Thursday, January 31, 2013

Sevcon ( Nasdaq - SEV ) -- Better Days Ahead

Sevcon (SEV $3.75) reported lower than expected Q1 (Dec.) results.  Sales dropped 22% to $6.64 million.  Earnings slid to a loss of $.39 a share.  Sevcon is a leading provider of controls for electric vehicle engines.  In general, half the business is directed towards off-road work machines.  The rest is used in small city cars, motorcycles, and all terrain recreational vehicles.  Both segments were hit hard in the latest quarter, continuing a slowdown that began earlier in 2012.  European volume nosedived 44% due both to the poor economy and a break in production by Renault of its promising city car line.  U.S. volume declined 18%, mainly due to the election.  The Obama Administration implemented stringent E.P.A. rules that will force a large increase in electric work machines.  Producers of those fork lift trucks and other vehicles delayed implementation, hoping Mitt Romney would be elected and moderate the impact.  Asian demand picked up by 17%, but that represents a small part of the business currently.

Work machine volume is poised to accelerate over the next 3-5 years.  E.P.A. regulations that go into effect in 2015 and 2017 will require less pollution and greater fuel efficiency.  Sevcon is working on a number of programs, mainly in the hybrid engine area.  The electric car segment promises to recover, as well.  Renault built a limited number of city cars to begin with in 2012.  Demand was strong.  Bigger production volumes are slated to begin in March.  Motorcycle and ATV demand has been consistent.

The long term outlook remains positive.  Electric vehicles will remain a niche segment until improved battery technology expands their range.  That's not on the horizon.  But there are millions of short range commercial, industrial, and consumer vehicles that are candidates for hybrid and electric engines.  The share count is low. So any meaningful improvement could support substantial stock price appreciation.

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