American Power Group: The Little (Dual Fuel) Engine That Could

| About: American Power (APGI)
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Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

Even a conservative 10% market penetration… would equate to a $1.6 billion addressable market…with [IUL approvals creating] … an additional half-billion-dollar market. --APGI CEO Lyle Jensen

American Power Group (OTCPK:APGI) presents a long investment opportunity whose entry point for the wise long is now. The APG story is compelling. What makes it more compelling is the story's setting… the current flash point of growth in the use and availability of natural gas. I outline all of this in great detail in my Seeking Alpha Instablog post on APGI.

Yet, a micro-cap having a story doesn't mean they have the means to bring that story to fruition, or that they will avoid doing so on the weary, diluted backs of early investors. APGI stands at the turning point of cash-positivity, even pending profitability, and uniquely has the resources and business plan to be the micro-cap story that succeeds.

How is this so?

APGI has already completed a vast majority of the costly "heavy lifting" needed for perfectly-timed and successful rollout of its superior diesel/natural gas retro-fit conversion units and OEM dual-fuel Glider Trucks. This includes spending the millions of dollars needed to have accomplished all of:

  • The testing and applications to receive an industry-insurmountable number of OUL engine family approvals from the EPA (~500). The Company is working to become the first retrofit technology to obtain IUL approval and estimates the cost to complete the top four engine families to be around $500K.
  • Full patent protection of their technologies and methods
  • Establishing the crucial partnership with The Wheeltime Network and the costs related to technician and authorized dealer training
  • Establishing manufacturing capabilities
  • Hiring appropriate support and sales staff at the company level
  • Proactively facilitating the solidification of the share base into a solid, company-friendly group of major holders and retail investors. This became even more the case in April and May of 2014 when a forced seller's shares made it into the hands of solid longs.
  • The costs of many years and millions of breakdown-free miles on their dual fuel vehicular evaluation units and stationary use evaluation units (e.g. fracking rigs)
  • Establishing major partnerships with leading companies in the natural gas realm, such as Blu, Gain, Evol, and others.

As such, the company's capital expenditure budget for the coming year and beyond will see a dramatic decrease. For APGI to gain EPA approval for the one remaining OUL engine family, and the four IUL engine families they seek for their business plan, the total remaining outlay will be a only about $500,000.

APGI's business plan points to robust sales with little company capital and few, if any other additional company resources.

  • APG assembles their stellar V5000HD dual-fuel conversion kits at their Iowa location, which can support annual revenue in excess of $20M without additional build-out using well-established part supply chain.
  • Human resources, sales, installation, and support (and, crucially, their related costs) are all taken care of by the authorized dealers (such as the Wheeltime Network members) and CNG/LNG partners, for both the retro-fit and glider truck programs.
  • APG's business model would, at most, result in additional company hiring only in response to rises in sales, not as a prerequisite for sales to begin.
  • APG's current company representative structure (regional representatives serving the dealers around the U.S., and international partners like Wesfarmers' Evol, LNG) is sufficient for APG's rollout.
  • APG has the unbridled support of a tiered, multinational, multi-product sales and support network that can drive earnings exponentially. To wit: note that APG is the only dual-fuel partner unanimously selected by the Wheeltime Network members - noted fully on Wheeltime's website's home page, and note that Blu, who tested numerous competitors' systems, has taken all other dual-fuel systems off their vehicles, supporting and selling APG's.
  • Crucially, customers who have field-tested APG's system, usually in head-to-head testing with competitor's systems, are placing their follow-on orders with APG and the company is gaining new customers monthly.

APG's financials are strong.

  • The company's CFO, Chuck Coppa has publicly stated the company anticipates turning cash-positive during fiscal 2014 leading towards profitability.
  • The company has over $1M cash on hand. Mr. Coppa, stated "based our fiscal 2014 plan, anticipated IUL approval rollout and existing cash, receivables and bank line we believe we'll have the necessary resources to continue rolling out our business plan towards our goal of attaining sustained profitability."
  • While there is a good deal of "overhang" from warrants related to past offerings, it would be easily overcome in earnings-driven share price appreciation even with the most conservative of market penetration and sales estimates. Analyst John Gay of The Quiet Investor does a good job of discussing this in his recent coverage with a Buy recommendation. With his permission, it is printed in its entirety in my instablog, and is well worth the read. As before, I also recommend investing the cost of access to the excellent, professional article on APGI by Seeking Alpha Pro Stewart Flink. I expect to see analyst coverage by 4Q14, and articles from some two or more seasoned SA members in the coming months.
  • APG has a proven, industry-respected, "invited to the table" management team and intellectual property, hardware, and engineering that is regarded in this sector.
  • The history of American Power Group's birth had it share of challenges. Long-term investors from the Green Man Technology era and before invariably praise CEO Lyle Jensen and CFO Chuck Coppa. They use terms like "competent," "committed," and "failure is not an option" type of leaders. The Quiet Investor Analyst report does a thorough job of describing the history and supporting their current Buy recommendation. It is available in my SA instablog.
  • A veteran (over 30 years) managing investor with emerging technology companies described his belief that APGI will join the list of those he's worked with that become billion dollar entities. He stated to me, "The key to APGI's success is the vision of (NYSE:CEO) Lyle (Jensen), a hands-on working Board of Directors, a chairman who refused to give up, and (NASDAQ:CFO) Chuck Coppa, who kept it all together."
  • During the Q3 Investor conference call, Lyle Jensen the Company's CEO provided some very positive comments, worth including here:

So to boil all that down, we - APG estimates there are 2000 to 4000 engines in the oil and gas market that could become candidates for APG's dual fuel conversions and that would be valued at somewhere between $75 to $150 million addressable market based on the average kilowatt power of each rig site. In addition to that, Baker has reported that there are 358 rigs operating in Canada which we now have opened up our market to and that is another $5 to $10 million of market opportunity that we believe we can address.

