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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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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Sevcon ( Nasdaq - SEV ) -- Makes the Adjustment

Sevcon (SEV $4.25) reported unexceptional Q1 results.  The company is a leading independent supplier of controls for electric and hybrid vehicles.  The systems take directions from the driver and make the engine respond, maximizing efficiency and power.  Sevcon has a long history in the work machine market.  That segment fell on hard times last year when demand for mining and construction equipment declined.  Electric forklift truck demand slipped in the March period, as well.  Part of that is believed to the result of a shift towards natural gas powered trucks.  Sevcon entered the on road electric vehicle segment a few years ago via a relationship with Renault.  The company provided the controls for the 2-seat Twizy city car that Renault introduced, initially to relatively strong demand.  Weak economic conditions in Europe subsequently caused volume to slide, though, and that trend continued in Q1.  Off-road electric motorcycles and ATVs remained solid.

Sevcon responded to the slowdown last year by moving into the hybrid controls segment.  That effort hasn't resulted in large production runs yet.  But several programs are believed to be in the pipeline.  Sevcon's new Gen-4 system is geared primarily for the hybrid market.  The company also has beefed up marketing efforts in northern Europe, where the economy remains sound.  And pick-ups appear to be underway with the Renault and forklift truck lines.  Results probably will improve modestly over the next 1-2 quarters as the new opportunities reach fruition.  Significant gains are possible beyond.  Electric vehicle demand could advance in the wake of Tesla Motors' recent success.  The move into hybrid applications offers even greater potential.  Our 2014 estimates may prove ambitious.  But it won't take much to get earnings moving since only 3.35 million shares are outstanding.

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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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Sevcon ( Nasdaq - SEV ) -- On-Road Electric Vehicles Show Spark

( Note - Previous reports about Sevcon can be found in the International Stocks section. )

Sevcon (SEV $6.00) reported Q3 (June) results that were less than our expectation.  Fully taxed earnings declined 75% to $.01 a share.  The company is based in the United Kingdom, where the standard rate is 23%.  Sevcon operates around the world, though, so its official tax rate fluctuates depending on the specific locations where it conducts business.  It also claimed some R&D credits in the latest period.  After adding all the benefits back in Sevcon reported GAAP income of $.05 a share for the June quarter.  Sales rose 8% to $8.88 million. 

Sevcon is a leading provider of computerized controls that manage the engine performance of electric vehicles.  The company had a gangbuster business going prior to the 2008 Financial Crisis, focusing on industrial and off-road vehicles.  As gasoline prices blew past $100 a barrel mining companies, forklift operators, and a wide range of other work machine users switched to electricity to save on fuel costs.  In some cases they received government subsidies or other benefits because they were fighting the good fight against global warming.  That business fell of the cliff in 2008 (see financial table below).  Sevcon has a fantastic and hard working management team, which didn't panic.  The company diversified into the on-road (motorcycles, scooters, and city cars) and ATV markets.  Recently, it signed a deal with a Chinese truck manufacturer, as well. 

Those diversification efforts restored sales growth.  The legacy industrial segment returned to life over the past two years, as well, providing further impetus.  Sevcon's newer consumer oriented markets continued to gain momentum in the June quarter.  But the industrial segment experienced some backsliding as a result of the poor worldwide economy.  Sevcon added several engineers in the quarter, boosting expenses.  The shortfall in sales combined with the higher expense level crimped income.

Sevcon is dependent on the industry's performance.  It might be counter-intuitive but history suggests demand for electric vehicles is strongest when the economy thrives.  People have money to experiment with.  The tests are successful.  They expand.  Strong economies also make it easier for governments to support emerging technologies.  The deer in the headlights approach to economics now being pursued in Europe and the United States is likely to provide a significant headwind, until it changes.  On the plus side, electric vehicle price performance is continuing to improve at a fast pace.  So even under recessionary conditions the industry is likely to keep growing.

Sevcon is a high potential speculation.  The company's market capitalization is $20 million.  Sales are approximately double that.  Margins could improve substantially if volume improves.  The age old formula of rising sales and expanding margins could drive the value of these shares substantially higher over the next 2-3 years.  We projects sales could reach $75 million to provide earnings of $1.20 a share, after allowing for the sale of an additional 1.25 million shares to support growth.  If financial results reach that level, moreover, they're probably going to keep going higher, perhaps at an explosive pace.

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