The results themselves weren’t completely terrible (though, they certainly weren’t anything to cheer). See them for yourself here. Yes, Q4 2010 was rough in comparison to Q4 2009, but that is predominantly the results of the expiration of the government subsidies, so it isn’t quite a fair comparison.
A few things jumped out at me. First, why is the company issuing shares when it has a significant amount of cash on hand and has strong operating cash flows? The company went into the quarter with $75.5 million in cash, yet it issued 2 million shares, raising $64.8 million (the company was committed to using some of the proceeds to repay a term loan, but the company still raised far more than necessary for that). The press release says the excess net proceeds (after repaying Intesa Sanpaolo S.p.A) for:
[W]orking capital and general corporate purposes, which may include expansion of its business, additional repayment of debt and financing of future acquisitions of companies or assets.Despite this, the company used only $4 million in cash for the EvoTek acquisition (plus another 89,207 shares – further dilution) The company now has $124.7 million in cash The company has very little debt left to repay, so from the press release we can expect the cash to be used for business expansion – hardly a sure bet, and a red flag for value investors.
Second, the company’s guidance for 2011 was downright scary.
In 2011, Fuel Systems expects continued soft European automotive trends and continued strength in the IMPCO business. As revenue growth and cost efficiencies gain traction during the year, the Company expects full year 2011 revenue to be between $375 million and $400 million and expects 2011 gross margin of 23% to 25% and 2011 operating margin of 5% to 7%. Management reiterates that it continues to target gross profit margins in excess of 25% and mid-teen EBITDA margins over the medium term.In comparing this forecast to previous years, we see that management is expecting a fairly sizable drop at the top-line (Compare to $430m and $450m for 2010 and 2009 respectively), a significant decline in gross margin (30.7%, 32.8% and 28.4% for 2010, 2009, 2008 respectively) and a downright collapse in operating margin (13.5%, 17.8%, 13.1% for 2010, 2009, 2008 respectively). Using the midpoints of these figures, the current debt and cash and newly diluted share count and FSYS looks like a $15 stock. Management appears to be expecting a return to 2008 revenues and pre-2007 margins. For reference, the stock traded in the mid to high teens back then.
I wish this was simply the mark of an overly conservative management issuing guidance that it can outperform, but management has proven to be fairly accurate in its forecasts. Last quarter, the company forecast gross margin of 29 – 31% and operating margin of 14 – 16%, with full year revenue of $425m – $450m. Actual results were not far off: 30.7%, 13.5% and $430m.
I had high hopes for this company, but it appears that management is sending a strong signal that its earnings are only temporarily elevated (making the low P/E more of a mirage than anything). Additionally, given management’s free use of its shares as currency, it seems the company may be signalling that it believes the shares to be priced high compared to what it expects in the future.
Author Disclosure: No position
Talk to Frank about Fuel Systems Solutions