The nation's quest for energy independence and surging oil prices drive the need for cleaner and cheaper energy sources, pushing alternative fuels to the hot spot and Fuel Systems Solutions, Inc. (FSYS) as an alternative-fuel-components maker, is clearly a key beneficiary.
Fuel Systems Solutions engages in the design, manufacture, and supply of alternative fuel components and systems for use in the transportation, industrial, and power generation industries. The company's products enable internal combustion engines to run on cleaner-burning gaseous fuels like natural gas, propane and biogas.
The wide availability of gaseous fuels, which have lower emissions and costs compared to gasoline and diesel fuels, is leading the growth in the global alternative fuel industry market.
The price of natural gas or propane is typically substantially less than the price of gasoline and customers can capitalize on this fuel price differential, by converting a liquid-fueled internal combustion engine to run on propane or natural gas. The cost of the conversion, the company claims, can be recouped within six to eighteen months, depending on the fuel cost disparity at the time.
Propane, also known as liquefied petroleum gas or LPG, fuels over 10 million vehicles worldwide, with 270,000 of them on the roadways of America and there are about 7.5 million natural gas vehicles in use round the globe. Fuel Systems believes that it has maximum growth prospects in developing countries within Asia, North Africa and areas of the Middle East, which currently have the lowest ratio of vehicles per one thousand people. According to the company, these regions are slated to grow rapidly over the next ten years as economic growth stimulates personal vehicle ownership.
The European Union has set a target to replace 20% of liquid-fueled vehicles with gaseous-fueled vehicles by 2020. The 4 largest natural gas-consuming members of the EU - the United Kingdom, Germany, France and Italy, all have introduced incentives for gaseous-fueled vehicles. All this bodes well for Fuel Systems, which has a strong International presence.
The company derived 77% of its revenues from sales outside the U.S. in 2007, 78% in 2006 and 66% in 2005. Robust International standing cushions the company from the beleaguered U.S. economy.
The positive outlook for natural gas fuels is also conducive for the stock. Worldwide consumption of natural gas, which remains a key fuel in the electric power and industrial sectors, is forecast to rise from 104 trillion cubic feet in 2005 to 158 trillion cubic feet in 2030, according to the International Energy Outlook 2008 from the Energy Information Administration or EIA.
The industrial sector, which is the world's largest consumer of natural gas, is expected to account for 43% of projected natural gas use in 2030, while electricity generation is forecast to represent 35% of consumption, the EIA says. Both industrial and power generation sectors are key markets for the company.
The recent passage of an energy bill that continues tax credits for alternative energy investments came as an unexpected bonanza, considering the same bill was rejected only the week before it was passed. The tax credits would have otherwise expired this year, in the absence of a renewal. Fuel Systems Solutions, as a maker of alternative fuel components, is positioned to gain from the alternative-energy push.
The company turned in a smashing second quarter, with profits rising 11-fold from last year. Revenues for the quarter rose 49.9% to $98.3 million from $65.6 million last year.
Net income totaled $4.6 million, or $0.29 per share, compared to year-ago $395,000, or $0.03 per share. Excluding a non-cash goodwill impairment charge of $3.9 million, or $0.25 per share related to the company's Australian operations, earnings would have been $8.5 million or 54 cents/share. Analysts were looking for earnings of 27 cents per share. In the last three quarters, the company has outperformed Street estimates by 100%, 122.2% and 82.4% in the same order.
Analysts are bullish about the company's earnings prospects in the third quarter and full year. In the last 90 days, the company's third-quarter earnings estimates have been revised up by 9 cents to 25 cents/share from 16 cents/share, and full-year expectations by 47 cents to $1.48/share from $1.01/share.
On an upbeat note, the company boosted its full-year revenue expectations for the second time. April 22, the company said it expects revenues of $290 million for the full year. Later, on May 12, the company boosted its revenue expectations to $320 million. Currently, the company sees revenues of $350 million for the full year and attributed the upward revision to its assessment of near-term market trends. Analysts are looking for revenues of $370.37 million.
Expectations for full-year gross profit and operating margins were also revised up. The company now sees gross margins of 27%, up from prior projections of 24%, and boosted operating margin outlook to 12% from 9%.
Growing cash and dwindling debt are the reflections of strong balance sheet. The company's cash and cash equivalents have grown 66% to $43.64 million in Q2-08 from $26.28 million in Q3-07. In the same period, long-term debt has reduced to $7.99 million from $11.1 million, and short-term debt to $5.78 million from $7.6 million.
Despite operating in a capital intensive industry, the company reported a relatively low debt-to-equity ratio of 0.087 for the most recent quarter, compared to the industry's 0.33, sector's 0.66, and the S&P 500's 1.97. The debt-to-equity ratio is the measure of a company's financial leverage. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt.
With a current ratio of 1.8 in the most recent second quarter, the company can fund its current liabilities with current assets 1.8 times. The current ratio is an indication of the company's ability to meet short-term debt obligations and is ideally placed between 1 and 2.
A current ratio of less than 1 indicates the company cannot meet its short-term liabilities, while a ratio of over 2 means the company may be tying up cash that can be applied towards investments, or returned to shareholders in the form of buybacks or dividends. The company has maintained a current ratio of 1.8 in the last four quarters, signaling that current liabilities have not grown faster than current assets in the last one-year period.
These ratios embody the financial strength of a company.
Corporate Insiders seem upbeat on the stock, and own 27.2% of the company's outstanding float, while, institutional owners own only 64.5%.
Fuel Systems faces customer concentration risks. Sales to the company's top ten customers accounted for 39.7% of total sales in 2007, 36.5% in 2006 and 40.2% in 2005. If any of these customers were to cut back orders substantially, it would impact the company's revenues and profitability.
Rising oil prices favorably impact the demand for the company's products. Although, oil prices are in a down trend now, the stock seems well positioned for the long-term, as economy, and environmental concerns are expected to drive the conversion of an increasing number of vehicles to run on clean-burning gaseous fuels.
FSYS shares broke through a long-term resistance level in mid May, after the company posted a six-fold increase in first-quarter earnings. In early August, the stock got a booster shot from the company's second-quarter profits that rose eleven-fold, and went on to touch a 52-week high of $61.24. However, since then the stock has pulled back sharply along with the broader markets. As of Thursday's close the stock has lost 52% from its August high, and is currently at a support level and its 200-day MA.
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