Power Solutions International (PSIX) is up 200%, and was up 300% over the last year, and they have no earnings. Trailing 12 month earnings are -$1.51/share. What gives? Why would a company with no earnings suddenly rocket 200% in a year? The answer is of course, that PSIX has a compelling story about where it is headed.
PSIX's main focus is natural gas engines. They either modify or build from scratch all sizes of natural gas powered engines, and are one of only two companies licensed by GM (GM) to modify GM engines for highway usage.
For example the earlier of the smaller engines, we buy that from a group called Wuling in China. That two liter engine we get from Mitsubishi... And for example we have the worldwide rights for that Mitsubishi engine for mobile applications. So only we can use that engine in the industrial world. The other engines tend to be on the top end, tend to be from General Motors. And that last engine of the group, that 8.8 liter is our own design. That's the thing that we designed from scratch...
The next category, it's very exciting for us, you know on the highway segment ... But these are engines that are used in buses, trucks, any equipment that goes on the U.S. highways and there the base engines are the 4.8 and 6 liter GM engines. And then again our 8.8 is our own design. And then we got some heavier duty options which we haven't released yet....the importance of this, especially GM engines is, there is only two companies in the U.S. that are allowed to take a GM engine and create a new engine for it and be allowed to use on road.
None of that however is what got me interested in PSIX. Personally I don't think natural gas will ever be widely accepted as a transportation fuel. While the tanks are extremely rugged, it would only take one truck train accident and the ruptured natural gas tank suddenly becomes an air/gas bomb. If the person filling up this CNG car had been smoking, the results could have been catastrophic.
What got me interested in PSIX was that they provide a solution to a huge and growing problem. Northern North Dakota recently made the headlines because the flaring of gas from fracking was so extensive that it could be seen from outer space. Because the infrastructure doesn't exist to collect this "waste gas," the frackers simply burn it. To make this seemingly ridiculous situation even worse, drillers truck in diesel fuel to power the generators and engines needed for fracking.
The common sense and obvious solution is to stop flaring the gas, and use the "waste gas" to power the generators and engines that are currently using diesel. That is where PSIX comes in, they have a product that does just that.
And the key technology here is that right now E&P and oil and gas sites, what they do is they truck in diesel fuel to run the equipment. Equipment could be pumps or generating electricity and at the same time they're often flaring off natural gas. Out technology allows our engines to run on that natural gas that they're flaring off rather than truck it in diesel. So essentially you have free fuel and the payback on our systems is very fast. We're seeing in a matter of month's payback for the operators. So that's been a very exciting trend.
More importantly, whether or not the drillers want to upgrade, the EPA and other government agencies are giving them no choice. Starting in 2015 drillers must end flaring and either store or use the natural gas. While I hate these kinds of regulations, from an investment perspective, it is nice to have a gun being held to your customer's head forcing them by buy your product.
The other interesting thing is that starting in January 1, 2015, this flare gas regulation, we're in the shale site and other sites, these E&P operators have to stop flaring off the gas and either use it or store it. So that's going to create another large demand for us we think starting around 2015.
Other regulations are increasing the cost of diesel engines, so natural gas engines for commercial use are becoming more attractive. Once again if the EPA and other government agencies are forcing consumers towards PSIX's products.
So all diesel engines in the U.S. starting this year in 2013 have to comply with Tier IV regulation. This made the diesel engine up to twice as expensive as it was before. So Tier III, it also made about 35% larger. Really for the first time in our Company's history, our natural gas engines are about, on average about 20% cheaper than the diesel and at the same time the fuel costs to run those engines is about half... In 70s, America really converted in their industrial commercial markets from 100% gasoline to 100% diesel and most of that conversion happened within about a five-year period. And since well over 90% of the industrial market's backbone of America still runs on diesel, we see a lot of more markets potentially expanding 10 times or greater in a very short period
The biggest risk to PSIX is the same risk that afflicts ethanol and biodiesel, that being regulatory risk. These industries are being manufactured by the government. PSIX's lofty stock price is due largely to expectations of sales to be generated as the result of regulations. Anyone that follows how the EPA administers the ever changing RFS2 and how Congress passes and then lets expire and then reinstates tax credits knows that is a risky business. 2014 being an election year also makes this strategy even less certain.
Weakening for climate change legislation is already evident overseas. Recently both uber-Green Germany and initiator of the global warming movement UK have signaled that they are turning away from a costly climate change agenda. These cuts to climate change funding will have a real impact on the prospects of companies that rely on such spending. PSIX's stock price has had a strong rally, largely dependent upon expectation of future legislation and regulations being enacted. If America turns its back on climate legislation as it appears the EU is, green energy companies dependent on such legislation are at real risk of having their future earnings prospects evaporate. Many green energy companies only exist because of government subsidies and regulations, and many fail even with such support. The greatest threat to PSIX's stock price is a change in the regulatory environment, and that risk can not be overstated. A single stroke of a pen or landslide election could immediately greatly alter PSIX's forward earnings outlook.
The money spent on preparing the UK for the impacts of global warming has almost halved since the environment secretary, Owen Paterson - widely regarded as a climate change skeptic - took office. Critics called the cuts "shocking" and "complacent."
To make matters worse for this regulatory investment theory, the Northern Hemisphere is experiencing one of the coldest winters in recent history. Global temperatures have been flat to falling for over a decade, and actual temperature data has invalidated almost all of the IPCC's temperature models. The reason the global warming theory is melting before our eyes is obvious to anyone who takes the time to pick up an introductory atmospheric physics text book. It appears the legislators over in German and the UK have been doing their studies, but it stands to be seen if the trend makes it over to America.
The entire CO2 as a significant greenhouse gas theory is a complete fabrication. Greenhouse gases are defined by the spectrum of IR range that they absorb. CO2 absorbs a very narrow band at 15 microns. 15 microns is consistent with a black body of temperature -80 degrees C. CO2 only absorbs radiation from very cold sources of radiation.
The earth emits IR radiation in the 10 micron range, consistent with a black body temperature of 15 degrees C. Facts are, CO2 is transparent to IR radiation of 10 microns. Don't take my word for it, simply grab an atmospheric physics text book and look it up. The entire CO2 is causing global warming and climate change theory is dependent upon people never taking the time to understand the basics. You will never see this chart, found in basically every intro level atmospheric physics text book, in an IPCC report on global warming. The reason is obvious, the basic physics behind CO2 causing global warming on earth is nonexistent.
In conclusion; regulatory changes are likely to drive sales towards PSIX, especially starting in 2015. PSIX has the ideal solution to the problem of the wasteful flaring of natural gas. As long as the regulations that are in place, or are scheduled to be implemented are in fact implemented and enforced, PSIX should see solid growth going forward. That fact has not gone unnoticed by the markets, however, and PSIX has already been bid up in expectation of future earnings. Only time will tell if the optimism is eventually supported by actual earnings, but for now, I put PSIX on my watch list.
The biggest threat to PSIX and other alternative energy companies is the loss of public support for climate change legislation and regulations. If the record cold continues, that may become a very real possibility. Support for climate change legislation is showing signs of weakening over in the EU. If that trend makes it to the United States, the outlook for PSIX will be greatly reduced. Recently the EPA cut its RVO for ethanol which proves that environmental legislation can and does change, and public opinion appears to play a roll.
The number of Americans who believe global warming isn't happening has risen to 23 percent, up 7 percentage points since April 2013.
Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Full Disclaimer and Disclosure click here.