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Another Company That Could 'Kill The Gasoline Engine'
5/16/2013 12:30:00 PM
As regular readers of StreetAuthority Daily know, I think there ismoney to be madeinvesting in companies building "America's Natural Gas Highway."
One of my favorites is a company that could helpkill the gasoline engine, Westport Innovations (Nasdaq: WPRT) . But today I want to tell you about another potential gasoline engine killer that's about to be listed on a major exchange for the first time.
You've probably heard the backstory. Using horizontal drilling and fracking, energy companies have unlocked an ocean of oil and natural gas previously out of reach. And it's happening at a record pace. In fact, the International Energy Agency said Tuesday that "North America has set off a supply shock that is sending ripples throughout the world."
As surprising as it sounds, the United States has more oil reserves than Saudi Arabia. And as that oil is produced, an almost infinite quantity of natural gas is being pumped too. Prices have fallen. And now the big money is betting on a "new normal" for low natural gas prices.
Nowhere is this more Game-Changing than in the transportation sector...
The New York Times recently reported that Procter & Gamble ( PG ) and UPS ( UPS ) , among other large companies, are switching a significant percentage of their fleets to natural gas. UPS estimates the cost savings at 30% to 40% per mile driven as compared with diesel.
That's significant. In fact, spread across the millions of semi trucks on the roads -- and across the nation's "off-highway" vehicles like tractors and other niche farm and construction equipment -- that's more than just big money. It's even more than a Game-Changer, really. It might be one of the largest and most impactful trends of a lifetime.
While most people have been focusing on different trends in natural gas, I've come across a little-known small-cap company that I thinkwill aid in "killing the gasoline engine."
Power Solutions International ( PSIX ) is a $275 million company that makes engines that run on natural gas. It operates in the same space as Westport Innovations, a company I first recommended in May 2012. But unlike Westport, PSI hasn't graced The New York Times with its story.
By that Imean thestock is still flying under the radar -- and that's good news for early investors.
To learn more about the company, I recently had a phone conversation with its chief operating officer, Eric Cohen.
Besides the fact that it's making a product I think could take-off in the coming years, PSI also just announced its moving from theover-the-counter market to theNasdaq . When that happens, large investors like pensionfunds ,mutual funds , insurance companies and banks will be able to buy theshares . I think all that buying means prices are likely to rise.
Unlike Westport, which converts diesel engines to run on cleaner and cheaper natural gas, PSI builds these engines from the ground up. These engines are custom-designed and built to perform a specific task for an equipment manufacturer. Most of PSI's business is for off-highway use in highly varied niche products, Cohen said.
Believe it or not, this is a revolutionarybusiness model . PSI isn't just turning out engines by the container-load. It is building them for specific products to do a specific task in what Cohen called a "holistic approach."
The engines are also lighter. An 8.9-liter Westport engine -- the type that would go in a school bus -- weighs 1,300 pounds. But an 8.8-liter PSI engine, on the other hand, weighs only 670 pounds. The output of the two engines is roughly equivalent, but the amount of energy required to move the engine depends alot on size and weight.
So the engine is designed for its task, it uses cleaner energy that is also vastly cheaper AND markedly MORE efficient.
PSI's customers love all this, a fact that is borne out on theincome statements. In 2010 it reportedsales of about $100.5 million while lastyear it reported sales of about $202.3 million -- a 101% increase in two years. And it's on track to continue that climb this year:Earnings came in 9% higher in the first quarter than they did in the first quarter of 2012.
Usually companies like this take on an enormous amount ofdebt to get off the ground, but when you check PSI'sbalance sheet , you'll find that it is debt-free.
Risks to consider: The switch from gasoline to natural gas-powered vehicles is still in its infancy. I wouldn't advise anyoneput more than a small percentage of their portfolio in a stock like PSI.
Action to Take --> Factor in Cohen's belief that the "on-highwaymarket isprime and capable of delivering $500 million in business," and I see a company ready to capture growth building "America's Natural Gas Highway."