Merrill Lynch comments:
Reit. Underperform as the least exposed gains the most We are reiterating our Underperform rating and $23 price objective since we see the recent run-up as an opportunity to move out of the stock. Since Friday’s close, Fuel Systems has outperformed other nat gas stocks as investors anticipate re-introduction of the Nat Gas Act (see Nat Gas Act Coming but Not a Slam Dunk). We would move out the of the stock because (1) we don’t expect the company to materially benefit if it is passed, (2) earnings estimates remain at risk, and (3) the valuation is expensive, in our view, and significantly stretched relative to Landi Renzo.
Fuel Systems not a big beneficiary of Nat Gas Act
The company is just starting to roll out CNG systems for Chevy’s Express and GMC’s Savana vans at about 40-50 vehicles per week. We think gaining prominence in this category will incent more action from OEMs though we would not expect any material impact to top-line results until 2013. Recall that during the height of Italy’s cash-for-scrap program, BRC shipments topped out at 5,800 vehicles per week. We do not see the company reaching that run-rate anytime soon in the U.S., even with swift passage of the Nat Gas Act. We see other Nat Gat Act related names with U.S. exposure such as Clean Energy (CLNE, C-2-9) and Westport (WPRT, Not Rated) benefitting more from such legislation.
High multiple and big premium to Landi
Despite four quarters of sequential revenue declines, lower profitability, and reduced guidance, Fuel Systems appears expensive at 42x our 2011 EPS estimate of $0.72 and 26x our 2012 estimate of $1.45. The stock also trades at a considerable 180% premium to its closest competitor, Landi Renzo (LDRZF, C-1- 7, EUR2.49), despite Landi’s superior revenue growth and profitability (Chart 1). The trajectory of the company might be turning up, but we see a long and bumpy road ahead as the company transitions.
