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FSYS seems to have blown a gasket since last November’s high of $52, as its shares have lost more than 33% of their value. Now trading at just $35, the company sports a ridiculously “cheap” 14 times earnings estimates (that is unheard of for a growth company), but is this type of implosion justified or a typical market overreaction?

Well to be honest, the shares probably never belonged as high as they reached in the first place, nor should they have dropped as low as their current depths. Uncertainly over the Italian Government’s Car Sales incentive program probably spooked the market- participants are worried that lower incentives could sputter car sales in the region. Exasperating FSYS’s slide has been a very weak Nasdaq market – which lost 6% of its value in the last two weeks alone.

The company is throwing off some very huge numbers: Its third quarter results absolutely blew off the doors, as income leaped 19% to 88 cents on a sales jump of 10%. The firm’s gross profit margin rose 490 basis points from 29% to 33.9% - quite impressive considering the company has already taken $27 million in charges (related to negative foreign exchange impact - due to strength in the US Dollar). Earnings for the quarter would have been 6 cents higher, had the company not ramped up its Research and Development activities 40% from $2.7 million to $3.8 million. The alternative fuel supplier also completed two cash acquisitions in the quarter, by acquiring Teleflex’s (NYSE:TFX) power systems business for $15 million and purchasing the remaining 50% stake in its WMTM joint venture in Brazil.

Ample liquidity offers further acquisition prospects: the company’s balance sheet is pristine . Its cash holdings of $44 million and borrowings of only $22 million give it abundant flexibility to make opportune acquisitions as they present themselves. FSYS's strong cash position and free cash flow also bodes well for the argument that a cash dividend or stock repurchase plan could be implemented down the road.

Delayed Original Equipment Manufacturer momentum: In the last three quarters, FSYS has performed 114,000 vehicle conversions that enable vehicles to run either on gasoline or natural gas. The growth in this segment has been sequentially impressive with its first quarter producing 30,000 units, its second quarter at 37,000 and third quarter, cumulating at 47000 conversions. At its current growth rate, it could reach 60,000 units by the end of the fourth quarter.

Fourth quarter estimates: FSYS will report 4th quarter results in early March and earnings expectations of 71 cents (a whopping 120% increase in earnings) on $132 million in sales could be too conservative, as Management has been known in the past, to “under promise” in order to “over deliver”.

The company is expected to earn $2.68 in 2010, which represents a paltry 10% improvement to 2009 estimates of $ 2.44. I think if the Natural Gas Act is passed in congress (aka the Pickens plan), FSYS could easily sport an earnings increase of five times its forecasted amount in 2010 ( to $3.66) . Jim Cramer has even got on FSYS’s bandwagon, stating that the company’s earnings could soar if the legislation is passed.

Downgraded: Sidoti & Co recently downgraded its opinion on the shares from a “buy” to a “neutral” rating and cut its one year price target from $59 to $53. I guess Sidoti will soon be upgrading ,because it doesn’t make any "sense" to be “neutral” on a stock that you have forecasted to appreciate 50% from its current levels.

Short interest has climbed 22%: the shorts are certainly jumping on the bandwagon on this one, as short interest climbed 22% from 2.75 million to 3.37 million shares, representing 31% of available trading shares (float). One of the reasons the shares have been so weak , is the fact that new shorts are selling “at will” to open new positions. Sooner than later, these short positions will need to “buy to cover” (to book their profits) shifting the supply/demand pattern more favorably to the “long” camp.

Bottom line: FSYS possess ample low hanging fruit at these oversold levels and it is time to pick expeditiously with both hands. The shares have simply come down too far in too short of a time frame and are due for at least a 10-15% “dead cat bounce”. Bargain hunters and shorts covering to take profits could provide the fuel for its next leg up, while a broker upgrade or a reasonable conclusion to the Italy Car Incentive program could be the “icing on the cake”. The shares offer a compelling risk reward scenario-sporting a downside of only $5, versus upside potential of $15. The gas tank is definitely half full on this one.

Disclosure: long FSYS

Source: Fuel Systems: Is Gas Tank Half Empty or Half Full?