Fuel Systems Targeted by Short Sellers as Chief Remains Upbeat

By Peter J. Brennan

Feb. 27 (Bloomberg) -- Seven months after oil prices tumbled by more than half from a record in July, Fuel Systems Solutions Inc. is counting on a rebound to as much as $90 a barrel to boost demand for the components that enable gasoline engines to burn low-emissions fuels.

Some investors aren’t persuaded that Fuel Systems’ shares will rise with the price of oil. Short interest has quintupled since November, a sign some stockholders expect the shares to fall. Short sellers say the shares may be over-valued, noting that the ratio of the stock price to per-share earnings is double that of other auto suppliers, said Graham Mattison, an analyst with Lazard Capital Markets Ltd. in New York.

“A lot of people are saying, ‘They are in the automotive business, no matter how you cut it,’” said Mattison, who has a “hold’ rating on the shares. “The outlook for automotive sales has become more bleak.”

Worldwide automobile production will decline 12 percent to 62.6 million this year, according to Haig Stoddard, analyst at IHS Global Insight in Troy, Michigan. His estimate has fallen from last July when he predicted 2009 production of 78.4 million. Ford Motor Co., the second-largest U.S.-based automaker, yesterday lowered its 2009 U.S. sales forecast by 1 million vehicles.

Fuel Systems, based in Santa Ana, California, was formed in 2006 by the merger of Impco Technologies and BRC S.r.L, a Cherasco, Italy- based firm.

The company or its trained distributors convert new or used vehicles to alternative fuels by adding components to the engine and a separate fuel tank for propane or natural gas. The conversion takes about two days and costs as much as $10,000 in the U.S.

‘250 Million Cars’

When asked about rising short interest, Fuel Systems’ Chief Executive Officer Mariano Costamagna said traders should know that the stock mirrors the price of oil, which is too low. “The correct price,” $70 to $90 a barrel, will be reached later this year and demand for Fuel Systems’ products will pick up, he said.

“There are 250 million cars in the U.S. running on petrol,” Costamagna said from his office in Santa Ana. “They are all potential clients.”

The company’s Web page declares that “escalating oil prices” will boost demand for components to reduce consumption. A barrel of oil reached $145.29 in July. The price for April delivery as of this week was $40.86.

Mattison is the only one of six analysts following Fuel Systems with a “hold” rating on the shares. The five others rate it a “buy.”

Analysts’ Estimates

Per-share profit may be little changed in 2009 while sales will increase 7.9 percent, the slowest growth since 2002, according to the average of six analysts’ estimates compiled by Bloomberg.

The stock last year more than doubled in value. Landi Renzo SpA of Italy climbed 45 percent. Costamagna said Landi is the company’s biggest rival. Mattison said new competitors are entering, such as Juniper Engines Inc., a joint venture between Westport Innovations Inc. and OMVL SpA, which in January introduced forklift engines fueled by liquefied petroleum gas.

Analysts haven’t altered their views of Fuel Systems in the past six months. John Quealy of Canaccord Adams Inc. raised his rating to “buy” from “hold” in August, before the stock fell by half, mirroring the drop in oil prices and car sales.

Other analysts, including Ron Oster of Broadpoint American Technology, also are firm in their support.

Fuel Systems deserves a higher valuation because it has good products in an environmentally friendly industry where governments are promoting growth, including rebates for those who switch to engines running on cleaner fuels, said Oster, who is based in Greenwich, Connecticut. He has a $50 target price on the shares.

“You cannot simply compare it to other auto suppliers,” Oster said. “Because there is a clean-tech component, there is a higher growth component.”

Short Sellers

Investors may see a surge in the share price if Fuel Systems reports earnings on March 5 that top analysts’ expectations, Oster said. Fuel Systems beat estimates in each of the past four quarters and the shares climbed an average of 30 percent in the next trading session, he said.

About 5.82 million shares were sold short as of Feb. 13, according to Bloomberg data, five times as many as on Oct. 31, and eight times the average daily trading volume of 729,000 in the past six months.

Short sellers borrow stock and sell it in anticipation of a drop in value. They then buy back the shares at the lower price and pocket the difference.

The shares fell $1.65, or 7.9 percent, to $19.13 yesterday in Nasdaq Stock Market composite trading. They have dropped 42 percent this year.

Costamagna and his brother Pier Costamagna together own 21 percent of Fuel Systems as of Aug. 19, according to Bloomberg data.

Fuel Systems’ Impco unit sells primarily into the industrial market with customers like forklift maker Nacco Industries Inc. while its BRC business converts vehicles for makers such as Toyota Motor Corp. and General Motors Corp.

Cheaper Than Gasoline

Tougher emission standards and differences in state requirements have pushed the conversion price to as much as $10,000 a vehicle in the U.S., about three times the rate for a vehicle in Europe, analyst Oster said.

Natural-gas can be as much as 50 percent cheaper than gasoline and emit up to 29 percent less carbon dioxide, said Richard Kolodziej, president of NGVAmerica, a lobbying group.

Fuel Systems has several factors in its favor, including tax breaks for consumers and businesses, a new unit for North America, a large distribution network, long-standing relationships with automakers and a product that permits cars to run on either natural gas or regular gas, Oster said.

Short trades began rising in November. John Lansing, a technical analyst who co-founded the Web site Trending123, recommended shorting the shares to the low $20s because it was tied to falling prices of commodities. He sold at $23.

“That was close enough” to the bottom, said Dallas-based Lansing, who said he made about a 30 percent profit. He predicted the stock will rebound to the high $20s before “it ultimately goes to $18.”

To contact the reporter on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net.