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Driving on natural gas..Fuel Systems Solutions (FSYS)

June 2nd, 2009 · 5 Comments

Most of the attention goes to electric or hybrid cars, but there are alternatives…

An interesting play riding the wave of several trends, profiting from very cheap natural gas prices, a falling dollar, and a move towards cleaner fuels…

We hope to do a more formal write-up later in the week, but here is a summary of a company we like. It produces, distributes, and installs equipment for converting care so driving on natural gas. They have also some industrial products that make up 18% of their revenue.

What we like:

  • Sound metrics and performance. Growth last year was 40%, while they’re not going to repeat that this year (obviously), but then again, their share price has come down quite a bit as well, to say the least
  • Nevertheless, with analyst estimating $1.39 per share this year and $1.72 next year, the share price (around $20) is certainly not expensive
  • Natural gas is much cheaper and cleaner to burn than oil, so it reduces pollution, oil dependence, global warming
  • The company is well established internationally, especially in Europe where, contrary to the US there is a lot of infrastructure in many countries (which means you can fill up with natural gas or propane at the filling station)
  • There are generous incentives and other measures in place in many countries, to increase the uptake. The new programs in the US (like the recovery act, the Clean Cities program and state level programs) could very well provide much more interest there. After all, the US sits on a large amount of natural gas
  • Their systems are duel-fuel systems, that is, the driver can seamlessly switch from gas to traditional gasoline with the turn of a switch. This is especially important there were, like the US, isn’t much infrastructure (few filling stations with natural gas or propane). In fact, uptake in these converters will increase the incentives for building out that infrastructure..
  • Their sales are growing in the original equipment manufacturing (OEM) sector, that is, sales directly to car, bus, and truck manufacturers. This year, that will represent a 50/50 break compared to the traditional 70/30 ‘after-market’ (that is, converting an existing car). This has provided some buffer, as the after-market has suffered from low gasoline prices and credit constraints (consumers need to pay upfront for the conversion of their own cars, which requires a significant amount of money, despite generous subsidies is many countries)
  • Despite the crisis and the crash in the car market, gaseous fuels remain one of the bright spots in the European OEM automotive sector
  • In 2008, they build three new plants (one in Poland, two in Italy), increasing the installation capacity from 17,000 to 100,000 vehicles per year. The latest of these factories (Pisa, completed in Nov 2008), will start contributing early 2009
  • They have initiated a strategy for the US market, first by targeting the fleet business (which is much less dependent on infrastructure) and second by bringing the technology to the US consumer, as penetration in the US is very low (less than half a percent, compared to 20% in some European countries, while the US has a lot of natural gas..)
  • If during 2009 the dollar is weaker than 1.3 to the euro, revenues and profits will be positively impacted (a stronger dollar reduces foreign currency revenue expressed in US dollars, as happened in the first quarter of 2009)
  • Their industrial market is down significantly (and will remain so in 2009), but they have an interesting product (a fuel injection technology) in the pipeline which will take advantage of regulatory chances in 2010
  • Capex spending could double this year, but a lot of one-time accounting items that marred the 2008 accounts will disappear in 2009
  • Q109 surprised hugely on the upside (44 cent net profit per share versus 21 cent consensus expectation)

It’s still not too expensive, despite the runup, but since we’re not terribly positive on the general markets, we don’t expect immediate miracles, but an intial position at $22.55 seems a good idea nevertheless.

Tags: FSYS

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