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Fuel Systems Solutions (NASDAQ:FSYS) absolutely got its clock cleaned; since reaching an unrealistic and dizzying price of  $61, the shares have been on rapid and steady freefall, resulting in a 60% haircut.

What went wrong? Several things, the main culprit was simply getting caught up in the downdraft of the overall market meltdown. Secondly, the shares simply went up too much in too short of a time resulting in a very overpriced situation (it should have never gone as high as it did in the first place). Thirdly, the crude oil decline of more than 50% did not help matters either. On the bright side, The “Pickens Energy plan” has been getting more and more press lately, and one of its  key objectives, to convert vehicles to  natural gas, couldn’t be a better advertisement for the merits of owning shares in this alternative fuel company..

The good news: The company is scheduled to announce third quarter results on November 7th and could beat analyst expectations, which are probably too low. FSYS is forecasted to report sales of $86 million and 25 cents per share in earnings. Management is very capable at managing their guidance in an advantageous manner, by under promising in order to over deliver, and this might be the case. 

On the high side, it’s possible that FSYS  could deliver sales of $92 million and earnings as high as .42, based on a 12% operating margin and a 40% income tax rate. This scenario is unlikely because FSYS guided revenue for the next two quarters totaling $157 million, which amounts to about $79 million per quarter in anticipated sales. The company pegged fiscal 2008 sales at $350 million while analysts are showing a more optimistic forecast of $370 million, The low end estimate, assuming revenues of $79 million, would produce earnings of .36, beating estimates by 44%.

In summation, expect FSYS to deliver earnings in the range of .36 to .42, which should have a beneficial impact to the share price. One wild card to be cognizant of: the impact of foreign currency exchange, as recent strength in the US dollar could hurt FSYS’s bottom line, as more than 60% of its  sales are derived from customers outside the US .

Lack of insider selling is impressive:  Although the shares ran up from $10 to $60 in a period of less than four months, insiders, surprisingly, sold relatively few shares. In fact, the largest shareholder, CEO Mariano Costamagna, who owns 1.8 million shares, sold a mere 43000 shares  or 2% of his holdings. You would think after seeing your shares run up almost 600%, you would be inclined to sell more than just 2%  of your position. This leads me to consider that Costamagna , perceives the shares offer further upside.

Valuation more realistic: The deep sell-off in the shares have brought them back to earth. FSYS is now selling at about 17 times 2008 earnings estimates of $1.48 and 14 times 2009 estimates of $1.81 (22% growth). The company’s liquidity is fine, with a cash position of $43 million and only $13 million of debt. Both Canaccord Adams and Broadpoint Capital have each raised their outlook by setting buy recommendations as well as issuinga $54  price target.

Bottom line: The shares are oversold, they have dropped too far in too short of a timeframe. The stock is due for a bounce as a result of potential bargain hunting and short covering to book profits. There is also a good possibility FSYS will beat earnings expectations, and if they do, and guidance  remains  intact, the shares could easily rally back to the $40 area before selling pressure develops. The stock, at this juncture, offers more reward than risk, and in addition, could be purchased strictly as an earnings play.

Disclosure: none

Source: Fuel Systems Solutions: Recent Slide Creates Buying Opportunity