Fuel Systems Solutions (FSYS, Financial) failed to impress with a its poor first quarter results for fiscal 2015, clearly indicating the impact of continued challenges in automotive and industrial end markets, due to troll in the oil pricing, which has affected the demand. The poor performance in the first quarter disappointed many investors resulting in the loss of market share as well.
The past stock performance for five years is also not so impressive, and, the trends in the market are indicating a further drop in the market share in the future. Fuel Systems has to look out for some ways to maintain profitability and hold a competitive edge in the market. It is, in fact, carrying out some impressive moves which are expected to help it in the long run. Let us have a look.
A closer look
Fuel Systems' quarterly revenue dropped by 10.6% to $63.3 million as compared to last year’s same quarter’s revenue of $81.3 million. Moving on, Fuel System’s gross profit margin rose to 22.9% as compared to 21.4% in the first quarter of 2014. However, Fuel Systems disappointed everyone on the earnings front. It posted adjusted EBITDA of $1.9 million as compared to $2.2 million in last year’s same quarter.
Fuel Systems is well aware of the headwinds it is facing. It has also pinpointed key areas where it needs to check its performance. To better confront the challenges, it has come up with strategies such as three-year cost reduction and restructuring initiatives. It is laser focusing on creating better efficiencies in elements such as cost organization and manufacturing. The success of these efforts will leverage its market position as well as technological leadership in the space.
The way ahead
In the midst of this softness, Fuel Systems is counting on its restructuring and cost reduction initiatives. With these initiatives under way, the company expects to generate $23 million every year, which is a solid growth sign. In addition, Fuel Systems is restructuring its organization to improve its margins. Along with resizing its workforce, Fuel Systems is also engaged in writing down the carrying value of certain assets, which it thinks are its top priority.
Fuel Systems is also having its eye on material reduction initiatives. Under this, the company will mainly be focusing on implementing alternative sales and distribution models after selecting particular manufacturing facility, and, then scrutinizing it. But the company is suffering due to lower oil prices, as it has reduced the demand for LPG and CNG vehicles. The lower oil prices have affected the buying sentiments of the customers, as they don’t want to upgrade their vehicles on CNG and LPG platforms.
However, the analysts are expecting the boost in the sales of light-duty vehicles by 55% in 2015. This is a positive growth indicator for Fuel Systems. Thus, a long-term outlook for the company looks promising, and it should drive its market share in the future as well. In response to these opportunities, Fuel Systems is investing aggressively in direct injection technology in Europe; sticking to its plan for OEMs across the globe.
To secure long-term growth, the company is further under negotiation for a contract for new model year 2016 cab chassis program. This should be a wise move by the company, and, if everything goes well, the company is planning to start this program in the second half of fiscal 2015. Further, its recently launched CNG fuel system kits for Chevrolet 1500 and Silverado have been received positively by the customers due to superior drivability and performance. These are expected to continue in the future as well.
Conclusion
Now moving to the fundamentals, the stock is expected to yield solid earnings growth in the near term which can be seen through its forward P/E of 63.43. The stock can also be a solid long term holding with a CAGR of 14.47%, which is more than the industry's average. All these signs indicate that Fuel Systems is definitely a good pick as of now.
