Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

There is no doubt I have been on the wrong side of the trade on this one. Since my last piece, the shares have fallen an additional 20% and I am wondering when a bottom will actually be found. The fact is, in the last 30 days some good things have occurred that the market has completely ignored, such as the company raising its guidance (sales by 8% and operating margin to its top end range of 16%) the Nasdaq market rallying 3% and even Jim Cramer putting in a good word or two by stressing that FSYS’s stock price had been pushed down to a good price level and could be bottoming. A recent rally in oil prices, coupled with a weakening US dollar, are also positives for the stock.

Fourth quarter earnings will be out this Thursday, so everybody will be focusing on first quarter’s guidance. The analysts have already written off the company in 2010 (thanks to the Italian Government’s reduction in Auto incentives) by forecasting its earnings to decrease 10% from $2.60 to $2.34, yet even with the lower earnings scenario the shares are trading at a very cheap multiple of about 12 times forecasted earnings.

Cash dividend or stock buyback in the cards?

We could see a cash dividend declared. The Company could easily payout 20% of its earnings, which would equate to about 56 cents a share, resulting in a 1.8% yield. Another scenario could be a stock repurchase plan being adopted to take advantage of the decimated share price as well as provide confidence to the markets. A 10% buyback is quite feasible when considering the company has over $50 million in cash stashed away with minuscule debt.

Bottom line: We will have to wait for the earnings event before this one’s volatility abates and the placement of the tourniquet stops the bleeding. I think poor guidance is already factored into the share price and then some (as evidenced by the stock losing almost 1/2 its value in the past six weeks) so the shares seem to have a decent opportunity to rally if management is successful in clearing up some of the company’s uncertainty during the conference call.

The wild card: the US Natural Gas Act. If this bill passes in Congress, FSYS could see an immediate 20% pop in its share price - another reason supporting the case to be long, despite the stock’s recent carnage.

Disclosure: Long

Source: Positive Guidance Could End Fuel Systems' Hemorrhaging