HPDI solution for heavy trucks.  Still there may still be some shoes to drop from the feet of the coronavirus centipede.  It may be the prudent move to put WPRT on a watch list of promising companies to pick up when recovery appears more secure.

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.