Power Solutions has dramatically cut down its debt and improved shareholder returns.
Two weeks ago, I published an article on grid-scale gravity energy storage systems developer Energy Vault Holdings, Inc. (NYSE:NRGV) wherein I noted the stock's negative momentum put it at high risk of being kicked off the NYSE. Since then, NRGV has sunk to sub-$1 territory making it a risky proposition despite a bright 2-year outlook as I pointed out in the article. Incidentally, I noticed that Energy Vault's peer that was delisted from Nasdaq years ago has lately been moving in the opposite direction. To wit, Power Solutions International (OTCPK:PSIX) has more than tripled since early May, its 14-Day RSI reading of 87.6 telling the whole story.
PSI is a leader in the design, engineer and manufacture of emissions-certified, alternative-fuel power systems. The company operates through three main segments: Power Systems, Industrial and Transportation. Its pivotal Power segment develops systems used in stationary and mobile power generation applications supporting standby, prime, demand response, microgrid, and co-generation power (CHP) applications. The Industrial segment makes forklifts, agricultural and turf, arbor care, industrial sweepers, aerial lifts, irrigation pumps, ground support, and construction equipment. The Transport segment develops powertrains purpose-built for medium-duty trucks and buses including school and transit buses, work trucks, terminal tractors, and various other vocational vehicles. The company's products are primarily used by global original equipment manufacturers (OEMs) and end user customers.
PSIX was delisted from Nasdaq in April 2017 after failing to meet certain filing obligations laid out by the U.S. Securities and Exchange Commission (SEC).
"As previously reported, the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the Securities and Exchange Commission (the "SEC").The Company intends to promptly seek relisting of its common stock on a securities exchange once it has completed the restatement of its financial statements and it is current in its SEC filing obligations. " Source
Obviously, the company is yet to return to the main exchanges, meaning PSIX currently trades over-the-counter with all the attendant risks and drawbacks including low daily trade volumes, higher volatility and less coverage. PSIX shares have been largely flat over the past two years until they zoomed off on May 7 after the company reported first quarter earnings. Revenue for Q1 2024 clocked in at $95.2 million, a decrease of $21.2 million, or 18%, compared to the first quarter of 2023. This was directly attributable to a decrease in sales in the Industrial and Transportation segments to the tune of $14.1 million and $24.4 million, respectively, partially offset by an increase of $17.3 million in the Power Systems end market. The company attributed shrinking sales in its transportation end market to lower sales in the truck and school bus market due to changing regulatory requirements for engine product offerings while the decrease in its industrial end market was due to lower demand for products used within the material handling and arbor care markets. The company was also unable to import certain raw materials after the enforcement of the Uyghur Forced Labor Prevention Act ("UFLPA").
On a more positive note, PSIX attributed higher power systems end market sales to surging demand for data center products, specifically packaging products such as enclosures as well as demand response products. I will dive deeper into this segment below.
A KEY HIGHLIGHT: Power Solutions International restored positive shareholder equity in the quarter to the tune of $3.2 million, the first time shareholder equity turned green since 2020. In other words, the company's total assets now exceed total liabilities. The company paid down debt of $5.0 million in the first quarter of 2024, and has managed to shrink its debt book from $225M in FY 2022 to $140.2 million by end of March 2024.
Here are more highlights from that report, all of which are positive:
Power Solution's management guided for a 3% Y/Y revenue growth for FY 2024, pointing to revenue of $472.7M. This implies that the company expects revenue to grow at a healthy 10.2% Y/Y clip for the remaining three quarters thanks to the strength of its Power Systems segment. I believe that's a big reason why PSIX shares have tripled over the past two months. This key segment is solely responsible for powering growth for the company, expanding 25.4% Y/Y in 2023 compared to -28.6% growth by the Industrial segment and -4.7% by the Transportation segment. Power Systems is now the company's largest segment, responsible for more than half of its revenue compared to 37% two years ago. That's a good place to be considering that the data center rack and enclosure market size is projected to increase by double digits over the next five years, with forecasts of 10.7% CAGR growth here and 12.7% growth here. This growth will be driven by ongoing trends including the growing need for edge computing, implementation of SDDCs (software-defined data centers), and consolidation.
The data center space is generally seeing robust growth. Last term, specialty contractor EMCOR Group Inc. (NYSE:EME) reported strong data center buildout momentum thanks in large part to the AI boom, as I discussed here:
''...high tech manufacturing is driven by AI and data center buildout. Go to data centers, we're really good. And we've been really good at this for a long period of time. We started this back in the early 2000s. There was a little bubble up in 2010, '11. We kept that capability. And that leadership we have in our electrical and mechanical segments and some of our subsidiary leaders, they are world class specialty contractors and data centers as is our fire life and safety offering. So what's driving demand here? Driving demand is us, right? We want more and more service. We -- big companies like EMCOR is putting more and more things in the cloud, but also the proliferation of AI, and that needs more systems. These went from 5, 10, 15-megawatt facilities to 50, 80, 100 megawatt facilities.''
It's likely that the strong growth by Power Solutions' Power segment and its data center products are responsible for the company's improving margins and profitability across the board (and the favorable product mix management talked about during the earnings call).
On a purely technical level, this appears like a good time to buy this stock. PSIX is a highly volatile stock and fell 4.2% on Friday; however, the stock lies in the middle of a very wide and strong rising trend. PSIX holds a sell signal from the short-term Moving Average but the short-term average is above the long-term average thus generating a general buy signal.
Power Solutions traditional Industrial and Transport segments are languishing with the automotive sector expected to face another slow year in 2024, although the supply chain challenges that have hampered the industry since Covid have been easing. Thankfully, the company's data center products appear to have garnered ample momentum, enough to pull the company from a long revenue slump. The company's cash position, margins and profits are all trending in the right direction while its debt is shrinking. These shares are cheap, trading at a PE ratio of 4.9 compared to 6.9 median by the Automotive Industry. I don't think PSIX has much downside at this point, and rate this company a Buy.