We use a vast quantity of diesel, and if we could replace it with something else, it would be a serious game-changer. If that fuel were cleaner and cheaper, then the diesel dominos would begin to fall, and quick.
In fact, natural gas costs half as much as diesel. And it is abundant, clean and can be domestically sourced. And I've found a stock that is the strongest pure play on this trend -- Westport Innovations (WPRT), which makes natural gas engines.
Natural gas has the ability to displace billions of gallons of diesel, not only on the road but in marine applications and for heavy equipment. This is an area that has several key tailwinds behind it -- enough to where I think it can legitimately be called the inevitable future.
Westport Innovations' natural gas engines that are cost-competitive with diesel engines and have 80% of the parts in common. It manufactures engines in three divisions:
1. Light duty, which serves the automotive and small industrial (such as forklifts) sector.
2. The heavy-duty division, which uses an original equipment manufacturer (OEM) engine, but adds special drop-in equipment to enable these behemoths to use natural gas.
3. Joint venture Cummins Westport Inc., owned 50/50 with the world's leading diesel maker, which produces natural gas-powered engines for larger trucks and tractor-trailers.
A fourth business unit, Weichai Westport, is engaged in bringing these engines to China, which has a rapidly expanding commercial vehicle and heavy-equipment fleet as well as a large reserve of natural gas.
Westport has a market cap of just under $2 billion, which is right in the sweet spot for the types of companies I like to recommend.
The company had 2011 revenue of $264.7 million, an 83.3% gain from the year before, and an impressive compound annual growth rate of 39% since 2007. It's also -- surprisingly for an alternative energy company -- solidly profitable.
Net earnings in 2001 came in at 37%, and Westport hasn't seen its bottom line fall below a 26% net margin since 2008. How's that measure up? Only 34 companies on the S&P 500 can beat that level of profitability.
A number of factors have converged to form what looks a lot like the perfect storm for natural gas to become a substantial fuel source.
Supply and pricing dynamics, industry support, continuing infrastructure development, strong political support and international opportunity -- it's all there.
But let me be clear: None of this is theoretical. It's here. It's happening. Natural gas has been the star of the show, literally, at several industry events so far this year.
Major manufacturers are embracing what Westport is doing. Its auto contact list is a Who's Who: GM, Hyundai, Peugeot, and Citroen. On the large truck side, highway travelers will recognize names like Kenworth, Peterbilt, Freightliner, Navistar and Mack Truck.
Right now, the stock is trading near the lower end of its 52-week range, which is admittedly a wide one. The stock has traded as high as about $50 and as low as $20 in the past year, so be prepared for a bit of volatility.
But I've just scratched the surface. T. Boone Pickens noted that the United States has three times more natural gas than Saudi Arabia has oil, "and it's right here in the United States."
Natural gas also clearly has White House and Congressional support, and it is gaining serious traction abroad, especially in China. The prime candidate to invest in the space is clearly the pure play, Westport.
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