Cummins Inc. (CMI), Westport Innovations Inc. (USA) (WPRT): How to Play Natural Gas Vehicles

Waste recycler

Waste Management, Inc. (NYSE:WM) has been the frontrunner in adopting alternative fuel trucks, and currently operates with the largest NGV fleet in the U.S. The waste recycler had around 1,000 NGV trucks in 2011, which has quickly swelled up to 2,000 NGV trucks in 2013. The company started switching to alternative fuels back in 2009, but it was only recently that it accelerated its shift towards cleaner fuels.

Although the company operates with over 21,000 collection vehicles and NGV vehicles account for less than 10% of its fleet, its management stated last year that NGVs will account for 80% of its fleet by 2017. This aggressive target calls for an addition of nearly 15,000 NGVs, which will play a vital role in improving Waste Management, Inc. (NYSE:WM)’s profitability.

According to its management, these NGV trucks cost around $30,000 and return almost 90% of their value as annual fuel savings. This means that once NGVs account to 80% of its entire fleet, Waste Management will be able to save roughly $400 million from 2017 onward. This is a massive positive for the company, as these cost savings will increment Waste Management 2012 net income of $814 million by nearly 50%.

Conclusion

In my opinion, investors should stay distant from Westport Innovations Inc. (USA) (NASDAQ:WPRT) for now. It doesn’t have any significant positive triggers, and the rising competition in the NGV designing industry could make matters worse.

However, Waste Management appears to be a good investment option. It is a defensive play, with stable and consistent cash inflows. And if it succeeds in deploying natural gas fired trucks on its targeted scale, its return on equity, free cash flows and net income could simply skyrocket.

Meanwhile, Cummins Inc. (NYSE:CMI) is also poised to grow with the booming NGVs. Its diversified portfolio adds stability to revenues, while its technologically advanced offerings have successfully captured most of the NGV market.

So, in short, buy Cummins and Waste Management and avoid Westport Innovations.

Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Cummins, Waste Management, and Westport Innovations. The Motley Fool owns shares of Cummins, Waste Management, and Westport Innovations. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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