Hi all,
Below are my notes on PSIX Q4 earnings release and conference call. Everything seems to be progressing well and the price looks good.
Anirban
Press release: http://investors.psiengines.com/releasedetail.cfm?ReleaseID=…
Transcript:http://seekingalpha.com/article/2957196-power-solutions-inte…
Earnings Highlights.
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Revenues of $103.9M versus $61.5M in Q4 14, up 69% YoY. Compare this with revenues of approximately $94M in Q3 14, up 45%, over Q3 2013 revenue of $64.6M. Revenues in Q4 14 up sequentially 11% over Q3 14.
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Contributing to the sales increase was continued growth across all of the Company’s major end markets including heavy-duty power generation systems, material handling and aftermarket parts sales. Also contributing to net sales in the period were sales of approximately $6.9 million of integrated generator systems from Professional Power Products, Inc. (“3PI”), which was acquired on April 1, 2014. 3PI has been adding about $6-$7M to the top-line in the past two quarters since acquisition.
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Adjusted net income came at $5.3M, which compares with $2.6M in Q4 13. Adjusted net income was $4.4M in Q3 13.
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Adjusted EPS went up to $0.48 versus $0.24 in Q4 13. This compares with $0.39 versus $0.24 in Q3 2013.
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Gross margins improved to 20.3% in Q4 14 versus 19.2% in Q4 13. Gross margin was 19.8% in Q3 13.
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They achieved revenues of $348M for FY 14. They had guided for $330 - $360 M in 2014, so they came in above the mid-point of guidance. Reaffirmed 2015/16 guidance. 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 this call with an overview of achievements in 2014. The following were highlighted:
o First design win in the on-road sector with Navistar on the school bus platform.
o Ramp up the PSI Mitsubishi 2.0 and 2.4 liter industrial engine business for the forklift market.
o China JV won five major customers giving PSI a solid foothold in the Chinese domestic market. Chinese market expected to be twice the size of the US market opportunity.
o Continued to make inroads in the flare gas generator market.
Gary noted that the US and other major economies are in the multi-decade process of shifting from diesel to alternative fuel sources such as natural gas and LPG. They plan to build their opportunities around this multi-decade shift. He specifically talked about the following opportunities in 2015:
o They expect NACCO to ramp-up nicely in 2015 (also noted in Q3 2014) and have a material impact in 2015.
o The Navistar IC Bus Division will offer a PSI 8.8-liter propane engine as an alternative fuel option for its 2015 model school buses. It’s interesting to note that IC bus has about 35% market share and they expect good transition to propane option among new customers. IC bus has approximately 35% market share and we expect a meaningful portion of their customers to choice the propane option. The propane engine has equivalent power to the diesel engine and Navistar has highlighted this multiple times as an important strategic initiative in Navistar’s earning call.
o The oil & gas opportunity was great for PSI in 2014, with respect to selling power generators that work on flare gas. There are 1 million oil wells in the US and they believe they have only penetrated a small portion of this market. In 2014, they sold 3000 units, and thus far they have sold about 10,000 units. Further, Gary noted that while falling oil prices impact rig count, he notes that while exploration market suffers the operating wells still have power needs and operating wells are less sensitive to oil prices compared to exploration activities. He noted the following data points from one customer:
One of our customer estimates that the wells can use nearly $325,000 per year in diesel fuel, which translates to electricity cost of $0.35 per kilowatt hour. Utility grid power can cost upward of $0.16 per kilowatt hour. In contrast, gas powered electricity can cost around $0.03 per kilowatt hour. This cost advantage is compelling. By switching to nat gas generator that burns on free fuel, oil producers can have distinct opportunity to save a substantial amount of their operating expenses, which is more critical than ever in a lower margin environment.
He also noted that as the installed base increases, the service and after market opportunity increases.
