Hi all,
Let me start off by saying this is a great board with useful and actionable discussions and advice.
As a believer in natural gas, I own shares of several companies in the space. After I exited my WPRT position last year, I added PSIX to my watch list, and ever since I have been waiting for a pullback that never came to fruition. In the last few days we have seen the stock pull back over 20%.
Saul, and others who own the stock: are you adding at these levels?
Thanks,
Sameer
Saul, and others who own the stock (PSIX): are you adding at these levels?
I added at $60. Not a huge amount, but about 20% of my position.
Saul
Saul,
Thanks for your prompt response. I am doing some DD and going through some of your old posts on this company before deciding on whether or not to start a position.
-Sameer
Is there a board where PSIX is being discussed (beyond the post on the WPRT board)?
Neil
Neil
There were a lot of posts on the WPRT board and we even set up a PSIX thread, but the people on the board were so hostile and defensive that I stopped posting there completely. (They hated to hear that they had a choice, apparently).
If you’d like to post about PSIX here, you are welcome.
This is from The Fly on the Wall earlier this month.
Power Solutions price target raised to $90 from $75 at Barrington
Barrington is raising its price target on shares of Power Solutions to $90 from $75 citing improving margins and multiple expansion. The firm maintained its Outperform rating on shares.
Saul
This is a nice MF article by Martin Zimmerman a couple of days ago.
Imagine you’re Continental Resources’ (NYSE: CLR ) CEO. You produce more oil in the Bakken oil play than anyone else. The company’s profits grow like a weed, the stock climbs faster that the S&P 500 index, and with production increasing and drilling expenses decreasing, investors are thrilled! What’s not to love?
Well, a few things. You also produce a pile of natural gas along with all that oil, and there’s no real good way to store it or get it to market. With natural gas prices still at historically low levels, no one’s in a rush to build a pipeline out to your wellpads. So you burn the gas off or flare it. Environmentalists give you grief, new government regulations are coming, and you’d really rather not waste that energy and money, but what else can you do?
Turns out, you can burn that natural gas at the wellpad in a generator. This saves you money on producing electricity since you use your own natural gas instead of buying diesel fuel. While you’ll still flare gas, at least you’re putting some of it to good use.
Big kid on the block, and on the pad
In 2013, General Electric (NYSE: GE ) announced that we are in “The Age of Gas.” Given the money and effort the company is investing in natural gas products, that statement is no hot air. GE offers Continental and other drillers the Waukesha line of generators. These generators use natural gas from the wellhead with minimal processing, thus reducing flaring and expenses. GE estimates these generators can reduce fuel costs by up to 80% compared to diesel-fuel generators.
These same generators can use gas from landfills, wastewater-treatment plants, and other biogas sources. Applications include back-up electricity generation, natural gas transportation, and enhanced oil recovery. Businesses, hospitals, and farms across the world use Waukesha generators. This diversity of applications and fuel sources helped GE’s power and water division generate more than $1.8 billion in profits during the fourth quarter of 2013.
Small player producing power and profits
With a market capitalization less than what GE power and water makes in profits for one quarter, you may wonder how a company like Power Solutions International (NASDAQ: PSIX ) can compete. Well, it competes by leveraging 20 years of experience in building alternative-fuel engines for markets GE doesn’t necessarily go after.
To be sure, Power Solutions makes generators that burn natural gas just like GE’s Waukesha generators. Power Solutions also builds engines for heavy-duty trucks, which have grown in sales by 131% (compound annual growth rate) since 2008. It also makes engines for smaller vehicles and even Zambonis (those vehicles at ice rinks that resurface the ice).
Even better, Power Solutions makes fat profits doing it. From 2010 to 2012, sales doubled and earnings quadrupled, from $0.19 a share to $0.81 a share. The third quarter of 2013 showed a non-cash charge related to the pricing of warrants that forced the company to report a loss. Excluding this charge, Power Solutions would have reported earnings of $0.24 a share, a 4% improvement over the previous quarter and a 20% improvement over the quarter from 2012.
