Fuel Systems Solutions: Fueling a Rocketing Stock

| About: Fuel Systems (FSYS)

It has been quite a ride with Fuel Systems Solutions (NASDAQ:FSYS). In the last year, the shares have sprinted from $10 to $60, then quickly cratered to $25 on profit taking, before snapping back to the low thirties. The stock just got too cheap, and bargain hunters and shorts covering to ink profits aided in its partial rebound. Although the company has generated phenomenal sales and earnings growth, it is certainly not resting on its laurels. The company is now moving to the next level, attempting to leverage its recent successes by acquiring other alternative fuel companies.

Latest acquisition: The company announced it had acquired Argentine-based "Distribuidora Shopping SA", for $22 million. The transaction is comprised of $12 million cash and $10 million in FSYS shares. The Argentine company had 2008 sales of $33 million. FSYS management indicated the acquisition will provide synergies allowing the combined companies to expand their global manufacturing and distribution platform in the alternative fuel vehicle segment.

Dilutionary impact: FSYS will have to print up approximately 333,000 shares, in order to complete the acquisition. This will increase the company's shares outstanding roughly 2% from 15.74 million shares to 16.07 million shares. The move should add almost 10% to FSYS's top line and at a 14% operating profit, be highly accretive, resulting in about a 30 cent increase to FSYS's bottom line.

Going on the road: Management took its show on the road, when it presented at the 11th Annual Needham Growth Stock Conference held on Jan 8. Management made a compelling demonstration of its exciting prospects during the presentation .

Analyst coverage is growing: In the last six months, FSYS's research coverage doubled, when both Janney Montgomery Scott and Canaccord Adams initiated research coverage with buy ratings. Broadpoint Capital and Lazard Capital also have buy ratings in place. The entire group's median one year price target is $50.

Potential short squeeze: FSYS's short interest increased substantially in the last period, rising almost 50% from 2.64 million shares to 3.86 million. This large short position could launch the shares on a nice advance , if a short squeeze starts to develop.

Bottom line: The stock has already been through its correction phase and that is a very good thing. The shares could likely run to the $40 vicinity before needing refueling. The risk-reward ratio is favorable, as the upside potential is at least twice the stock's downside risk. Translation: Time to jump on this "Rocket Ship" to the moon.

Disclosure: No position.