As you know, I have been studying PSIX, going through the conference calls and their presentation at the small and mid-cap conference. I have prepared a write-up, basically an amalgam of my notes. Can you have a look and comment on it? I would like to post this to my friends over at the Options board … but after your comments.
Why I 'm Buying Power Solutions International?
Power Solutions International (PSI; NASDAQ: PSIX) is a global producer and distributor of "clean tech” power systems, running on alternative fuels such as natural gas, propane, and biofuels, for original equipment manufacturers in a wide range of industries. PSI’s power systems are used in electricity generators, oil and gas equipment, forklifts, aerial work platforms, industrial sweepers, agricultural equipment, aircraft ground support equipment, construction equipment, irrigation equipment, and numerous other industrial equipment. PSI also provides clean tech engines on-road/highway equipment such as school busses, transit busses, long haul trucks, garbage trucks, and military vehicles, while steering clear of the long-hual truck market.
PSI’s power system configurations range from a basic engine block integrated with appropriate fuel system components to fully packaged power systems that consist of a combination of various internally designed engine sub-components such as cooling, electronic, air intake, power takeoff, exhaust, and hydraulic systems. The basic engine block is typically sourced from third party suppliers (e.g., Mitsubishi, GM, Doosan) and integrated with appropriate engine sub-components; additionally, PSI has started work on its own engine.
As we will see below, PSI has grown its business substantially, has significant insider ownership, and is poised for growth with significant tailwinds that could propel this holding. This looks like a very good multi-bagger opportunity, when we consider the above and note that PSI has a market cap of 700M, is producing $200M+ revenue, and is poised for significant growth in the coming years.
Financials and Insider Ownership
PSI since its IPO has executed very well. PSI has seen strong revenue and earnings growth:
-------------------------------------------- Year Revenue Non-GAAP EPS -------------------------------------------- 2010 100M 0.19 2011 155M 0.44 2012 202M 0.74 2013(e) 235M 0.89 --------------------------------------------
P/E on FY13 estimates is about 74. FY14 eps is estimated to be around 1.35, so PSIX is selling on a forward P/E of 49.
There’s strong insider ownership. CEO Gary Winemaster owns about 4.5M out of the 10.5M shares. Kenneth Winemaster, the CEO’s brother, holds about 2.8M shares. This should hopefully align management’s interests with those of the shareholders.
This business is seeing some strong tail winds. Pricing of natural gas versus diesel, coupled with environmental regulations are likely to increase demand for clean tech engines. Alternative fuels are at an attractive price point, currently selling at about half of diesel at an equivalent-gallon basis. Emissions regulations in the US, EU, and Canada (Tier 4 regulations) require many non-highway diesel engines to reduce Nitrogen Oxide by 80% compared to previous regulations. These regulations have the effect of increasing the cost of diesel engines (i.e., they need new emission control systems etc) and according to PSI makes natural gas engines 20% cheaper than comparable diesel engines. PSI believes that the combination of cheaper, cleaner engines, along with cheaper fuel will drive adoption of clean tech engines.
Heavy-duty engines for Oil and Gas industry are also driving sales. Typically, these companies would truck in diesel and flare off well-head gas. PSI has developed heavy duty engines that can run on well-head gas, saving costs and eliminating flaring. PSI has serviced this industry using their 22 litres or smaller engines, but there’s pent-up demand for larger power systems from companies such as Chesapeake and Sandridge. PSI has signed an agreement with Perkins (a division of Caterpillar) to expand their offering of heavy-duty engines. In addition to economic reasons, there’s tailwind in the form of environmental regulation. The flare gas regulation requires flaring off the gas to stop starting Jan 2015; the gas is required to be used or stored for later use. The broad portfolio of power systems for this market, coupled with the economics and regulators factors, can be a market beating recipe.
While the industrial and oil & gas markets are driving revenue growth at PSI, they are continuing to look for opportunities in the on-road market. Here, PSI is focussed on the class 3 to class 7 vehicles (light to medium duty vehicles) and not on the class 8 long haul trucks markets. What’s interesting here is that the class 3-7 is about 320,000 units/year versus in the Class 8 which is about 70,000 units/year. So its a higher volume market. Further, the vehicles in the class 3- 7 are mostly return-to-base or return-to-depot category, so these are not affected by infrastructure problems that have haunted companies like Westport.
Additionally, PSI is starting to build out its facilities and network in China, focusing on the forklift and engines market through a joint venture. China is estimated to have 50% more shale gas than the US, and it would be natural for the Chinese to move vehicles, industrial as well as highway vehicles, from diesel/gasoline to natural gas. PSI has made headway into the forklift market. The Chinese forklift market is about 260,000 engines/year versus about 180,000 engines/year in the US, and most of the Chinese forklift engines are diesel. According to PSI, the five largest OEMs in China for manufacturing forklifts have committed to taking their product and this demand is expected to result in strong sales in 2014 and beyond.
Much of what is written above is drawn from PSI’s conference calls and presentation at the JP Morgan Small and Mid- Cap Conference. For details, see the following links:
JP Morgan Small/Mid Cap Conference: http://seekingalpha.com/article/1893591-power-solutions-inte…