Alternative fuel system company Fuel Systems Solutions Inc. (NASDAQ: FSYS) continues to progress. The company Thursday reported Q3 EPS of 77 cents versus the 43 cents First Call EPS estimate and the stock was up $8.82 to $42.63 at mid-day. I'm reiterating my Buy rating for the company, first recommended on August 17, 2009 at a price of $30.42, but wait for a pull-back following Thursday's surge. If bought FSYS in August, you're up about 40%.Fuel Systems' Q3 revenue increased 10% to $116.2 million, with the company reporting a record 47,000 systems installations, up from 37,000 and 30,000 in Q2 and Q1, respectively. Demand for alternative fuel vehicles was strong, especially in Italy, which offset weakness in its industrial business, and a negative foreign exchange impact, the company noted.
As noted in the August review, Fuel System appears to be well-positioned to benefit from Congress' proposed extension of tax incentives and credits for natural gas vehicles and infrastructure. The proposed bill also mandates that 50% of the U.S. government's vehicle convert to natural gas in the years ahead. The First Call FY2009/FY2010 EPS estimates for FSYS are $1.68 to $2.00. That FY2010 EPS will likely prove to be low.
In theory, natural gas can be a game-changer in U.S. energy use patterns - particularly if a large portion of the vehicle fleet converts to it. Obviously, in addition to tax-based incentives, conversion rates will also depend on the price of crude oil and gasoline: low gasoline prices (below $2.50 per gallon) have led to less demand for alternative fuel systems; high prices (sustained prices above $3 per gallon) spur fuel substitutions and conversions.
Stock Analysis: Fuel Systems Solutions Inc. is a high-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in FSYS on a pull-back to $40 or to $37, then buy another 25% in one month. Under any circumstance, don't buy more than 50% of your FSYS position before December 2009. Sell/Stop Loss if you were to buy shares in this company: $18.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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