Fuel Systems Solutions (FSYS) 11/17/09


By Brendan Coffey, Analyst and Editor of Cabot Green Investor
From Cabot Wealth Advisory 11/17/09. Sign up for free Cabot Wealth Advisory e-newsletter.

Fuel Systems Solutions (FSYS) Could Be Home Run Stock in Natural Gas Conversion

I was recently mulling the desire to reduce the U.S. carbon footprint and the part-ownership we all have in two of Detroit's Big Three automakers. Specifically, I was thinking about Chrysler and why it just ended its electric car program ENVI.

Technically, the program was absorbed into mainstream vehicle development being run by Fiat, the Italian automaker that owns a large minority chunk and controls the management of Chrysler.

I don't suspect that Chrysler is walking away from electric as a possible vehicle platform, but I can speculate as to where I think Chrysler, led by Fiat, is heading: compressed natural gas or CNG.

Now, I don't believe CNG will replace gasoline, but I think it could be the major alternative vehicle option for Chrysler.

Why do I think this?

For one, Italians love natural gas powered vehicles. One recent report estimated that 25% of the vehicles sold in Italy last quarter run on compressed natural gas (or methane).

That's an astonishing amount. And that doesn't include the large number of after-market CNG conversions that are done to cars in Italy, too. As the largest automaker in Italy, Fiat is sending CNG-powered cars into the market. This spring, it announced six models for the Italian market that are able to run on either gasoline or natural gas. Here is a quote from a statement Fiat gave to AutoChannel.com at the time:

"Fiat believes that methane propulsion systems are currently the most appropriate and readily-available technology for resolving pollution problems in urban areas. This is because the use of methane has positive implications in terms of environmental benefits (reduction of approximately 23% in CO2 emissions and reduction of PM emissions to practically zero). Furthermore, methane proves itself to be a valid financial alternative to traditional fuels (diesel and petrol), which are increasingly subject to rising prices."

Pretty straightforward commitment, right? CNG at the nation's 800 filling stations is also as low as half the price of petrol in Italy.

Now consider this: the U.S. has the world's largest reserves of natural gas.

U.S. compressed natural gas filling station company Clean Energy Fuels (CLNE) can bring the gasoline gallon-equivalent to a filling station for $2.50 a gallon wholesale.

The U.S. government is mandating automakers get cleaner vehicles on the road and is a near lock by mid-2010—if not sooner—to pass a law extending significant tax credits to build CNG filling stations and convert gas engines in trucks and cars to use CNG.

The final piece of the puzzle? The leading engine conversion company, both for automakers fitting the conversions on the assembly line and for the aftermarket, is an American company, Fuel Systems Solutions (FSYS). Fuel Systems' U.S. arm is called Impco and it's based in California. Fuel Systems also has a major arm called BRC, which is based in Milan and supplies conversion kits to, among others, Fiat.

As I said, this is speculation on my part about the direction of Chrysler. And regardless, FSYS is proving to be a big winner in the market: I got Cabot Green Investor subscribers into the stock in August at 31 and shares have already climbed 55% to 48 thanks to strong European conversion business and an EPA regulation on truck emissions going into effect in 2010 that will make using CNG for truck engines much more attractive.

Consider how well FSYS could perform when gasoline prices inevitably push well over $3 as the economy improves (and as the dollar, in which oil is priced on the international market, remains weak). If Chrysler takes what I see as the logical path to producing a low-emissions car in the near-future, Fuel Systems could be an early leader in the home run sector of the decade before us.

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