We have excellent Class 8 truck and engine market statistics generated by such companies as Power Systems Research, R.L. Polk and Ward's Auto, and if we take a look, there is joint concurrence but there are over 3 million Class A trucks operating today on the US highways and they range in age from 2014 to the late 1980s. As we size the market, I think it's important to note that the US on road vehicular conversion market was created just two years ago when EPA came out with new regulations.

Our goal here is to have the highest number of OUL and IUL approvals for all of the top model years of the top seven engines and those include CAT, Cummins, Detroit Diesel, Mac, Mercedes Benz, Navistar International and Volvo. The Navistar International engine family is the only one left to complete OUL testing on which we'll get done in the next couple of months. In total, when we take a look using the market statistics, we believe the OUL market for these seven engine models for model year 2009 and older is estimated at 1.6 million vehicles on the road today. Now we've yet to predict an adoption rate but as an example, a 10% market penetration over time would equate to a $1.6 billion addressable market. APG estimates the available IUL market which are the lower mileage engines for these seven model years as another 400,000 to 500,000 trucks, which at a 10% market penetration would be an additional half-billion-dollar market for APG's vehicular market.

APGI's technology enters a stage ripe with demand for natural-gas-based fuel savings. I believe this will show itself in sales starting in 2Q14 and ramping up in the quarters to follow. The regular retail investor or even fund manager who wants to invest in the dual-fuel / natural gas phenomena is short on options. While APG's sales grow, former competitors who had their stances as to why their approach was better than APG's have since gone out of business (e.g. Peake and Eco-Dual, both of which used injectors from the last company similarly claiming dual-fuel viability, foreign company Clean Air Power). Viable competitor (if not potential acquirer) Caterpillar has affirmed APG publicly as their only viable dual-fuel competitor, with top engine development and global product validation executives knowing all about APG and regarding them as a company with solid technology that is going to see sales. The timelines shows CAT getting into stationary dual fuel with its Dynamic Gas Blend after APG's lead, and shows no CAT presence in the vehicular realm. With Cummins, Volvo, Westport, Clean Air Power, and other's natural gas, HPDI, or dual-fuel programs all either having mechinical failures, inabilty to do anything but at best limp home only the cab if natural gas is not available, unable to produce over 460 horsepower, and other drawbacks, in addition to other of the problematic injector-based dual-fuel companies closing shop, the field for APG was wide open, and is now drastically moreso.

With inferior competitor Clean Air Power trading on a foreign exchange, and CAT's stock hardly going to have raving growth in response to possible success with their Dynamic Gas Blend subdivision of their engine division, where does the retail investor and fund manager go to get in on the coming flood of demand for dual fuel savings in vehicular and stationary applications? They turn to the only publicly traded company that also happens to have a proven, patented, reliable, cost-effective, market-ready dual fuel system… American Power Group. This will drive share price. Further, I foresee APGI being on a regular exchange in the near future, with the next pausing points, even without sales news, being $1.60 and $2.20. With increasing vehicular sales, fracing and stationary wins, new customer growth, initial customer follow-on orders, and fleet retrofit or Glider orders on a larger unit scale, the upside potential for APGI is significant.

Like any investment, there are risks. Just some include that the company still trades on the pink sheets, there exists the impediment of the large fully diluted share count, the natural gas field is rapidly expanding (which also means rapidly changing,) APG is, after all, a small company, and while I have tried to unearth all I can, there's always the possibility of a better technology being developed, or the risk that somehow there are later problems with APG's system that result in expensive recalls and/or loss of continued interest.

There are some who argue that the business model of APG is not sustainable because after a huge ramp-up of sales over several years, there may not be a steady income stream, or that APG will be so successful in using dual fuel as a stepping stone or trial entry into natural gas, and thus also contributing to the demand for and establishment of a natural gas fueling infrastructure that it will indeed convince fleets to go to full natural gas vehicles as they buy new vehicles, which will eventually dry up most dual fuel conversion approaches. Recent flluctuations in natural gas pricing has given even further support to dual-fuel, with fleets looking at it now as not a bridge to dedicated natural gas, but the business-plan-safest, non-single-fuel-dependent, range anxiety-eliminating, fueling infrastructure-independent way to save money by having the ability, but not the dependence, on use of natural gas in their fleets. APG dual fuel takes great risk off the table due to its proven reliability, patent protection and software IP rights, galactic lead in EPA engine approvals, and freedom of wise business choice it gives customers to choose to use natural gas when it's available, where it's available, and when its price makes it advantageous to do so.

Based on the factors I outline in my lengthy Instablog article about APGI, and, frankly, positive comments about APG I've heard from leaders in the engine, power, fueling, rail, marine, backup power, oil and has, and over the road freight fields, it must be acknowledged that APG is a highly attractive potential target for acquisition. In one sense, the preferred convertibles' overhang and the nature of the company's board give longs some early defense, but there is always the possibility of the company being acquired before longs get to see the full growth APG will command.

So many possibilities...that's why one has to do one's own due diligence. I've done mine; continue to do so, and am solidly confident with my long and regularly-increasing investment in APGI.

Due to the combination of current financials, costs already handled, the low demand on company resources required for sales, the prowess of the company's management, their dual-fuel product's proven post-field-test preference by vendors, the endorsements by major energy, transportation, and natural gas entities, the paucity of dual-fuel investment opportunities, and the perfect market environment into which APG enters, I believe APGI is "the little train that could" - and will.

Disclosure: I am long APGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.