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Westport Innovations: Shares Approaching an Inflection Point

 November 23, 2012 12:32 PM

(By Mani) Westport Innovations Inc. (NASDAQ: WPRT) (TSE: WPT) shares are approaching an inflection point in 2013 as engine technology advancements and new product introductions increase the served available market opportunity and accelerate natural gas vehicle (NGV) penetration.

Vancouver-based, Westport is a manufacturer of natural gas engines, systems and components for vehicles that span the spectrum from light duty to heavy horsepower applications. The company has a 95 percent share of the North American market.

While the company's strength lies in the medium and heavy-duty segment, the company also offers products that are utilized in light-duty automobiles all the way up to locomotives.

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"We expect strong top line growth due to increased proliferation of natural gas vehicles (NGVs) as engine technology advancements and low natural gas prices drive improved payback periods," Deutsche Bank analyst Vishal Shah said in a client note.

Westport is a dominant supplier of natural gas engines in the United States and is well positioned to capture a significant share of new market opportunities globally.

The company is expected to benefit from a number of new product introductions, which in turn should result in served available market (SAM) expansion and increased NGV penetration.

"Specifically, we expect the new 12-liter engine, which will be introduced in early 2013E, to enable the company to target the regional and long haul truck markets in North America and increase SAM by 1.5x (from 70K to ~150K units)," Shah said.

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With the new 6.7-liter engine, the company is now able to target school buses, medium duty and vocational vehicles in North America, increasing SAM to about 80,000 units.

Recently announced OEM relationships could start contributing to revenue growth from 2013. Specifically, the Ford collaboration in the light-duty segment, the Volvo agreement in the heavy-duty truck segment, and the GM agreement in the light-duty segment. Moreover, the deal with India's Tata and Caterpillar (NYSE:CAT) could act as strong top line growth drivers over the next few years.

Concerns about product cannibalization by Cummins, Inc. (NYSE:CMI) has resulted in some pressure on shares, but the growth outlook is still attractive. Cummins has a joint venture with Westport for natural gas engines for North American transportation applications such as trucks and buses.

'We believe that the heavy duty and high horsepower applications are better served by Westport's proprietary direct injection technology (which has better torque capability and efficiency vs. spark ignition)," the analyst noted.

In addition, Westport heavy duty is the smallest of the three segments and revenue from this segment represents less than 15 percent of total company revenue.

"Our estimates show that an incremental sale of 250 units of WHD systems would contribute about ~$0.03-$0.04 to total 2014 EPS based on less than 1 percent penetration rate of the total market," Shah said.

Diminishing infrastructure bottlenecks and a resulting increase in OEM interest should drive additional upside to consensus estimates over the next 12 months to 18 months.

"We believe shares are adequately discounting the near-term macro headwinds post the recent guidance revision and, considering the potential for multiple catalysts on the horizon, we believe risk-reward is attractive at current levels," Shah noted.



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