Fuel Systems Solutions: Time to Load Up

Mar.10.09 | About: Fuel Systems (FSYS)

FSYS has fallen out of the sky - literally. Its previous rocket ship expedition is history, as its shares touched the $60 area last August, only to self destruct back to the $10 area, exacerbated by a less than stellar fourth quarter earnings report. This meltdown has presented a stunning buying opportunity, as FSYS will rise again, after a brief pit stop to refuel. At today’s price you can pick up the shares at the same price the company was selling before it put together a string of four tremendous earnings reports . The market is looking at FSYS like this earnings growth never occurred, but it did. To illustrate the magnitude of its success: 2008 earnings almost tripled from 38 cents to $1.44, while sales increased a dazzling 44%, from $265 million to $383 million.

The stock is way cheap again: FSYS is on sale, and it’s not just a half-off sale, but more like an 80% clearance event. The stock’s implosion presents a compelling value, too good to pass up. FSYS is now selling at a skinny multiple of about five times 2009 earnings estimates of $2.06. Its balance sheet is pristine with $26 million of cash sitting on the books, and only $4.6 million in debt. The shares are also trading near book value.

Analysts sour: Janney Montgomery Scott just downgraded from buy to neutral (way too late to the party on that one) while Craig-Halther Capital reduced its one year price target from $58 to $30. I think the $30 target is a bit optimistic, but $20 is a no brainer, especially if the price of crude starts to firm up, and you know it will.

The shares are way oversold: They have simply come down too fast in too short of a timeframe and are due for at least a “dead cat bounce” as shorts cover to book profits and bargain hunters start to accumulate. The stock has a significant short position of almost 6 million shares or 40% of its outstanding shares. Its short interest ratio of 9 is extremely high. The extreme negative sentiment exhibited by its high short interest, makes it a potentially lucrative short squeeze play.

Bottom line: Take a look at FSYS’s five year graph, there is tremendous support visible near the $10 level and the shares are pretty much already there. The stock could easily bounce back to the $15-18 vicinity by the end of the month. There is no doubt the stock currently offers a favorable risk reward ratio. There is no reason not to be a buyer at this point, if you want to take advantage of the next ride up. Translation: “Time to load up”!

Disclosure: Long FSYS.