Shares of Westport Fuel Systems Inc. (USA) (NASDAQ: WPRT) jumped an incredible 64.4% in August. This marks the continuation of a strong run for the natural gas and propane engine and fuel system maker's stock over the past few quarters. Since early March of this year, Westport Fuel System's stock price is up more than 243% at this writing.
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A couple of things are driving the stock upward, including a handful of moves by management to raise cash and reduce debt ahead of the commercial launch of the company's long-awaited HPDI 2.0 fuel injection system for the heavy-duty truck market.
August was a pretty busy month for Westport, with the company announcing its second-quarter financial results mid-month, as well as disclosing several other actions management took after the end of the second quarter to strengthen the company.
To start, Westport's second-quarter results were well accepted by investors, sending shares up 15% after the earnings call. Westport reported strong revenue growth of 67% (though that was a product of the company merging with Fuel Systems within the past year), improved gross margin percent, and better revenue and profits from its critically important joint venture with Cummins, called Cummins Westport. Sales at Cummins Westport increased 8% in the second quarter and first half of 2017 on modest growth in engine sales and strong growth in aftermarket revenue. Westport's share of profits from the venture were up sharply, to $7 million year to date. That's up more than triple from $2 million in 2016.
And while the positive operating results were a big positive, they only paint part of the picture for Westport, which continues to consume cash at a rapid pace, and has a substantial amount of debt coming due in September 2017. During the second quarter, Westport sold off its Auxiliary Power Unit business and some other assets for $88 million, and raised another $29 million from the issuance and sale of 19.1 million new shares.
In August (after the end of Q2), the company made an offer to the holders of $55 million (Canadian dollars) in debentures to either tender their debentures for a 1% premium on the principal or extend the debentures on similar terms for six month increments at similar terms as the original debt offering. However, the company canceled this offer near the end of the month (to which the market responded positively) and announced that it would pay off this debt when it matures on Sept. 15, 2017.
Its moves to strengthen its balance sheet have generally been viewed as very positive. Combined, the company will pay off $55 million Canadian in debt, and has raised $117 million in asset and stock sales. The expectation is that this will be enough to offset its cash burn over the next year, as it begins commercial production of its HPDI 2.0 natural gas injection system for heavy-duty engines this fall.
But even with the significant improvements in the balance sheet, investors should recognize that the company has only bought itself more time. HPDI 2.0 has taken years to develop, and as sales of the 12 liter natural gas engine from the Cummins Westport joint venture has shown, there are no promises that heavy-duty truck fleet operators will rush out and buy natural gas engines.
Don't get me wrong -- as a longtime Westport shareholder and close observer of the natural gas vehicles space, I'm optimistic that HPDI 2.0, which will be available from multiple OEMs, could be a game changer. But I think it's critical that investors acknowledge that adoption could be very slow to start, and not generate enough incremental cash flow growth for Westport to reach profitability before it runs out of cash in the next year or two.
Before you buy any shares of Westport Fuel Systems, you should decide if you're willing to take on that risk or not. If you are, you'll also need to decide how much capital you're willing to risk.
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