WPRT - Westport Fuel Systems: Likely To Roar Ahead As Headwinds Dissipate

Summary

• Westport Fuel Systems has seen its share price crater as their joint venture with Cummins concluded and as supply chain issues, Russia's invasion of Ukraine and gas prices hurt growth.
• But I believe that not only are these headwinds temporary, they are likely to aid the company in the long run as they are resolved, concluded or reverse course.
• As a result, I am increasingly bullish on Westport Fuel Systems and will be adding more to my long position.

I've had a love-hate relationship with Westport Fuel Systems ( WPRT ), going through a bearish phase due to the lower anticipated adaptation of their gas-powered engines and then after a 40% reduction in share price I became slightly bullish as their prospects improved and they continued to show signs of life with new contracts.

Since then, the company's share price took a further nose dive on behalf of two temporary headwinds and one permanent one. The latter is due to the conclusion of the Cummins ( CMI ) joint venture in which Cummins bought out the remaining joint venture. This was an incredibly profitable venture for both companies and it will mean that Westport Fuel Systems lost a valuable asset.

The two temporary constraints were the supply chain issues that nearly every company in the manufacturing sector experienced in the aftermath of the COVID-19 pandemic disrupting shipping and factory closures. The other is the ongoing Russia-Ukraine conflict, which has caused the company's sales in Russia to stop and given that there was a recent escalation, even though I believe this is still a temporary headwind - it'll take a while longer to conclude.

Temporary Headwinds

Even though there is the permanent headwind after the joint venture with Cummins was concluded, the company got a decent infusion of cash and equivalents. The company's solid prospects outside of the joint venture also remain. There are temporary headwinds which I believe have caused most of the company's headaches for the foreseeable future.

Russia's invasion of Ukraine has been a major blow to the company's millions of dollars in sales it generates from Russia given sanctions and the lack of appetite for new spending in the country as economic sanctions cripple its productivity. Even if theoretically the war would increase demand for gas-powered heavy machinery, the sanctions as well as the moral aspect of supplying that machinery for the purpose of a bloody invasion isn't something the company is likely to participate in.

According to the company's latest financial reporting, they saw an impact of $6.1 million from the conflict in the first half of 2022 and they expect some increased hurdles moving forward. I believe that the company will see an impact in 2022 of around $15 million in revenues it's used to receiving. This is due to the SWIFT limitations, which means that Russia cannot pay Westport Fuel Systems for their already delivered products and ongoing sales.

Supply chain issues is another main hurdle the company has faced. As I'll discuss in the next section, this actually is a long term boon for the company, but in the short term, which is still persisting, the overall lack of deliveries of raw materials and parts for their manufacturing processes means that the company is not able to meet existing demand and that new contracts will be harder to sign since there will likely be hesitation regarding delivery deadlines.

Another hurdle is higher fuel prices, which the company has stated it is seeing, resulting in softness in the demand for their products due to higher costs of LNG and CNG engines, which they expected to continue. However, the recent decline in these prices back to historically normal levels is an encouraging factor and I expect this demand to tick back up in the coming months.

Let's explore why I think the two main hurdles are temporary and what the timelines is for the company to return to a solid growth stage.

Headwinds Turned Tailwinds

When it comes to the company's sensitivity to Russia's invasion of Ukraine, the recent news about the expansion of their military as they continue to rack up casualties from the war isn't a good sign for the swift ending of the conflict. Even so, the company has been focusing more on growing their revenue streams in other parts of the world as a result and I believe will be able to mitigate the headwinds they face in Russia.

This means, I believe, that as they establish solid revenue streams elsewhere, once or if the war in Russia is over and the world eases their sanctions on their use of the SWIFT payment systems - the company will experience a sharp rise in revenues as both existing contracts come back to life as well as back pay for the products already delivered. This has the potential to come at a point where the company will be expanding and can really use the cash to increase production. It'll also likely come after the supply chain issues are fully resolved, which brings me to point number two.

Supply chain hurdles are temporary. After people were laid off as ports and companies operating around the transportation industry shut down due to the pandemic, a massive backlog of products which were sitting in ports or at their origin caused serious issues for manufacturing companies which relied on the consistent flow of goods and parts in order to meet delivery goals and deadlines. As these issues are being tackled in various ways to speed up the process, the company should expect these hurdles to conclude by years end.

A Bonus Tailwind

Another positive factor related to the supply chain issues is that there's an increased demand for transportation solutions, especially as gas prices remain relatively high, which bodes well for the demand the company is seeing. They stated in their most recent filing :

Demand for heavy-duty trucks has increased due to an ongoing need for freight transportation and the growing demand for more climate-friendly vehicles in markets with favorable fuel price economics.

I believe that this will help the company's long term demand as billions of dollars worth in the United States alone is being spent through the Biden Administration's Infrastructure Bill for increasing the amount of trucks and other climate-friendlier vehicles. This should benefit Westport Fuel Systems.

Projections & Balance Sheet - Further Tailwinds

The company has a solid $98.2 million in cash and equivalents after the cash infusion from the Cummins joint venture buyout, which I believe will allow them to ramp up production as demand increases as the aforementioned headwinds dissipate.

Another plus is that the company has used some of that cash and more to pay down about $12 million in long term debt, which has helped decrease their interest expense and save cash in the long run for operational advancements. They are paying some of the lowest interest expense to date at around $3.8 million annually, down from $14.5 million annually back in 2017 and down from $4.9 million in their latest reporting fiscal year.

According to analyst projection aggregation by Seeking Alpha, the company is currently projected to report a return to profit in 2024 by reporting $0.02 per share in earnings, which they are then expected to grow by over 1,000% to $0.22 per share the following year. That means that the company is currently trading at a price to earnings multiple of 5.4x their 2025 earnings projection.

Conclusion

Given that I believe that most of the company's short term headwinds will not just dissipate but turn into long term tailwinds, I believe that a price to earnings multiple of 20x is more appropriate, since analyst aggregation projects that the company will continue to grow earnings by 60% to 25% for the following 5 year period from 2025 through 2030.

Furthermore, I believe that the headwinds are reflected in these numbers, given the number of downward revisions that occurred, and that the company is highly likely to outperform these projections, which provides for a cushion in the valuation projection.

Assuming that a 20x price to forward earnings multiple is appropriate, a fair value price of $4.40 per share is calculated, which means that the company's current price of $1.15 per share is severely undervalued.

I am increasingly bullish on the company's long term prospects and will continue to add to my position throughout the coming weeks.

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