Power Solutions International (PSIX) Q3 2014

Hi all,

Not sure how many here still own PSI. I own them and keep track of their progress. Below are my notes from the quarter. Overall, it was a great quarter and their future looks bright, but the shares are also priced as such.


------------- PSI Q3 2014 Nov 7, 2014 -------------
Press release: http://investors.psiengines.com/releasedetail.cfm?ReleaseID=…

Transcript: http://seekingalpha.com/article/2654665-power-solutions-inte…

Earnings Highlights.

  1. Revenues of approximately $94M, up 45%, over Q3 2013 revenue of $64.6M. Revenues in Q3 14 up sequentially 13% over Q2 14.

  2. Strong growth driven by continued growth in the sales of heavy-duty generation systems & aftermarket parts sales. Professional Power Products Inc which was acquired in April 2014 contributed about $6.3M to the top line.

  3. Net income of $8.4 M up 82% from $4.2M in Q3 2013; sequential increase of 28% from $5.9M

  4. Adjusted EPS went up to $0.39 versus $0.24 in Q3 2013.

  5. Gross margins improved to 19.8% versus 19.1% in Q3 2013. Increase in margin was attributed to favourable shift in product mix.

  6. Their on-road segment has made good headway with Navistar announcing the use of PSI’s 8.8L propane fuel engine for an alternative fuel option in their ICC school bus product line. This is a good win as this will probably help them win designs at other OEMs.

  7. Reaffirmed full year 2014 revenue for $330 - $360 M. Offered outlook for 2015 & 2016 in the call. 2015 was projected to have revenue of $480-$500M, and 2016 of $580-$620M. The 2015 & 2016 guidance does not include revenue possible from the JV activities in China.

Conference Call Notes.

Gary Winemaster started the call with a discussion around the situation with Oil prices. He noted that while natural gas price have been fairly steady around the $4 mark, the price of oil has fallen around 20% in the past 3-months (crude oil is hovering around $80 mark). Gary made the point that while the drop in oil prices may slowdown the exploration activity, their gen. set opportunity is not driven by exploration activity but by existing and producing wells that are producing flare gas. There are over a million oil wells in the US alone and the economic opportunity is to use the free natural gas to power generators/compressors that are already operating at these well sites.

Gary also noted that their opportunities are not limited to flare gas. Other key areas include:

  • Forklifts and this one is set to accelerate with NACCO ramping up in 2015
  • Aerial lifts and sweepers
  • Aftermarket parts, which become a big contributor as the install base increases

On-road opportunity.

  • Gary said that they haven’t seen any slowdown in demand with the recent fall in oil prices. He believes that OEMs are making decisions looking at the long-term and it is expected that the spread between diesel and CNG will be about 50%.
  • On-road is expected to contribute $30M in 2015.
  • The Navistar launch is going to contribute towards the $30M revenue. Its interesting how they approach these engine mix. Typically, they work with Navistar’s customers to figure out the demand, in particular with lead customers and this ensure a good visibility into their sales pipeline.

On the LNG power generator market.

  • PSI believes that it will continue to take market share, with some increase in the share of the stationary business market but most sales still coming from the oil & gas side. He also said that in 2016 they should be seeing sales in China. Gary believes that the wellhead flare gas market is still in its infancy. The LNG gen. set sales accounted for about 35% of total revenues.
  • Countries like China are taking note of what the US is doing with respect to flare gas. China has more flare gas than US and 80% of the market is controlled nu CNPC and Sinopec and both have mandates to replace diesel engines wit natural gas engines.

On forklift opportunities.
+PSI management didn’t go into the details of their deals with major OEMs in China because of confidentially reasons. However, they noted that they are dealing with the major OEMs in China, that they have tailor made products for this market, and that this market opportunity is bigger than the forklift US market.

  • They are doing business with 8 of the top 12 forklift manufacturers.
  • Sell to the three largest in Korea
  • Sell to the largest manufacturer in Japan.
  • They have not targeted Europe because of the economic problems there, instead focusing on North America and Asia (smart move!).

Concluding Thoughts.

Let’s start with some valuation.
Stock Price (Nov 14, 2014 close) = $65.92
TTM Adjusted EPS = 1.18
Trailing PE = 69
Trailing PS = 2.9

On a trailing PE basis, PSI is not cheap. However, the company is showing some solid growth. Comparing TTM at Q3 13 versus now at Q3 14, we see that the business has grown revenues at about 32%. Earnings have also grown at about 32% and Cash Flow from Operations have grown at 48%. That’s pretty solid.

Now, in the past 3 quarters, PSI has bought in revenue of around $244M. They reiterated 2014 revenue in the $330-360M range and in the call stated that they expect to hit mid-point. Assuming a target 2014 revenue of $345M, they are looking at Q4 revenue of $100M versus Q4 2013 of $61.5M. That would be both solid growth sequentially and YoY. Of course, if they do better than mid-point it would be even better. Also, note that at mid-point we are looking at a FY 14 versus FY 13 growth of 45% in revenue. I would expect about a similar growth in earnings, if not more. Assuming the business can keep growing earnings at around 35% rate over the next 2-3 years, we are looking at a PE to Growth (PEG) ratio of around 2. Still a bit expensive IMO.

Overall though, I like how these guys are running the business. They are growing it well, focusing on profitability, building one market opportunity at a time. They sounded very confident in the conference call. In the next 3-5 years they are expecting to cross over $1B in sales. So far, I think the execution is great and management has a lot of skin in the game. The stock though appears to be on the expensive side. I would need it to be in the PEG ratio of 1.5 or less to add to my position. I will continue holding on to my modest position but I ‘m not adding to my position at these prices. I would add around the $50 to $55 mark if the stock gets there sometime before the next earnings announcement.



Still long and strong - thanks for posting your thoughts! My only regret is not getting in sooner. I read the call transcript on SA last week and continue to be impressed with the company’s performance and leadership. I have no reason to believe they won’t be a winner long-term.


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Hi Jason,

I agree, the longer-term trajectory looks good.

They will likely be achieving 45% growth b/w 2013 and 2014. They will potentially see another 40% odd growth b/w 2014 and 2015, at least as per their guidance. If they can maintain or improve gross margin (as they noted in the call saying that they are trying to get to the low 20% range), there should be some meaningful jump in the bottomline.

For the quarter ending Dec 2014, analysts seem to be modelling for revenues between $98M and $116M, with average at $103.45. The mean estimate is pretty close to what we would expect to see at the company’s mid-point guidance. The mean adjusted estimated EPS is 0.44. I think these targets will be achievable, and if they meet or beat estimate the share price will be fine. If they miss though, the problem with high flyers is that they will come down hard, so I 'm inclined right now to hold on the shares and not add to them.