Fuel Systems Solutions: Third Quarter Blowout Is an Understatement

Fuel Systems Solutions (FSYS) didn't just manage to crush third quarter earnings estimates, it obliterated them. Sales rose an astounding 62% from $65 million to $106 million, and earnings jumped from a loss of $359,000 to a gain of $18 million or 75 cents a share. The company beat its top line forecast by 23% and in the process, nearly tripled its bottom line expectations. Consensus of estimates had the company pegged at 26 cents of earnings, on sales of $86 million. I thought I was on the optimistic side in last week's piece, when the top of my range included prognosticating revenues of $86 million and earnings of 42 cents, but being blindsided to this extent, on the positive side, is something I definitely welcome.

Gross margin expansion and SG&A reduction: FSYS's gross profit margin increased a striking 500 basis points from 24% to 29%  while the company's Selling, General & Administrative costs shrank 640 basis points from 15.6% to 9.2% of sales. Interest expense dropped 75% from $203,000 to $51,000. FSYS improved its liquidity by slashing its long term debt by 33% from $9.4 million to $6.3 million and increasing its cash position from $27 million to $34 million.

Outlook ratcheted up: The company increased its full year sales guidance from $350 million to $385 million while bumping its operating income forecast  from 12% to 14%. The company stressed it remains confident regarding the prospects of continued organic growth and has the financial strength to invest in incremental growth opportunities.

Share direction is up: The last time FSYS delivered earnings, the shares more than doubled in a very short time. This earnings release was even a larger beat than FSYS's very strong second quarter results, so an even more intense rally is possible. Wall Street was apparently most impressed with the company's results, as the shares ran up almost 20% in after hours trading, closing near the $32 mark. The stock is slated for another big rally on Friday  as analyst upgrades, and short covering  (probable squeeze) provide the rocket fuel for a likely rally to the $40 mark.

Disclosure: LONG.

Comments

[Upside to F...:]

Okay, FSYS had a great quarter - but we're dealing with relatively small numbers here. If you compare how they did this quarter vs. the previous quarter - seasonal adjustments notwithstanding- you can see that the company's revenues have leveled off somewhat. Revenues increased a whopping $7 million - from 98.3 Million in Q2 to $105.5 Million in Q3. This is for a quarter that happened to a large extent before the full curtain of the financial crisis revealed the tragedies to come. Guidance for 2008 has been increased significantly - but unless cost cutting becomes greater at the company I think this is the top of earnings for the next several quarters. I find it hard to believe that any region - especially Europe and Asia where FSYS's growth seem's most pronounced - is going to be ramping up their industrial transports/fuel efficient vehicles/conversions significantly. Europe is more likely to cut back if anything considering the headwinds they are facing. FSYS will survive and prosper but it's short-medium term growth prospects expecially for the stock should factor in a long drawn out recession. I don't see this stock going much higher than $45. Reality bites.

2008 Nov 07 01:44 PM