Published: January 13, 2009

At first glance, the idea of using natural gas as an alternative form of fuel may seem to be counterintuitive. After all, it's still a fossil fuel. But natural gas burns far cleaner than ordinary gasoline or diesel fuel and cuts down dramatically on emissions. In fact, the EPA has named the Honda Civic GX, which runs on compressed natural gas (CNG), the "cleanest internal combustion vehicle in the world."

From an investment standpoint, the evolution of natural gas vehicles is at the perfect stage -- established enough to reach critical mass, but with years of growth still ahead.

California-based Fuel Systems Solutions (Nasdaq: FSYS, $29.79) designs and sells a wide array of components for use in vehicles that run on alternative fuels, most notably propane and natural gas.

As you might expect, these internal combustion engines require their own specialized equipment, and FSYS is the world's top supplier of fuel injectors, flow control valves and other necessary parts. Thanks in part to a network of over 400 distributors that spans 60 countries, the firm has amassed a dominant market share three times the size of its next closest rival.

According to the Natural Gas Vehicles Association, there are roughly 50 different manufacturers assembling all types of CNG-powered vehicles -- everything from fork lifts to garbage haulers. Believe it or not, there are already 150,000 of these cars and trucks on the road today, along with 1,600 refueling stations. Most of those are currently concentrated in states like Utah, where prices run the equivalent of less than $1 per gallon.

At this point, most CNG vehicles belong to commercial fleets, such as taxis and airport shuttle busses. But I expect to see many more parked in garages around the country in the near future. They are clean, efficient, and relatively inexpensive -- particularly after generous tax credits are accounted for.

Furthermore, billionaire industrialist T. Boone Pickens has been saturating the airwaves with commercials for the "Pickens Plan" -- which involves tapping the nation's massive natural gas supply for transportation rather than electricity, and then making up the power grid shortfall with wind generation. This publicity has increased public acceptance for natural gas-powered vehicles as a way to break dependence on foreign oil.

Unlike many cash-strapped alternative energy companies, FSYS is enjoying healthy revenue growth and churning out growing profits.

In the first quarter of 2008, management confidently raised its full-year sales forecast to $320 million and predicted gross profit margins to hit 24%. After the second quarter, the company increased its revenue guidance to $350 million and expected margins to touch 27%. And now after the third quarter, management has boosted expectations yet again, with the latest outlook calling for sales of $385 million and margins of 29%.

So despite tough economic conditions, FSYS has raised its guidance -- three times in the past three quarters. Meanwhile, revenues have climbed +60% for the year to $298 million, and earnings have surged from $0.07 per share to $1.44 per share -- consistently crushing analysts' targets.

With accelerating sales growth and profits surging 20-fold, you might expect the shares to have gained ground, and they did for the first half of the year, marching from $10 to a peak above $60. However, they have since slid back into the low $30s, providing an attractive entry point for investors interested in this promising company.

While just about every other stock plunged last year, FSYS rewarded shareholders with a nice +128% gain. But with a fair value of $58, the shares still offer attractive upside potential in excess of +94%.

Alternative fuels continue to gain in popularity for a variety of reasons. Natural gas is abundant, economical, and environmentally friendly. There are already more than 8 million vehicles equipped to run on CNG operating around the globe -- still just a tiny fraction of the world's total.

As the industry leader, FSYS looks to be a major beneficiary of this continued momentum, as well as Obama's well-known support for cleaner transportation initiatives. The company will convert more than 800,000 vehicles to natural gas this year and has just unveiled plans to launch a new automotive division in the U.S.

Nathan Slaughter
Editor
Half-Priced Stocks

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Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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