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Westport (WPRT) Rides on Eco-Friendly Product Mix Amid Headwinds

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Westport Fuel Systems’ (WPRT - Free Report) shares have rallied 231.3% quarter to date, outperforming the industry’s rally of 31.1%. The company, which was renamed after the merger of Westport Innovations with Fuel Systems Solutions, has been performing well on the back of a robust portfolio of environment-friendly products. However, this Zacks Rank #3 (Hold) firm is bogged down by certain macroeconomic headwinds that are keeping investors on the sidelines.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Let’s delve deeper into the tailwinds and headwinds faced by the company.

Canada-based Westport is a developer, manufacturer and supplier of advanced alternative fuel systems and components. The company’stechnology and products allow the use of gaseous fuels such as natural gas, propane, renewable natural gas or hydrogen in combustion engines. The use of natural gas instead of petroleum-based fuel reduces emissions and costs.

The adoption of stringent environmental regulations, mandating the reduction of carbon emissions globally, has augmented opportunities for Westport to raise revenues and market share. The company is banking on its market-ready products and customer base to capitalize on the opportunities to drive growth.

The heavy-duty truck sector has traditionally been arduous to decarbonize, owing to the difficulty of replacing diesel without compromising on vehicle performance. However, Westport High Pressure Direct Injection (“HPDI”) 2.0 features the only natural gas technology, while retaining the performance and efficiency of a diesel engine. This essentially helps in reducing greenhouse gas emissions and fuel costs by allowing heavy-duty trucks to operate on natural gas.

Recently, Westport announced that Weichai Westport Inc. (“WWI”),the company’s joint venture in China, secured the certification for its 12-liter engine integrated with the HPDI 2.0fuel system from the Ministry of Ecology and Environment of China. This certification enables WWI to promote and sell heavy-duty natural gas engines equipped with the HPDI technology to various truck original equipment manufacturers in China. This marks a milestone in Westport’s commitment to bring HPDI to the China commercial vehicle market and is considered material to the company’s success. Moreover, it expects stronger HPDI volume in the upcoming months, as it views the heavy-duty market much more guarded against the rising coronavirus cases as compared to the light-duty market and aftermarket.

Westport regularly undertakes acquisitions and divestments to develop technologies and edge on non-core businesses in a bid to streamline its portfolio and boost long-term prospects. In August, the company clinched a core electronics supply contract to a leading Tier One automotive supplier, which validates the company’s ability to offer diversified and competitive products and services to the global automotive industry.

In November, Westport inked a next-generation HPDI development contract with its current Europe-based original equipment manufacturer partner to apply Westport HPDI 2.0 to an updated base engine platform. The program will incorporate enhanced features for the resulting HPDI 2.0 fuel system as well as certification to meet Euro VI Step E emission regulations that will take effect in 2024, helping the company to develop a niche in the Europe heavy-duty truck market.

Moreover, Westport’s low leverage, as represented by a total debt-to-capital ratio of 0.44 against its industry's 0.47, increases its financial flexibility to tap growth opportunities.

While the company is riding on such positives, there are certain roadblocks.

Challenging macroeconomic conditions are weighing on the natural gas-powered-engine maker. With the rising number of coronavirus infections and a second wave of the pandemic hitting the economy, the company expects its sales and earnings to feel the heat. Worryingly, Westport registered consolidated revenues of $65.4 million in the third quarter of 2020, down 13% year over year. Amid the uncertainty induced by the pandemic, the company refrained from providing any guidance for 2020.

Westport’s profitability is highly dependent on natural gas fueling infrastructure growth and the availability of select government incentives and grants, which vary by geography. For instance, the German government extended road toll exemptions for heavy-duty natural gas trucks into 2023. However, the EU Commission has refused to approve the toll exemption for gas or electric hybrid trucks, and does not intend to support it through 2023.

Further, unfavorable foreign currency translations and tariff hurdles in China are likely to dent the company’s profits.

Meanwhile, some better-ranked stocks in the auto space are BRP Inc. (DOOO - Free Report) , LCI Industries (LCII - Free Report) and American Axle and Manufacturing Holdings (AXL - Free Report) , all of which sport a Zacks Rank of 1 at present.

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