Power Solutions (PSIX) stock price has gone parabolic this year, turning the former penny stock into one of the best-performing companies in Wall Street. It started the year trading at $1.6 and has jumped by over 1,000% to the current $20.
It has outperformed popular names like Nvidia, Microsoft, and Alphabet as its market cap has jumped to over $458 million.
What is Power Solutions International?
Power International is a company involved in the manufacturing of engines used in the power systems, industrial, and transportation industries.
Its engines are used by manufactures in areas like oil and gas, data centers, wood chippers, forklifts, school buses, transit buses, and off road utility vehicles.
In addition to manufacturing its engines, the company also buys them from third party companies like Doosan Infracore and Mitsubishi.
Most of its revenue comes from the power systems segment, which accounts for about 49% of revenue. It is then followed by the industrial segment, which accounts for 35% of revenue and the transport segment which brings in about 16%.
Why PSIX stock has jumped
Power Solutions has been under pressure in the past few years as its annual sales retreated. Data compiled by SeekingAlpha shows that its annual revenue dropped from $546 million in 2019 to $459 million in the last financial year. Its sales fell to $426 million in the trailing twelve months.
This slowdown continued in the second quarter as its net sales dropped to over $110 million from the previous $121 million. The sex-month revenue fell by 14% to $205 million as demand remained soft.
On the positive side its profits jumped sharply, with the net profit coming in at $21.5 million from $6.4 million in Q2’23. Its six-month profit was a big improvement to over $28 million.
Therefore, the stock has risen because of the management’s upbeat tone. They expect that its revenue for the year will rise by 3%, helped by the power segment. It also expects that its profit will continue rising.
The other reason for the surge is that it has worked to boost its balance sheet. It ended the last quarter with $135 million in debt and $28.8 million in cash. Most recently, the firm announced a new credit agreement with Standard Chartered Bank and Weichai America, its biggest shareholder.
The new deal allows Power Solutions to borrow up to $120 million from the two companies at a lower interest. It then made an initial draw of $100 million and used some of these funds to repay $60 million to Weichai.
At the same time, it entered a deal with Weichai that will give it access to $105 million in cash. All this means that the company has the adequate cash it needs without raising more equity.
Undervalued but with risks
The Power Solutions stock price has also jumped because of the perception that it is highly undervalued. Despite the recent surge, it has a forward price-to-earnings (P/E) ratio of 7.5, which is much lower than the industry median of 22.
PSIX also has a forward multiple of 11.37, also lower than the industry median of 20.5. These numbers mean that it is still a bargain.
However, the risk is that its revenue growth has not been good. Also, its biggest customer accounts for about 14% of total sales, which is a big risk.
The other risk is that its stock has jumped very fast, leading to the Fear of Missing Out (FOMO). In most cases when stocks rise that fast, there is usually a risk of a swift reversal, as we saw with Super Micro Computer and Celsius Holdings.
Power Solutions stock analysis
PSIX chart by TradingView
The weekly chart shows that the PSIX share price has been in a strong bull run after forming a double-bottom chart pattern at $1.35. It formed a golden cross pattern in July and moved above the key resistance point at $13.22, its highest level in June 2020.
The PSIX shares have remained above all moving averages while the Relative Strength Index (RSI) and the Stochastic Oscillator have moved to the overbought level. Therefore, I suspect that the shares will suffer a harsh reversal in the near term. If this happens, the next point to watch will be at $13.2, which is about 33% below the current level.
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