Back In November, I wrote a piece on Fuel Systems Solutions (FSYS) entitled "Extreme Punishment Unjustified", in order to pound on the table concerning its bargain status. Three months later, the carnage has only worsened, as its share's have descended another 20%, to a new 52 week low. They are literally just pennies away from their March 2009 bottom of $10.45. In a little less than six months, the shares have lost 50% of their value. Brutal "hate" selling has no doubt been the culprit.
The stock's rather hefty beta (measure of volatility) of 2.0, reveals that its shares should rise at twice the level of the overall market on up days, and drop at the same rate on down days. In reality, the shares are not adhering to this principle, as they seem to rise at just half the rate of the averages on up days, and lose four times the rate on down days. Obviously, there has been a large holder that has been systematically exiting his position, the question is who has been buying those shares? I have an inclination to say, it is the "smart money" who understands the wisdom of accumulating a position when fear is prevalent. How else are you supposed to buy low?
Fourth quarter earnings preview: Next month, FSYS will be reporting its 4th quarter results. Analysts expect the company to register earnings of four cents versus one cent. Sales are forecasted to drop 2% from $98 million to $96 million. The real drama though, will stem from management's guidance for 2014. Currently the Street expects FSYS to increase its earnings 28% from 18 cents to 23 cents on sales of $388 million. It is rather odd that the street anticipates the alternative fuel provider's sales to drop 3.8%, yet, their bottom line to actually rise- I guess that just proves the company's financial wherewithal. I predict, they will not meet expectations and this is solely based on their previous track record. I anticipate management will offer sales guidance in the range of $360 to $380 million. That being said, I doubt that unfavorable revelation will cause much of a selloff, because a miss is probably already factored into the current share price.
A huge disconnect: in the last 4.75 years (we don't have 2013 4th quarter results yet), the company has logged in $132,518,000 of net cash provided by operating activities, as well as raising another $60,000,000 via a 3 million share secondary offering. FSYS's balance sheet has improved immensely. They have no debt and have built up a cash hoard of almost $90 million, yet its market cap (shares outstanding multiplied by share price) is roughly the same today, as it was nearly five years ago.
Where did all that money go? Obviously it did not translate into shareholder value. Why not use some of the current stash of cash to buy back shares in the open market? This act of essentially striping off the low hanging fruit would accomplish three things (1) reduce outstanding share count, thus increasing earnings per share (less shares to allocate earnings through). (2) send a message of confidence to the Street (3) immediately shore up the share price because of the market effects of additional demand.
A stock buyback plan seems like an obvious solution, but since it has not happened by now, I am wondering if it ever will. I called the CFO and discussed the benefits of a stock buyback, and he responded by saying the suggestion would be taken under consideration. In my skeptical mind, I interpreted the response as mere lip service.
Maybe the next course of action would be for a shareholder to take on a more activist role, and put this (share buyback) on next year's proxy statement, as a shareholder proposal for vote. It certainly does not hurt to try, and at the very least, would bring notice to this valuable tool. The stock seems quite reminiscent of the Winn Dixie grocery chain, just before it was acquired in a buyout for a 60% premium. Hedge fund guru George Schultze actually featured my Seeking Alpha article in a letter to WINN's Board of directors requesting the company to enact a stock buyback plan. The moral of the story? Activism does make a difference.
Compelling value in the sector: If you compare FSYS to the other two large players in the alternative fuel space, the revealing bargain will certainly leap out at you. Its $87 million in cash, represents 38% of its market cap. FSYS is selling at just .57 of sales and .70 book value. Even if you strip out $56.6 million of goodwill and $12.6 million of intangible assets, its book value still ends up being greater than its current share price.
Even though both Westport Innovations (WPRT) and Clean Energy Solutions (CLNE) have also lost about half their stock market value, their metrics are not nearly as inviting. For example, WPRT's cash position represents just 5% of their market cap, trades at 6.73 sales and 4.81 times book value. Although, CLNE's net cash to market cap is non existent, (debt exceeds cash) its price to sales and price to book value metrics are far superior to WPRT's at 2.46 and 1.66 respectively.
Recent developments: Other than presenting at the Needham Growth conference back in November, a new board member being appointed, and the CEO's brother resigning, the company has been extremely quiet. Since they are in their "quiet period" (within 30 days of its earnings release), it is likely we will not hear a peep out of them until fourth quarter results are actually released.
Conclusion: There is no doubt the situation could get worse before it gets better, but at this juncture the downside risk is no more than $2, because at a certain level, the company becomes too susceptible as a takeover target. The six analysts who provide research coverage have a average price target in effect of $15.75- representing nearly a 38% markup. Compare that with perennial high flyer Google, where analysts are only projecting a target price increase of 10%. In a nutshell, FSYS represents a compelling risk versus reward scenario at this very depressed price, as the upside could easily be $10 or higher. With this potential in mind, the investor is basically risking $1 to make $5, translating to a juicy 1:5 risk reward ratio. It pays to be greedy when others are fearful, just ask Uncle Buffett.