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.
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.