Westport Innovations Inc. (NASDAQ:WPRT) is struggling to keep its head above water at the moment, as the company faces investor pressure and a nosediving Westport stock price.
This is a company you want to stay away from, and with good reason.
Facing a critical moment, the alternative energy company has decided to implement a daring yet altogether puzzling strategy to lift itself out of the current downward trajectory.
Westport made the decision to merge with Fuel Systems Solutions, Inc. (NASDAQ:FSYS) in early September, raising serious issues for investors and drawing the criticism of analysts. (Source: Westport, last accessed September 22, 2015.)
Above all, it’s the shareholders who will be affected by the changes in the WPRT stock price as a result of this move. Because Westport is still under extreme financial pressure as a result of revenue losses and a declining balance, the company had to resort to issuing shares in order to fund the merger. (Source: MarketWatch, last accessed September 22, 2015.) What this means in practice is that shareholder equity was severely diluted.
Translation: Westport transferred the financial liability of this deal onto its shareholders.
The value of the deal is in the range of $136 million, where FSYS shareholders will receive 2.129 shares of Westport stocks for every share of Fuel Systems. (Source: The Wall Street Journal, last accessed September 22, 2015.)
Westport is essentially grabbing at something—anything—in order to survive at this point. But will it be enough to keep the company from financial ruin?
It’s not likely. And here’s why.
A successful merger between two complementary entities is one thing, but trying to fuse together two weakening companies isn’t likely to bring about the results Westport is hoping for.
Fuel Systems announced a massive decline in sales in its second-quarter 2015 financial report, to the tune of 23%, and a 16% overall drop in the last year. (Source: Fuel Systems Solutions, last accessed September 22, 2015.) Westport fared a little worse, with an alarming 25% drop in revenue and 38% nosedive in sales. (Source: Westport, last accessed September 22, 2015.)
Lets not mince words here; both WPRT and FSYS are stocks that are crashing and burning.
Now, most companies aren’t strangers to a decline in sales numbers. This is an ordinary part of the business cycle, really. But neither Westport nor Fuel Systems is turning any sort of profit at the moment, and forecasts are not looking encouraging in this regard.
Fuel Systems reported an $11.0 million financial loss in the first two quarters of 2015. (Source: Fuel Systems, last accessed September 22, 2015.) But Westport is in a solid death spiral, having accumulated a staggering $782.2 million deficit in the last several years. (Source: Westport, last accessed September 22, 2015.)
Some of my critics might chime in at this moment and claim that all companies have bad years.
This is true. But Westport hasn’t turned a profit in 20 years. Attaching itself to a smaller version of itself isn’t going to change anything, especially considering there is no coherent plan from here onwards.
Get the picture?
If you’re holding either WPRT or FSYS stocks, you might want to re-examine your investment portfolio and make some cuts.
Barring some sort of unforeseen development which will lift Westport out of its financial woes, even worse problems are looming on the horizon.
Take for instance the balance sheet of the new merged company made up of Westport and Fuel Systems. In terms of liquid cash, it will have around $117.0 million—which looks promising. (Source: Yahoo Finance, last accessed September 22, 2015.) Unfortunately it will have a negative cash flow statement of approximately $50.0 million.
I don’t think I have to point out how bad of a financial position that is to be in.
But let’s turn to the new merged company’s plan, which is, as I mentioned, rather vague at the moment and less than promising. This merger of Westport and Fuel Systems is intended as a long-term strategic move, with WPRT concentrating on heavier-grade natural gas motors and FSYS putting more of an emphasis on lighter options. (Source: Westport, last accessed September 22, 2015.)
This isn’t exactly the sort of radical strategy to pull two failing businesses out of fire, and to be fair, they don’t have the money or revenue flow to sustain it. This merger may simply burn out before it even gets off the ground.
And how are the unfortunate investors reacting to all this?
It should be noted that relations between Westport’s executive level and its shareholders have been sour for a long time. And this latest betrayal of the latter by the former isn’t going to improve things. Only 15% of Westport and 34% of Fuel Systems shareholders approve of the terms of this merger, to put that into perspective. (Source: Market Watch, last accessed September 22, 2015.)
Considering that crude oil prices are still sitting comfortably at $45.00 per barrel, with no uplift in sight, questions arise of where the incentive or interest for Westport’s natural gas-based motors will come from. Add to the mix the merged WPRT and FSYS company’s financial troubles and you might wonder if it will even survive long enough for oil prices to rise.
If I was looking to make a wise investment in the energy sector while crude oil prices are keeping stock prices down, I would steer clear of both Westport Innovations and Fuel Systems Solutions when it comes to my portfolio.