After having a terrible 2014 which saw shares of Westport Innovations (WPRT, Financial) fall close to 70%, it looks like the company is finally coming back on track. Shares of Westport Innovations are up 43% YTD and have room to run higher. While it looks like Westport Innovation is stabilizing, I think investors should stay clear of the stock for now.
Good Q1 earnings fueled the rally
Much of Westport’s rally was because of the hype surrounding its quarterly earnings. Westport delivered revenue of $28 million in the first quarter versus $39.9 million in the year-prior quarter. The 30% decrease was because of the strength of the U.S. dollar. However, the top line beat the analysts' estimates by $1.25 million.
The company also beat the earnings estimate by reporting a loss of $0.27 per share versus $0.38 per share in the year-back period, beating agreement estimate by $01.0 per share. The company is cutting costs substantially, and this has resulted in an earnings beat, sending the shares higher.
Although Westport’s earnings report was good, I think it’s unreasonable to invest in the stock just because of that. The company faces certain headwinds going forward, and although it is making some good moves to overcome those headwinds, I think the risk/reward ratio isn’t in Westport’s favor.
Weak oil prices a headwind
Sales of natural gas engines have been negatively affected by the falling oil prices and given that oil is expected to stay way below the $100 per barrel mark that it reached last year, I think Westport Innovations is in for a rough ride.
According to Financial Post:
"The difficulty for Westport and its competitors is the slow pace of adoption of natural-gas-powered trucks, which tend to cost about $50,000 more than their diesel counterparts. Proponents say this is more than offset by the long-term fuel savings, but falling oil prices tend to make the extra cost less appealing. In addition, the lack of refueling stations has made long-haul trucking difficult."
Natural gas prices on the rise
To make matters worse, the natural gas price is expected to rise. The EIA's STEO projects that "The projected Henry Hub natural gas price averages $2.93/MMBtu in 2015 and $3.32/MMBtu in 2016." At present, natural gas is priced at $2.61/MMBtu. So, I think sales of natural gas engine will continue to struggle in the coming months.
Conclusion
Although shares of Westport have rallied in the recent past, the stock still poses many red flags. Falling crude oil prices, along with increasing natural gas prices will take a toll on Westport’s engine sales, and will also negatively impact the company’s joint ventures. Hence, I think investors should sell the stock.
