There’s been a lot of discussion (Mr Sideshow and Driller Jim) of the Westport story which got me a lot of attention back in the day, but a lot of you probably have no idea what it was all about, so I thought I’d clue you in: Westport was, is, a company that was trying to build big natural gas truck engines and establish a refill network across the country. They were a favorite of the Motley Fool and used as their advertising poster child. (This is the stock that will make you rich! Click here to find out more!). It was a great Story Stock! I was taken in at first too, and took a position for a while, but then I read the earnings reports instead of the MF puff posts, and exited. When I described why I had exited I got some appreciations, but some people on the board were furious that I had criticized their favorite stock, and I got a lot of abuse. I finally decided to make “one last try”. It was post #5686 on July 13, 2013. At the time Westport was selling at about $31.00. I believe the MF finally sold Westport in Jan 2017 at $1.16…That’s about 4% of the price I urged people to sell at. Down 96%. Here was my post in its entirety. I’m leaving it in regular print instead of italics so it will be easier to read. Occasional […]s will indicate comments I’m adding now. Here it is, the post from 2013:
I can’t help it. I’ll make one last try, in hopes it may help some Fools.
IT’S CLOSE TO IMPOSSIBLE FOR WPRT TO MAKE A PROFIT ANYTIME IN THE NEXT THREE TO FOUR YEARS. HERE’S WHY:
From their last quarterly report: Revenues $30 million, Loss $32 million. That means they burned through the $30 million of revenue and $32 million more. [In other words they took in $30 million and spent $62 million.]
You might think, okay, if they had increased their revenue by 100% and a little more, up to $62 million they’d have broken even.
But no way! Their gross margins were 27%. That means out of $100 in revenue it cost them $73 to build the engines that they sold for $100. They only kept $27 to cover R&D and SG&A (Sales, General and Administrative - the cost of running the business: offices, electricity, computers, commissions, salary of salesmen, salary of the CEO, etc etc).
That’s why they ended up spending $206 for every $100 in revenue
Now, let’s say, for example, that they had increased their first quarter revenue by 50% (or $15 million) to $45 million. And that they kept 33% of that extra $15 million (we’ll allow them a little better than 27% [gross margin] due to economies of scale). So they would have kept $5 million of that $15 million and their losses would have been "only” $27 million instead of $32 million.
If they had increased revenues by 100% ($30 million) to $60 million, they would have kept 1/3rd of the increase, or $10 million, and their losses would still have been $22 million.
You can see why a profit is impossible for the foreseeable future. It would have taken a 300% increase in revenue, $90 million additional (quadrupling revenue), for them to have come close to breakeven, assuming they kept $30 million of that as gross margin.
Their estimates, by the way, are for a 30% increase [not a 300% increase!] for 2013.
But that’s not counting increased SG&A expenses, salesmen, secretaries, salaries, offices, etc, to needed to service quadrupling sales. So they still wouldn’t be at breakeven, much less making a profit. It would probably take quintupling revenue to break-even.
I’m not saying that this estimate is perfect, and you might quibble that it would only take a 380% increase (or whatever) instead of 400%, or that some quarters might be better than others, but so what. That doesn’t change the basic facts.
It’s so awful that I understand your inclination to imagine that it can’t be true. But it is. THEY AREN’T LOSING 6% OF REVENUE LIKE AN ORDINARY COMPANY THAT’S IN TROUBLE. THEY LOST 106% OF REVENUE! (Right from the first page of their last quarterly report). That’s an impossible obstacle to overcome, or close to it.
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That was it. The posters who were in favor of Westport never responded to my numbers. They just said I didn’t understand what a great opportunity this was. (actually it was the most horrendous example of a hardware company selling expensive machines to a limited number of companies that I can remember). When Westport hit $25, people were “doubling down” on the bargain price, and at $20 they were doubling down again. The closing price last week was $2.19.
It was after the Westport episode that people started urging me to start my own board, which I did in the beginning of 2014. We are now more than four years old.
Saul