Friday, January 17, 2014

Sevcon ( Nadaq - SEV ) -- Back in Control

Sevcon (SEV $7.25) is a leading independent provider of control systems used in electric vehicles and in other applications that employ electronic motors.  Over the past year the company has expanded into the hybrid engine market, as well.  Sevcon's microprocessor based controls convert and regulate the electrical energy generated by a vehicle's power source to maximize the performance of the unit's motor.  Sevcon does not make battery packs or the motors themselves.  High volume manufacturers normally perform the entire process in-house.  Sevcon works with more specialized niche producers who require custom solutions.  Over the past decade the company established a strong position in the off-road industrial vehicle market.  That included electric fork lift trucks, aerial lifts, mining vehicles, and a variety of other work machines.  Sevcon additionally made significant inroads in the electric motorcycle market.  More recently, Sevcon supplied the control systems for a tiny "city car" manufactured by Renault.  That model failed to win market acceptance, in large part due to the weak economy in Europe.  But the partnership created the expertise Sevcon needed to pursue additional vehicle programs.  The company also branched off and recently began to penetrate the high potential hybrid vehicle market.

Meantime, profitability has been restored following the unexpected Renault downturn.  The French car maker ordered 90% fewer control systems in fiscal 2013 (September) than it did the prior year when the Twizy initially was introduced.  Costs have been reduced, despite the fact more engineers were hired last year.  Existing programs are returning to life, except in the mining area.  The fork lift and aerial lift segments have been especially robust.  The motorcycle business has been solid, too.  Earnings improved 62% in Q4 (September) to $.13 a share.  Sales advanced 11% to $8.87 million.  Several OEMs were added to the client roster last year.  Most of those won't contribute meaningful revenues in the current year, as their new vehicles go through the engineering process.  Substantial gains are possible over the next 2-3 years as those new vehicles reach the market.

China offers exceptional opportunity.  Sevcon declines to identify its business partners until the vehicles they are working on achieve commercialization.  The company has devoted significant effort to the Chinese market over the past few years, though.  It's believed that several relationships have been developed.  The Chinese government recently implemented a major electric vehicle initiative, primarily to help improve the pollution situation in its larger cities.  Electric buses will receive an $80,000 per unit subsidy under the new regime, making them far more economical than diesel or natural gas alternatives.  Sevcon's long experience in the mining and industrial equipment area provides an established track record it can leverage when pursuing those contracts.

Sevcon also has moved aggressively into the hybrid automobile market in Europe.  Electric cars have become popular and could garner 5% of the entire auto market during the next decade.  Hybrids hold much greater potential, though, because they have unlimited driving range.  A wide array of approaches are in development across the auto industry, combining gasoline, battery power, natural gas, and fuel cells to provide high performance, acceptable cost, great mileage, easy refueling, and top notch reliability.  Hybrid's market share may increase 5% a year beginning in 2015-16 and keep rising at that rate until it reaches 50% in the mid-2020s.

If Sevcon can catch either of those waves results could surge over the long haul.  Spectacular stock price performance is possible in light of the company's modest share count.  A recent board of directors change may foreshadow some joint ventures or other strategic moves.  Three new members were added in December.  Our 2-3 year projections are speculative due to the secrecy surrounding the company's R&D programs.  Realistically, though, sales could attain $50-$75 million to provide earnings of $.75-$1.25 a share.  (The high end figure assumes the sale of an additional 1.5 million shares to finance growth.)

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