A Clean Winner in the Industrials Sector
ESG Stock Pick
2022 has been one of the worst years for stocks and bonds since the Great Depression. Whether the recovery comes this year or in 2024, we think that today’s valuations offer a rare opportunity to buy good stocks low and hold for the long-term.
This year, the electrical equipment market was disrupted by supply chain challenges, exacerbated by the Russia-Ukraine war and supply chain challenges brought by it. __
Pioneer Power Solutions Inc (NASDAQ: PPSI) is an American highly engineered electrical equipment manufacturer. It’s had a rough 2022 - shares are down over 60% in the past year, driving the company to a market cap around $26 million, against a book value of about $42 million. There’s a lot of risk here, but we think that if PPSI can get back into shape, it’s primed for a strong recovery.
Company Overview
PPSI was founded in 2008 and has a global customer base. It manufactures, sells, and services four main product streams:
Electric power systems
Distributed energy resources
Power generation equipment
Mobile EV charging solutions
The company operates in two segments:
1 - Transmission & Distribution Solutions
Provides electric power systems, including e-Bloc, and distributed energy resources. These help customers transfer, monitor, and manage their electric energy requirements. It also provides low voltage switchgears and transfer switches.
2 - Critical Power Solutions
Provides new and used power generation equipment, and aftermarket field-services to ensure smooth and uninterrupted power to operations during times of emergency. The company serves utility, industrial, commercial, and backup power markets.
PPSI’s growth has been driven particularly by the e-Bloc and e-Boost products, and this is where we think the company can generate the most value.
The e-Bloc solution addresses the distributed generation market. Distributed generation is the concept of integrating multiple energy inputs, including zero-emission options like solar, wind, battery and/or hydrogen and traditional sources such as direct utility connections. This allows PPSI to cater to a diversified customer base, which is likely to help the company grow in the long-run.
PPSI’s e-Boost mobile charging platform, which provides a unique anytime anywhere mobile EV charging solution, is receiving interest from electric truck manufacturers, casinos, school bus manufacturers and EV manufacturers, as well as electric aviation businesses. In the last year, PPSI has booked $2 million of E-Boost business and delivered almost $1 million of value product year-to-date.
PPSI was recently awarded an $8 million purchase order for its flagship e-Bloc electrical solution by a major carmaker, scheduled for delivery in Q3 2023. e-Bloc's design enables seamless control and delivery of multiple sources of power, including green energy, and this new deal cements PPSI as a company at the forefront of the EV revolution.
Fundamentals
PPSI has a debt/equity ratio of 0.2 and a healthy balance sheet. It has more than enough cash to service its debt. In its latest 8-k filing in late December, the company disclosed that it received $6.2 million in cash pursuant to the notes receivable from the sale of its transformer business units in 2019. PPSI now has approximately $11 million in cash on hand. This transaction doubled the company’s cash position and strengthened its balance sheet, as the company targets the growing demand for EV charging infrastructure. CEO Nathan Mazurek stated this would provide PPSI with sufficient capital for continued investment in developing EV charging and distributed generation solutions throughout 2023.
Moreover, PPSI’s cash to market cap ratio of 42% is extremely stable. This is further confirmed by its strong liquidity position, as the company’s current ratio of 2.15 shows that it is well-positioned to cover its short-term liabilities.
We think the sell-off in PPSI stock was driven by bankruptcy fears as rate hikes, supply chain issues and declining demand in the broader market sent investors into a state of fear. But we think PPSI is is good position to survive and expand to capitalize on increasing demand for its products.
PPSI’s annual revenue is forecasted to grow by 100% from $27.5M to $54.5M between December 2022 and December 2023. The projected forward price/sales ratio is 0.47, very cheap for a company in good financial position, and significantly cheaper than the industry current average of 3.1.
In the past year, PPSI insiders have bought an additional 2.2 million shares (out of 9.6 million total float), meaning the company is over 75% held by insiders.
In the third quarter, PPSI spent heavily on production of e-Bloc and e-Boost products, and on compensation and corporate expenses. It’s currently operating with a negative free cash flow, but we see this as transitory as the company prepares to satisfy increasing demand.
Excluding corporate expenses, the company’s operating business units generated positive EBITDA during Q3 2022. Management hasn’t provided any real plans on how to get corporate spend down, so this is a clear downside to this stock.
Our take
PPSI’s e-Boost and e-Bloc are two very strong business units that can generate continued resilience and growth. Despite some expenditure issues, PPSI has a strong balance sheet and doesn’t seem to be at risk any time soon.
If you want to invest in the EV boom, then we think PPSI is a solid example of a cheap stock with real potential for growth in the coming years.