Tuesday, November 11, 2014

Sevcon ( Nasdaq - SEV ) -- Electrification Takes Control

Sevcon (SEV $7.50) is a leading manufacturer of control systems used in fully electric and hybrid vehicles.  The microprocessor based units manage the performance of electric motors, batteries, and related components.  Multiple inputs need to be interpreted on a continuing basis.  Sevcon's control systems are programmed to respond to that data to provide maximum efficiency.

Sevcon has a long history in the electric vehicle industry.  It has extensive relationships with makers of off-road machines like forklift trucks, aerial cranes, and mining equipment.  It also serves the ATV, scooter, motorcycle, and city car markets.  A joint venture that was established earlier in the year laid the groundwork for expansion in China, particularly in the bus and truck segment.  A first order was received in November.  Several projects are underway in Europe with undisclosed customers to provide a new generation of hybrid controls.  A potentially larger opportunity lies in electrification of vehicle subsystems.  More vehicle elements are being powered by small batteries that sit next to the device itself.  In the past those parts were powered by the main battery.  As the battery power is dispersed throughout the vehicle, each grouping requires its own se of controls.  Sevcon is ideally suited to provide the work because the projects are numerous and small, making them ideal to outsource.  Big engineering tasks, like running the entire drive train, commonly are performed in-house by vehicle manufacturers.

Sevcon already is profitable, unlike many green energy companies.  Financial results promise to accelerate as the Chinese venture gains momentum.  That is a 50-50 arrangement with a large component manufacturer.  The partner is lining up the orders.  Sevcon will perform the engineering and manufacturing work.  Sevcon plans to build the systems in England and export them to China, reducing the potential for intellectual property theft.  Margins are expected to be consistent with the company's existing business.  The electrification potential could be equally great.  Sevcon is working on several programs already.  The company also raised money in a recent equity offering, earmarking the funds for acquisitions that could play off the company's existing relationships.

Business is growing.  We estimate fiscal 2015 (Sept.) sales will rise 32% to $50 million to yield earnings of $.55 a share (+83%).  Growth could accelerate faster in subsequent years if the Chinese relationship builds momentum.  The electrification market offers further impetus.  Those systems will go into all types of vehicles, not just battery powered ones.  In 2-3 years sales could attain $75-$125 million to yield income of $1.00-$1.50 a share.  Applying a P/E multiple of 20x to the midpoint suggests a target of $25 a share, potential appreciation of 233% from the current quote.

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