But what about generators at the wellpad?
So Power Solutions does things that GE doesn’t. What about those natural gas generators for the drilling pad? Both companies report growing sales in this market. During its third-quarter earnings conference call, Power Solutions reported its sales of natural gas generators doubled from the prior year and increased 20% from the previous quarter. Hard to say which company is considered better by customers, but clearly Power Solutions has made a name for itself in the business. GE didn’t detail its sales figures for natural gas generators during its latest earnings call.
Final Foolish thoughts
Beginning January 2015, new federal regulations come into effect regarding the practice of flaring natural gas. This creates a headache for oil producers but an opportunity for both GE and Power Solutions. Continental is now incentivized to burn its natural gas in a generator not only by economics but also by government decree. Both GE and Power Solutions sell generators for this purpose. GE already claims Devon Energy as a customer; Power Solutions claims Chesapeake Energy and SandRidge Energy.
For conservative investors, GE would be the company of choice. Its sheer size and diversity means it’s not going anywhere soon. Plus it pays a dividend of about 3%. For those willing to take a little risk, Power Solutions looks like a small player making big strides. It may not pay a dividend, but with the stock tripling over the past year, who cares? Plus, its small size could invite a takeover. That said, there are high expectations built into the stock price, and a disappointment could vaporize those capital gains. Invest accordingly.
I have been looking at PSIX a bit, and noticed this mostly positive article from SA today.
http://seekingalpha.com/article/1971161-power-solutions-inte…
The biggest risk to PSIX is the same risk that afflicts ethanol and biodiesel, that being regulatory risk. These industries are being manufactured by the government. PSIX’s lofty stock price is due largely to expectations of sales to be generated as the result of regulations. Anyone that follows how the EPA administers the ever changing RFS2 and how Congress passes and then lets expire and then reinstates tax credits knows that is a risky business. 2014 being an election year also makes this strategy even less certain.
PSIX’s stock price has had a strong rally, largely dependent upon expectation of future legislation and regulations being enacted. If America turns its back on climate legislation as it appears the EU is, green energy companies dependent on such legislation are at real risk of having their future earnings prospects evaporate. Many green energy companies only exist because of government subsidies and regulations, and many fail even with such support. The greatest threat to PSIX’s stock price is a change in the regulatory environment, and that risk can not be overstated. A single stroke of a pen or landslide election could immediately greatly alter PSIX’s forward earnings outlook.
My question is, how do most investors get comfortable with this primary regulatory exposure?
Thanks, Vic
Vic, That is the disguised short article we’ve been talking about on this thread. I’d advise that you go back and read the whole thread. It’s very short.
It’s not regulatory based. Right now the oil companies burn off the natural gas that comes along with the oil. Then they have to buy diesel, and truck it in, to run the generators that power the pumps that extract the oil.
PSIX provides motors that run on the gas the oil companies are burning off. That means no more diesel expense, no more trucking expense. The companies are buying the engines because it makes sense economically, not because of regulation.
PSIX supplies engines for fork lifts and stuff like that everywhere because natural gas is cheaper than diesel, and because their engines are cheaper and efficient.
Saul
Saul,
I well remember how you nearly got lynched for having the audacity to show folks on the WPRT board how they really could have their cake and eat it too……… Take a chance on a money loser (WPRT) and/or invest right now in a very fast growing NG company that was actually making positive earnings each quarter (PSIX).
Then I got blasted for sharing how I took your advice and bought PSIX and made remarkable gains while WPRT continues to languish.
No good deed ever goes unpunished, Saul. There are many of us who really appreciate your courage to buck the politically correct trend of that board.
Jim
Yes, the patrons of the WPRT board are very adamant in defending the underperformance of both the company and its stock.
Jason
Long WPRT (and still holding out hope… for now)