Clean Energy Winners & Losers: Westport, Fuel Systems
NEW YORK (
) -- Two key stocks in the natural gas vehicle space have reported earnings in the past 24 hours, and it's
Fuel Systems Solutions
(FSYS)
that's taking a beating from the markets.
Westport Innovations
(WPRT) - Get Report
, on the other hand, received a big boost on Wednesday when it reported, even though it's given back some gains on Thursday morning.
It may seem counterintuitive that Fuel Systems, which actually makes money, would be the clean energy loser, versus Westport, which may not be a profitable company for years. Yet the two natural gas vehicle plays trade in very different ways. Westport continues to trade on the hopes that the U.S. will enact legislation driving the sale of natural gas truck fleets, and it picked a good day on which to report earnings. Fuel Systems, on the other hand, trades on actual earnings in the European auto sales market.
On Wednesday, President Obama's midterm election concession press briefing included the words "natural gas trucks" in response to a question about how energy policy can go forward with carbon cap-and-trade a non-starter. Westport earnings are a non-event for many investors, too, as it's a play on the long-term migration to natural gas vehicles.
Westport shares rallied on Wednesday afternoon, and this week have rallied by 12%.
Clean Energy Fuels
(CLNE) - Get Report
, a play on the build-out of natural gas vehicle fueling infrastructure, won't report until next week, but its shares rallied 14% after President Obama's speech.
Fuel Systems Solution shares were among the market's biggest losers on Thursday morning, down more than 11% on four times its average daily volume of trading. Fuel Systems remains one of the most heavily shorted stocks on the Nasdaq. Even after a huge rally in shares over the past three months of 27% -- a big part of it short covering -- short interest is still high in the natural gas vehicle stock play, and shorts were having their argument vindicated with Fuel Systems earnings on Thursday morning.
The issue for Fuel Systems Solutions in its earnings -- and the big case for the shorts -- is that ever since Italy reduced subsidy support for the sale of natural gas vehicles, Fuel System's core European market has been more vulnerable. With European auto sales falling off a cliff in August -- something already known two weeks previous to the Fuel Systems report -- Fuel Systems Solutions' revenue from European auto sales was cut in half versus the year-ago period. Its industrial sales segment actually grew in the quarter, but the question for investors is whether or not the key auto sales market in Europe will have a sustained recovery or whether the August swoon will return, leading to a bad fourth quarter for Fuel Systems.
Shawn Severson, analyst at Think Equity, said that expectations for the fourth quarter will depend on a recovery from what was a brutal August for auto sales in Europe -- September showed a one-month rebound -- and any indications from Fuel Systems that its geographic diversification into markets like India and Venezuela is prepared to pick up the slack quickly. The ThinkEquity analyst also said that the industrial segment which propped up revenue in the quarter won't be as strong in the holiday season.
Another clean energy analyst said Fuel Systems, unlike Westport, is actually valued based on earnings per share and revenue, and given the quarter estimates will have to come down. "They had a great 2009 and a great 2010, but everyone knew with the incentives going away in Europe things would slow down, yet it looks like the Street models were still too bullish."
Fuel Systems earnings per share of 29 cents beat, while revenue of $86 million was below the Street -- though the main difference was a foreign exchange charge of $9 million. It was the decline in auto sales in Europe, with revenue down $50 million, that is the key item, and the company outlook didn't provide assurance to investors.
Fuel Systems President Matthew Beale stated in the earnings release, "Regardless of near-term movements in individual markets, demand continues to build around the world for bi-fuel and dedicated alternative gaseous fuel systems."
The reference to "near-term" movements are the issue. Fuel Systems also said it expects fourth quarter revenue to include continued soft European automotive trends.
Fuel Systems reaffirmed guidance of full year 2010 revenue between $425 million and $450 million, gross margin of 29% to 31%, and 2010 operating margin of 14% to 16%. Yet ThinkEquity's Severson said working backwards through the operating margin target range, and incorporating the results so far this year, the fourth quarter could be a break even quarter in the worst case scenario.
Westport announced a shelf registration along with its earnings on Wednesday, and with it come the fears of dilution to existing shareholders, but it didn't suffer a dilution sell off. Westport didn't indicate when it would sell common shares, or in what quantity, and there was no pricing information, so it could still have a date with a dilution trade. ThinkEquity's Severson said one reason why the Westport shelf registration wasn't read as a negative by the market is because Westport indicated that it needed to raise the cash for a good reason: so potential strategic partners concerned about its balance sheet would be comfortable signing deals with the company.
Nevertheless, hopes that President Obama's words will translate into action on the legislative front could continue to be the rally point for Westport and Clean Energy Fuels.
The reality of what President Obama said on Wednesday is pretty much what has been said by the government in its last two failed efforts to pass energy legislation before the mid-term elections. Natural gas vehicle subsidies have had bi-partisan support since 2009. In 2010, Sen. Majority Leader Harry Reid picked up the issue and tried to insert it into a scaled back energy bill focused on the oil spill, but even that failed. The words spoken by President Obama about natural gas truck support have really been a legislative work in progress for two years now, and it's still far from a sure thing.
Also looming at the end of the year is the expiration of the existing subsidies for the purchase of natural-gas vehicles. The Natural Gas Act would finally make the subsidies high enough that conventional trucks would not be cheaper than natural gas alternatives, but short of that legislation passing in a hurry, there's a risk the existing natural gas subsidies don't get renewed, and then the market is left with no case to make to truck fleet purchasers.
"Westport's whole history is about the subsidies, and if those go to zero it's a few quarters of pain," said one clean energy analyst.
In the least, an extension of the existing natural gas vehicle subsidies could be an effort handled by a lame duck Congress, but the legislation that Westport really needs is still a wildcard. "Every quarter when Westport reports there's nothing exciting in the numbers, but then there's some legislation talk that hits the stock," the analyst said.
For the moment, trading on legislative policy is the way to go in natural gas vehicles stocks, and that's nothing new. "Eventually the legislation goes through, but when it goes through has been the question for two years already, and will continue to be the question," the clean energy analyst said.
-- Written by Eric Rosenbaum from New York.
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