A Write-up on PSIX

Hi Saul,

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.

Thanks,

Anirban

Why I 'm Buying Power Solutions International?

Business Overview

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.

Strong Tailwinds

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.

References

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:

Q3 2013: http://seekingalpha.com/article/1830422-power-solutions-inte…

Q2 2013: http://seekingalpha.com/article/1625962-power-solutions-inte…

Q1 2013: http://seekingalpha.com/article/1422271-power-solutions-inte…

JP Morgan Small/Mid Cap Conference: http://seekingalpha.com/article/1893591-power-solutions-inte…

11 Likes

Excellent write-up. I would just mention that they had been capacity constrained and built a new factory to bring them up to $500 million in sales. They pre announced that 2013 would be a transition year while they brought the new factory on line, but they expect to see a big increase in revenue in 2014.

Also you might be more specific on the savings for the well-head oil companies (They don’t have to buy diesel and they don’t have to pay for trucking it in. Makes it a no brainer to buy one of these engines.)

Saul

3 Likes

Nice write up. You mentioned that you think it is a multibagger opportunity. To support your assertion I would add information on their current sales and market share for each of their important market segments. Then I would provide info on the current market size of each segment and the market growth rate of each of the segments. This added information will give us an idea of the future growth opportunity in each market that PSIX is targeting. You already provided some info on the annual sales of engine. It was unclear whether those numbers were PSIX sales or total market sales. You need to add the missing numbers and the projected annual growth rate for each.

1 Like

Wow Chris, you are giving him an enormous amount of work to do!

1 Like

Thanks Saul, Chris.

Chris - I will try to dig up the information you asked for. I didn’t see those numbers flashed in PSI’s presentations but I will check again. Its mostly the large market opportunity in well-head gas (largely untapped + driven by regulation and economics), the forklift market (where there are about 260,000/yr in China and 180,000/yr in the US, again driven by economics and regulations), and other industrial applications (again driven by economics and regulations related to diesel engines). The following from the JP Morgan conference may be useful:
And since well over 90% of the industrial market’s backbone of America still runs on diesel, we see a lot of more markets potentially expanding 10 times or greater in a very short period of time and we’re kind of in the epicenter of lot of that. Many of you have seen these headlines but there is no shortage of large OEMs and fleets out there that are really looking to or already moving towards alternative fuels, away from diesel.

Anirban

2 Likes

I have posted an updated version on the SA “Options” and the SA “Stocks that interest you” boards:

http://discussion.fool.com/1081/ot-power-solutions-international…

http://discussion.fool.com/1081/power-solutions-international-ps…

Thanks again for your feedback.

Anirban

Thanks Anirban,

I have access to RB boards, not SA. Can you please post it on this board? Thanks.

Chris

I am Buying Shares of Power Solutions International (NASDAQ:PSIX)

Business Overview
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.

Strong Performance and Strong Tailwinds
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.

PSI launched clean tech, certified engines in the 8-22 litre category for the industrial market in 2008. Sales have grown from $1.1M in 2008 to $31M in 2012. That’s 130% CAGR. More recently, PSI has been expanding its heavy-duty engine portfolio to 61L engines with 1MW output for the power generation and the oil and gas industries.

Typically, oil and gas companies would truck in diesel for their power generation needs and flare off well-head gas. PSI’s heavy duty engines that can run on well-head gas, saving fuel 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. PSI’s broad portfolio of power systems for this market, coupled with the economics and regulators factors, appears to be a perfect recipe for market thumping sales & profits!

PSI has grown its sales in the forklift engines market from about $15.9M in 2010 to $49.4M in 2012, or at 76% CAGR, without venturing into China, which is potentially a much larger market than the US. 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. However, 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 is starting to build out its facilities and network in China, through a joint venture. 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.

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 such as busses, construction vehicles, RVs, delivery fleet) 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.

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
-------------------------------------------

Revenue has increased 2.3x and earnings have increased 4.7x with respect to 2010 levels. Net sales for Q3 2013 were $64,628,000 versus $51,703,000 in Q3 2012, representing a 25% YoY increase and a 9% sequential increase with respect to Q2 2013.

As of their Q3 2013 report, PSI had $8 million cash and borrowings of $12M from their line of credit; they have $49M available from their credit facility.

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.

Bottomline
In the last 3-4 years, PSI has grown its business substantially. It has positioned itself to take advantage of the significant tailwinds in the industrial heavy-duty engines market and is poised for significant growth and is poised for growth, both in the US and internationally. The international opportunity is just starting to play out with their joint venture in China. Of course, their are risk, mostly of the execution and regulatory types, but the odds seem to be staked in favour of PSI. I ‘m encouraged by PSI’s strong insider ownership, which should keep management’s and shareholders’ interests aligned. Considering the above, and noting that PSI has a market cap of only 700M (its still a small cap company that is not widely followed by analysts), I believe the odds are in favour of PSI turning into a multi-bagger over the next 5 years or so.

