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Why George Soros Is Buying Westport Innovations

Westport revenue and gross margin both increased in the most recent quarter, but the company is still striving to reach the stage of true commercialization of its technology.

Westport's just reported first fiscal quarter of 2011 was not a game-changer: a small miss on revenue and an in line earnings per share loss of 21 cents. The revenue miss was attributed to a delay in shipping some product that will show up in the next two quarters, so it won't impact the full year revenue picture.

The Westport earnings didn't provide much incremental information, and the Street maintains its position that the recent trading on the political hopes has to be separated from the multi-year time horizon.


There is a reason why Westport has the least short interest of the three leading natural gas vehicle plays in the U.S. When the energy legislation passes is less important to the bullish Westport view than the conviction that earnings momentum will be generated in the second half of 2011 and 2012. Therefore, if Westport shares continue to slip after having reached a 52-week high in late July -- the shares were down 2% on Thursday morning -- bullish investors may want to add to long-term positions.

ThinkEquity's Severson says that when an investor looks at stocks like Westport or Clean Energy Fuels, it's still hard to apply fundamentals in terms of valuation for companies that don't make any money. These are volatile names, very much caught up in sentiment trading, whether it is oil prices or legislation. Nevertheless, the ThinkEquity analyst thinks that the long-term fundamentals are a separate issue, and all the short-term volatility doesn't impact the strategy of a long-term investor like Lord Abbett.

The ThinkEquity analyst cautions investors that with Westport the investor is still making a singular bet on natural gas as a fuel technology, and for those interested in the natural-gas vehicle theme, it will still be a waiting game. An investor can trade any of these alternative energy names, without a good management team in place and without profits, and make money, but that is not the point for a long-term investor.

Profitability for Westport could still be a few years out, yet the trend to natural-gas vehicle fleets is accelerating, and simple economics of the business work in its favor, with the big "if" of the federal government doubling the existing tax credit for natural gas vehicle purchasers.

ThinkEquity's Severson says it's best to think of clean technology investments in terms of return on investment (ROI). Trucking companies know how much they spend on fuel and how much a natural gas vehicle costs, and how long the payback period will be after migrating away from diesel.

Westport estimates the cost of a standard heavy duty truck at $106,00. After a doubling of the existing tax credit for purchasers of natural gas trucks, the cost of the clean fuel vehicle would be $118,000. These economics would make the payback period a little over seven months for the purchasers of natural gas trucks, based on the assumption of a $1 difference in the price of natural gas and diesel fuel, and 20,000 gallons of fuel consumed annually.

Regardless, as long as the market lacks clarity on the federal tax credit, purchasing behavior will remain uncertain. Yet analysts say that the earnings of these natural gas vehicle companies are already lumpy. What's more, all the major truck purchasers knew that the federal government was going to introduce comprehensive energy legislation at some point, so the long-term reasons for investing in these stocks amid all the short-term market noise has not changed.

"It's changed a lot in the last year, with more investors now aware of the natural-gas truck industry as an investable theme. We're past the stage of education and we've entered the stage of 'when to buy,'" said ThinkEquity's Severson.

-- Reported by Eric Rosenbaum in New York.

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