New Portfolio Idea — PPSI

A cheap way to play the expected EV infrastructure growth

In this newsletter, I share summaries of attractive investment ideas sourced from the Value Investors Club and incorporated into my personal portfolio. These summaries will be complemented by regular updates on key developments impacting investment theses. My aim with Idea Hive is to document my own portfolio management process while also enabling readers to quickly grasp and follow attractive investment opportunities.

Today, I am back with the latest portfolio idea, Pioneer Power Solutions (PPSI). A write-up on PPSI was published on VIC in March. PPSI stock has sold off sharply since early April when the company reported weaker-than-expected Q4’23 results. However, I think the market has overreacted and the investment thesis remains intact. So I think the entry timing for this portfolio position is now even better than at the time of the write-up.

Just a quick note before diving into the idea: I have already identified several other attractive starting positions for the Idea Hive portfolio, so you can expect frequent posts over the coming weeks.

Now, let’s dig in.

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Pioneer Power Solutions (PPSI)

• Elevator Pitch: A cheap way to play the expected EV infrastructure growth.

• Current Price: $3.99

• Target Price: $20+

PPSI is a $40m market cap ($33m EV) company that manufactures two electrical power management product lines:

• e-Bloc: switchgear systems installed outdoors, allowing to maintain and manage 2 or more sources of power, e.g., solar panels and conventional power grid. This is PPSI’s main revenue-generating product.

• e-Boost: portable fast-charging units for EVs. Products include e-Boost Pod (a self-contained unit housed in a container) and e-Boost Mobile (a trailer unit). among others. This is the company’s newer, currently unprofitable product line. The segment is fully linked to the electric vehicle end-market (compared to 20% exposure for e-Bloc).

Source: VIC write-up.

PPSI presents a cheap way to bet on the expected growth of EV infrastructure. At the current share price levels, PPSI is trading at c. 12-13x forward P/E (management has guided for $0.31-$0.34 in 2024E EPS). I think this valuation is too low for a business that boasts a net cash position ($7m, with no debt) and has displayed impressive growth over the recent years, including 48-51% during 2022-2023 and a further 30% expected in 2024.

And PPSI management’s EPS guidance might be too conservative as the smaller, cash-burning e-Boost segment is expected to turn break-even by mid-2024. Management has previously suggested that the EPS of e-Boost was -$0.06 in Q3’23 (compared to $0.10 in total Q3’23 EPS) but the product line was expected to break even during Q2’24. So, assuming conservatively that the EPS of e-Bloc does not increase, the segment alone would generate $0.64/share in annualized Q3’24 EPS. This would imply a P/E multiple of 6.2x, significantly below that of much larger yet slower-growing competitors PWR and ETN trading at over 20x multiples.

What has driven the growth story so far? Well, PPSI’s revenue growth over the recent years has been propelled largely by sales of e-Bloc growing 71% in 2023 and 83% in 2021. This has been driven primarily by several large customer orders, including:

• $12m order from “one of the world’s largest merchandise retailers” (announced in Dec’21).

• $9m order from “one of the world’s largest automakers” (delivered in 2023).

• $6m order from three water districts in California (delivered in 2023).

There seems to be further growth runway for e-Bloc product line given already signed purchase orders (e.g., $7m order signed in Sep’23 and scheduled for delivery in Q2’24) and the potential for selling units to new/existing customers. The company has hinted that it might potentially receive a large number of additional orders from the above-mentioned large merchandise retailer (see quotes from Mar’23 conference call below).

We expect additional orders in 2023. They have the units that we produce for them. They're monitoring. They're seeing how it goes. They've targeted hundreds of stores. We did 63. They're targeting almost 1,000 inclusive of the 63 over the next several years. So yes, we expect more orders, frankly. I don't expect any of those orders before midyear, which would, depending on their schedule and so forth, which would make these a 2024 shipping delivery revenue item for us. We're not including any of that in our projections for 2023.

Another key driver of growth here, given the EV infrastructure tailwinds, might be PPSI’s e-Boost product line. While revenues from e-Boost have so far been minimal (c. $1m in 2023), during the Q3’23 conference call, management stated that they expect to quadruple e-Boost revenues in 2024 to $4m. This is expected to be driven by already signed orders in several different end-markets (see quote from Apr’24 conference call below).

In addition, in 2023, we booked more than $4 million in new e-BOOST orders across the first end markets ranging from the major transportation agency, a major automaker, municipalities, several enterprises operating bus and truck fleets, a North American utility, a truck dealership as well as many others.

The opportunity seems to exist as PPSI is a micro-cap stock with a predominantly retail investor base that is in the early stages of a potential profitability inflection. Another reason for the current attractiveness of the investment opportunity is the fact that PPSI stock has sold off sharply following Q4’23 results released in early April. The company reported a revenue decline of 19% in the quarter, leading to full year revenues coming in at $41m vs. the initial guidance range of $42m-$45m. However, it seems that the market has overreacted as the revenue decline was driven primarily by the timing of certain orders shifting from Q4’23 to 2024.

Below I am sharing my thoughts on several aspects that bears might point out here:

• One of the key concerns might be that e-Bloc and e-Boost appear to be rather commoditized products, with seemingly large competition. For instance, e-Bloc competes with other switchgear system providers, including such power management space behemoths as Eaton Corporation. This, coupled with PPSI’s significant customer concentration (e.g., revenues from a single customer accounted for 45% of total sales in 2022), might indicate that company’s product could potentially face significant competition. However, judging by PPSI’s rapid growth over the recent years, it appears that the company’s products might be differentiated from the competition.

• The investment thesis here partially relies on PPSI management’s outlook. However, while there is a risk that management’s guidance might be too rosy, what gives some confidence on this front is high insider ownership (29%) and the fact that management has generally met its guidance over the recent years (since 2018).