I ‘m starting a position in this company.

References
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:

Q3 2013: http://seekingalpha.com/article/1830422-power-solutions-inte…

Q2 2013: http://seekingalpha.com/article/1625962-power-solutions-inte…

Q1 2013: http://seekingalpha.com/article/1422271-power-solutions-inte…

JP Morgan Small/Mid Cap Conference: http://seekingalpha.com/article/1893591-power-solutions-inte…

3 Likes

Typically, oil and gas companies would truck in diesel for their power generation needs and flare off well-head gas. PSI’s heavy duty engines that can run on well-head gas, saving fuel 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. PSI’s broad portfolio of power systems for this market, coupled with the economics and regulators factors, appears to be a perfect recipe for market thumping sales & profits!

Thanks for the updated write up. It’s certainly improved with the market info on the number of engines sold. The above paragraph talks about using NG generators at the oil well sites. Similarly, I would ask how big is this opportunity. How many wells are there? How many wells are forecasted to be added? How many wells will be in remote locations? How much revenue and profit does PSIX get when selling a generator for a well? While the idea of selling generators sounds good, quantification of this opportunity is not present in the write up. I’m not trying to nitpick your write up which is already good. I’m trying to add some constructive criticism.

Thanks again for sharing your work!

Chris

1 Like

Hey Chris,

Thanks for the constructive criticism. I appreciate it. I will try to dig up what I can find and share on the board.

Anirban

Hi Chris,

The following is from their Q3 2013 transcript:
http://seekingalpha.com/article/1830422-power-solutions-inte…

So I want to ask first about the, the quarter came in on the top line a little bit stronger than expected, and I just want to clarify that that way from the oil and gas POWER-GEN markets, is that right?

Daniel Gorey - CFO
That was a major contributor Walt, yeah I mean we’re seeing it, I think we’ve all talked about we’re seeing some great success and the good news there is we’ve just begun, I mean it’s hard to tell what penetration is but, I think we probably think it’s in the single digits in terms of penetration and those oil fields, there’s a long way to go and as Gary and Eric have talked about now we’re going to get a product line extension up to 61 liters, so yeah that was a big driver of the four.

Walt Liptak - Global Hunter Securities
Okay. And are you giving a look at what the 2014 budgets might be like for, I guess up to the 22 liter POWER-GEN sets for oil field, you’d seen a continuation of the growth?

Daniel Gorey - CFO
Yeah, we’re seeing a continuation of the growth, and an expansion of that.

Walt Liptak - Global Hunter Securities
Okay. Can you give us an idea of the magnitude, and you mentioned it was doubling this quarter, you got the ramp production you’re looking for; what kind of production levels are you looking for?

Gary Winemaster - Chairman, President, and CEO
Yeah, well it’s a little premature to be throwing around numbers, but we’re excited we’re very excited about the opportunity. We have said from time to time that this business that was $31 million in revenue last year is going to exceed probably $50 million for this year and we think it will probably be in the $75 million range. Now again we haven’t rolled up budgets here, we’ve got a long way to go to kind of firm those numbers up but it gives you a magnitude, kind of a census of the opportunity in ’14.

Hope this helps!

Anirban

1 Like

Hi Chris,

The following article on the Fool’s free site discusses the well head has opportunity. Note that GE is a player in this domain but still PSIX has been able to get big customers and grow its business. Have a look here:
http://www.fool.com/investing/general/2014/01/27/can-power-s…

Anirban

Thanks Anirban,

So the engines sold into the oil and gas well market are significant at $31M in 2013 with growth to $75M in 2014! That is great growth and a nice piece of their the overall business (what was the forecast for 2014 revenue? over $300M? can’t recall.) Also, they said that they think that the penetration of the wells is about 10% so there’s lots of opportunity still out there. That info added to your write up will make it stronger. Also, you mentioned China may have lots of NatGas (untapped). Have they even started fracking there? I’ve heard that NatGas prices in Asia are 3x higher than in the US. That’s why there’s lots of talk about building the infrastructure needed to liquify and export NG from the US to Asia and Europe. So I’m not sure that switching from diesel to NatGas is as compelling outside the US where supply is ample and prices are low.

Chris

1 Like

Another article on PSIX was published today:
http://www.fool.com/investing/general/2014/02/04/fool-contra…

Anirban.