Based in Canada, Westport Fuel Systems Inc. (WPRT) manufactures advanced fuel delivery components and systems for the automotive industry. Shares of WPRT have gained 145.5% over the past year, reflecting robust investor interest in the clean energy space.

The stock has gained roughly 25% since the company released an impressive earnings report on August 6. Its revenues increased 135% year-over-year to $84.70 million for the second quarter.

Its net income came in at $17.20 million, up 475% or $14.20 million from the same period last year. However, 62.7%, or $8.90 million, of its total net income growth can be attributed to a tax recovery under Italy’s COVID-19 tax relief ruling.

So, here’s what we think could shape WPRT’s performance in the near term:

Marketed Public Offering and Shareholder Returns

WPRT administered public stock offering in the United States and Canada in June in which it issued 20.93 million shares for which it received $115.12 million in gross proceeds. The company plans to use the proceeds to fund its capital expenditures for research, development, and the expansion of its production capacity. It also plans to finance potential acquisitions to fuel its inorganic growth and meet general corporate expenses.

However, it might take a while for the company’s investments to generate profits. Meanwhile, the dilution of its share capital through the issuance of new shares is expected to diminish its EPS and ROE in the near term.

Weak Profit Margins

WPRT’s trailing-12-month revenues increased 22.8% year-over-year to $310.45 million. Its gross profit came in at $51.84 million, translating to a 16.7% margin. However, the company’s gross profit margin is 43% lower than the 29.29% industry average.

Its operating loss and loss before interest, taxes, depreciation, and amortization stood at $24.52 million and $10.25 million, respectively. WPTRT’s trailing-12-month ROTC is negative 6.29%, while its  EBITDA margin is negative 7.9%. Its 2.19% CapEx/Sales ratio  is 8.7% lower than the 2.4% industry average.

The company's trailing-12-month net income stands at $19 million, owing to currency gains and earnings from unusual items. However, its  bottom-line profits might be misleading due to exchange rate fluctuations and speculative gains.

Poor Capital Structure and Liquidity

WPRT’s total debt amounts to $100.68 million. But  with a $171.69 million total cash balance, its net debt stands at $ 71.01 million. Moreover, the company’s trailing-12-month net operating cash flow and levered free cash flow are negative $27.60 million and $27.93 million, respectively.

Thus, without adequate cash flows, the company’s creditworthiness is concerning. Its debt/free cash flow ratio is negative  1.80. Also, its trailing-12-month levered free cash flow margin is negative 9%.

Stretched Valuation

In terms of its non-GAAP forward P/E, WPRT is currently trading at 40.50x, which is 95.4% higher than the 20.73x industry average. In addition, the stock’s forward EV/EBITDA and Price/Sales multiples of 26.31 and 2.30, respectively, compare favorably with the industry  12.27 and 1.53 industry averages. Furthermore, WPRT’s 3.57 forward Price/Book ratio  is 15% higher than the 3.11 industry average.

POWR Ratings Reflect Bleak Prospects

WPRT has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

WPRT has a D grade for Stability and Value. Its relatively high 2.97 beta  and premium valuation justify the Stability and Value grades.

Of the 67 stocks in the Auto Parts industry, WPRT is ranked #56.

In addition to the grades I’ve highlighted, one can check out WPRT ratings for Momentum, Sentiment, Growth, and Quality here.

Click here to view the top-rated stocks in the Auto Parts industry.

Bottom Line

WPRT is an up-and-coming player in the automotive supplier industry, with a promising growth outlook because clean energy investments are currently near all-time highs. However, the company’s top-line growth is not translating to commensurate profits, indicating operational inefficiency. Thus, we think investors should wait until the company’s profit margins improve before investing in it.

WPRT shares were trading at $4.89 per share on Wednesday afternoon, up $0.03 (+0.62%). Year-to-date, WPRT has declined -8.26%, versus a 19.35% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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