However, he noted that the fast paced growth of this segment will not happen in 2015. 2014 saw 100% increase over 2012. 2014 generated about $120M in revenues, and they expect to see at least $30M in Q1 2015, so they are at least tracking the $120M run-rate and they think it would increase but I think they are being conservative here.
They also noted that large Chinese companies (SINOPEC & CNPC) have expressed interest in their flare gas generators.
With respect to 2015 guidance, management noted that they expect revenues b/w $480M and $500M. They expect achieve 20% YoY growth in each quarter, including in Q1 2015, but this would imply a decline with respect to Q4 14. They noted that this is ‘normal’ for their business although not obvious when looking at the past couple years of rapid growth. They expect revenues for 2015 to be backend loaded this year. There were several comments in the call that pointed to why they think revenue would be backend loaded (which was said to be similar to 2014).
- There’s some pushing out of purchases in the oil fields
- Navistar is likely to bring in about $30M revenue, most in Q3 & Q4.
- 3PI acquisition is likely to hit around $10M by Q3. It was around $7M in Q4 2014.
Note that at the mid-point they are still expecting about 40% YoY growth with respect to the $348M achieved in 2014.
On-road opportunity.
- They expect to announce some wins in China in Q1/Q2. Revenue should start trickling in by Q4 2015 or Q1 2016.
- They look at China as a big opportunity for several reasons. China’s pursuing alternative cleaner energy over diesel for economic, energy independence, & environmental reasons.
On the LNG power generator market.
- There was a question with respect to being aggressive on pricing to grab market share. Management noted that they are already aggressive with pricing and below that of existing systems and large OEMs.
- With respect to the oil patch, it was noted that most oil & gas companies don’t want to own these generators. They would rather rent them, and that’s the current business model. The following commentary I thought was useful to gauge their sensitivity to oil prices:
Yes, I’ll start. Well as Gary mentioned before, the primary focus of our business is existing wells and that’s what going back from our customers. So again once a well is in production, the cost to produce it, the initial cost is sunk to commercial or variable cost, so the bulk and the vast part of our market is really existing wells. So we can’t quantity the exact number, but we see it as a minimal impact on our oil and gas business that exploration side.
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, representing 80% of the Chinese market opportunity.
- The Chinese forklift market is in excess of 200, 000 units.
Concluding Thoughts.
Let’s start with some valuation.
Stock Price (27 Feb 2015 close) = $56.53
TTM Adjusted EPS = 1.4
Trailing PE = 40
Trailing PS = 1.8
On a trailing PE basis, PSI is not cheap. However, it’s now cheaper compared to when I wrote my Q3 review, on both PE and PS basis. The company demonstrated solid growth. Revenues went from $238M in 2013 to $348M in 2014, or about a 46% ramp-up in one year. Adjusted earnings went from $0.92 in 2013 to $1.41 in 2014, or a 53% ramp-up. Even at the low-end of their 2015 guidance of $480M, we are looking at revenue growth YoY of 38%. I would think earnings would grow at least by 38% if not a bit more. Let’s assume a 40% growth in earning for 2015. That puts us on a PEG of 1, which I would think is pretty good for a fast growing business. We are probably looking at adjusted EPS of around 1.97 for 2015 (assuming 40% earnings growth). That gives us a PE (next twelve months) of about 28.7. Not bad for a company that could potentially keep growing at around 20 - 25% for the next several years.
I like this company. It’s got committed management with significant insider stake in the business. They are long-term thinkers, one of the few among the companies I follow that give out guidance 2 years out. The other one that does give out longer-term guidance is CELG. These guys like to crave out a niche by working with partners, and once the partnership is established they try to grab more share. They like building one market at a time. I will continue holding on to my position and may look to add at more compelling prices, although I have been careful to not make this a large position. While I like the management, I think they operate in high capital, low margin areas, and its difficult to establish a moat. That said, this can be a good holding at the right price. Today’s prices look decent for starting a position. Anything below $50 would be a very good buy provided there have been no fundamental changes to the business.
