Power Solutions International - PSIX
|Nov 5, 2012|
I was making another pass through the ranks of pink sheets and OTCBB stocks this week when I came upon on unfamiliar company with a healthy stock price of around $15, Power Solutions International. When looking at unlisted stocks, share prices over $5 or so immediately draw my attention. In my experience, the companies behind these stocks are far more likely to possess real revenues and profits than companies with share prices of $5 or lower. Plenty of companies with investment potential can be found trading below $5, but the hunting quickly becomes difficult as ones moves down the price scale. The ranks of companies with share prices below $0.50 or so seem to be populated almost entirely of zero-revenue "development" companies or those with operating income stuck perennially in the red.
But anyway, back to Power Solutions International. PSI designs and manufactures alternative fuel engines. The engines run on natural gas, propane or biofuels. They power a variety of machines such as generators, forklifts, oil&gas equipment and others.
In news that should surprise absolutely no one, the market for alternative fuels engines is growing by leaps and bounds. The low price of natural gas, especially, is driving demand for alternatives to traditional gas engines. Power Solutions international did $83 million in sales in 2009, but $186 million in the four trailing quarters. That's a 38% annual revenue growth rate. What's more, unlike many alternative energy companies, PSI is profitable! The company produced $6.1 million in operating income in 2009 and grew the figure to $11.37 million in the four trailing quarters.
Revenue in the second quarter of 2012 hit an annualized run rate of just over $200 million. For such a rapidly-growing company in a hot industry, PSI's valuation is very conservative. With a market cap of $131.6 million, PSI trades at 11.6 times trailing operating income and 9.7 times the most recent quarter's annualized results. As revenues and profits continue to grow, these multiples will drop rapidly.
There are reasons to believe revenues will continue to rise. The potential of natural gas-powered engines is only just beginning to be recognized. As infrastructure is created to support natural gas-powered machines and engines, these engines will become a more viable choice for businesses and eventually consumers. The government plays a role in encouraging cleaner-burning natural gas engines too, by creating demanding emissions standards. PSI's recently-introduced 8.8 liter engine is designed for use in both off and on-road markets. Previously the company competed almost exclusively in off-road markets. The company is also moving into the hybrid engine market.
Despite the company's remarkable growth and consistent profitability, Power Solutions International flies almost entirely under the radar due to its unlisted status. While PSI languishes at 0.70 times trailing 4 quarters revenues, but unprofitable NASDAQ-traded competitor Westport Innovations is valued at 3.8 times revenues.
At present, SEC rules prevent companies that went public through reverse mergers from listing on a national exchange until 12 months have passed and at least one fully-audited annual report has been filed. (Power Solutions went public via reverse merger with a shell company. PSI itself has been in business since 1985.) PSI should fulfill these requirements after the December 31, 2012 annual report is filed. At that point, I would not be surprised to see an uplisting. As a quickly-growing, profitable company in a niche market space, I expect PSI to attract a lot of attention and quickly be granted a higher multiple.
What I present here is only a quick summary of Power Solutions International's investment potential, but there's a good deal of information out there for investors wanting to know more.
The usual caveats apply. PSI is a small competitor in its industry and may not have the research capabilities or bankroll of larger companies. Natural gas prices could rocket and make natural gas engines uneconomical. The company's shares are illiquid.
And now for a few housekeeping matters. First, I'd like to apologize for the low volume of posts lately. The old day job has been especially demanding. I appreciate your readership and I hope you will follow this blog via email or Twitter. Both are linked in the sidebar to the right.
As a result of an onslaught of spam comments over the last two weeks, I have been forced to install a captcha system for comments. Yes, captcha is annoying, but so is clicking "spam" on 100 comments advertising pharmaceuticals.