The engine and power train systems sector has been experiencing a volatile trend since the start of this year, with the major players showing a decline. The embryonic nature of the industry has resulted in considerable volatility in the revenues and earnings of the companies operating in the sector, which has translated into volatile stock prices. Fuel Systems Solutions (NASDAQ:FSYS) is one of the leading companies which provide alternative fuel systems for transportation, industrial, and refueling applications worldwide. The company has a global presence, and offers its customers a broad range of cost-effective products and applications. FSYS stock price has followed the trend in the sector, and has lost over 27% year-to-date.
Due to increased competition and foreign exchange rates, the revenues of the company faced a severe decline. This decline is offset by the increased revenues due to improved automotive and industrial segment turnover in the last year. Moreover, the company anticipates strong future growth in these segments, due to improved margin contributions from the U.S. market and new engine programs beginning in late 2014 and early 2015.
Fuel Systems Solutions designs, manufactures and supplies alternative fuel components and systems, which control the pressure and flow of gaseous alternative fuels in internal combustion engines, for use in the transportation and industrial markets in more than 60 countries and through more than 170 original equipment manufacturers [OEMs]. The company derives revenue from two major markets: Automotive and Industrial, of which the automotive segment largely contributed towards the company's performance over the last few years. However, the manufacturers of industrial mobile equipment and stationary engines are also among the most active consumers for the company. Moreover, these markets have seen substantial growth in the use of clean burning gaseous fuels due to the less harmful emissions effects of gaseous fuels and the cost advantage available in many markets of gaseous fuels over gasoline and diesel fuels.
Revenues & Business Performance
Fuel Systems Solutions is a pioneer in gaseous fuel technology for transportation and industrial applications. However, the increased competition and the economic downturn in Europe have adversely affected the company revenues - the decrease was offset to some extent by increased turnover in the automotive segment. The revenues of Fuel Systems stood at around $399 million in the last year, which is up around 1.5% compared to the previous year.
Source: SEC Filings
The Automotive segment proved to be the major contributor towards the company's performance over the last few years. As the population of the world is increasing, it is expected that the passenger vehicle fleet growth will occur in developing countries within Asia, North Africa and the areas of the Middle East. These regions currently have the lowest ratio of vehicles per thousand people, and are expected to grow rapidly over the next decade. Moreover, the alternative fuel vehicles operating on propane and natural gas are widely available in European, Asian and Latin American markets thought OEM and aftermarket distribution channels, and have gained considerable importance over the last few years. The automotive segment reported revenue of around $276 million in the last year, which represented 69% of the total revenues, and was up around 1.9% during the period. The industrial segment also reported a slight increase in revenue in the last year, to stand at around $123 million.
Source: SEC Filings
Revenues decreased over 19% in the second half of the current year, reflecting lower OEM volumes as a result of difficult economic conditions and the loss of the company's biggest customer in the last year. Moreover, the company has reduced its full-year gross margin outlook to a range of 19%-21%. However, the company is working with OEMs to develop programs based on both port and direct injection, and is further differentiating its OEM products from aftermarket products by redesigning the aftermarket products according to the prices and feature demands of the aftermarket. On the industrial side, Fuel Systems is planning to launch its BRC Brakepads under its wholly-owned subsidiary, MTM. The BRC Brakepads include chemical technology designed for high-performance competitive racing with more environmentally friendly models.
Moreover, Fuel Systems Solutions is undergoing a transition in its end-markets, which enabled it to develop new products and markets for future growth and revenue stability. Economics, energy independence and environmental concerns are some of the main market factors which drive the growth of the market for alternative energy. Therefore, the company prioritized its cash flows to invest in the development of long-term growth opportunities in the second half of this year. Fuel Systems is also in process of closing its Livorno automotive facility, in order to cut down the costs and improve profitability in the coming quarters.
The industry is in the early stages and it is likely that there will be volatility in the revenues and earnings of the companies operating in the sector. As a result, the stock prices of these companies have been volatile. Nonetheless, the potential is present in the industry and Fuel Systems Solutions will prove to be a good investment. In the short-term, however, shareholders should expect some volatility.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
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