Description

Executive Summary

This micro-cap has an average daily volume of $375K, making it most suitable for individual investors and small funds.

PPSI is an electrical-power management company with all the following characteristics:

• Profitable, with an inflection point occurring now.
• High growth (~60% and ~50% topline growth in 2023 and 2022, respectively).
• Owner-led, with the CEO owning 20% of the company and having purchased shares at $6 on the open market in 2023.
• Enjoys both Electric Vehicle (EV) and Artificial Intelligence (AI) macro tailwinds.
• Record backlog.
• Net cash.

Despite all the above, the company is trading at what I estimate to be 5x 2024 P/E. I don’t know the precise multiple, but it is certainly not 5x. The right multiple is probably at least 15x and I suspect once the market understands it missed this small company, it can re-rate fairly quickly. I believe the company is likely to triple in the next 12 months.

The company was written up by mrsox977 in 2016, but the company changed dramatically due to the sale of its largest segment, rendering the previous writeup less useful, hence my motivation for a new analysis.

I will keep it short as this is timely and I suspect the market will catch up to this quickly.

The Company

Pioneer Power Solutions, Inc. (PPSI) is an electrical-power management company with two distinct product lines: e-Bloc and e-Boost. Both product lines were developed in the past few years. e-Bloc is more mature (expected to generate $35M of topline in 2023) but still growing very quickly and e-Boost is a newer product line (expected to generate $1M of topline in 2023) that will significantly ramp up in 2024 (10x based on CEO commentary). Each of the product lines is manufactured at a different facility.

e-Bloc allows a customer to maintain and manage 2 or more sources of power. An example of a use case is a large factory that uses a lot of power and decided it’s cheaper to use solar panels but the panels can’t support all of the factory’s needs, so it still uses the power grid to some extent. E-Bloc would manage the factory’s ability to use the 2 sources of energy (either simultaneously or with specific rules in mind). Other competitors offer solutions to this problem, but PPSI are the only ones who have a single integrated solution that can be placed outdoors.

Use cases for e-Bloc are diverse and include data centers, water utilities, fixed EV charging stations, etc. 20% of customers are currently EV related.

e-Bloc should generate $35M during 2023 growing ~60% YoY (after growing ~50% in 2022). The product appears to have achieved market fit and is now rapidly expanding. The current facility is at a 100% utilization rate. The CEO in the last earning call explained that the company is subcontracting the lowest value processes to expand capacity and that he expects capacity to grow by more than 50%, potentially even 100% during 2024.

e-Boost is a portable fast-charging unit for EVs. You would expect that there would be sufficient fixed charging units to satisfy EVs, but EV adoption is accelerating and there are many use cases where there is no fast-charging unit available. Existing customers include electric buses / trucks that need to charge quickly, and seaports that receive shipments of EVs that arrive “dead” and need to be charged to be driven to their respective destination.

e-Boost is expected to generate $1M of revenues in 2023 and based on the CEO’s commentary during the latest earning call the company expects 2024 revenues to be close to $10M.

Macro Tailwinds

The EV tailwind needs no introduction. EV adoption is growing rapidly. 20% of the e-Bloc business and 100% of the e-Boost business are linked to EVs.

The AI tailwind is nuanced and indirect. I’ve been trying to utilize second order thinking to benefit from the AI craze and the following quote from a recent Elon Musk interview stood out:

“The constraints on AI compute are very predictable... A year ago, the shortage was chips; neural net chips. Then, it was very easy to predict that the next shortage will be voltage step-down transformers. You've got to feed the power to these things. If you've got 100-300 kilovolts coming out of a utility and it's got to step down all the way to six volts, that's a lot of stepping down.

My not-that-funny joke is that you need transformers to run transformers. You know, the AI is like... There's this thing called a transformer in AI... I don't know, it's a combination of sort of neural nets... Anyway, they're running out of transformers to run transformers.

Then, the next shortage will be electricity. They won't be able to find enough electricity to run all the chips. I think next year, you'll see they just can't find enough electricity to run all the chips.

The simultaneous growth of electric cars and AI, both of which need electricity, both of which need voltage transformers – I think, is creating a tremendous demand for electrical equipment and for electrical power generation."

e-Bloc provides the ability to use several sources of energy for customers who are either concerned the grid won’t be able to always meet their demand, or have a cheaper source of power they sometimes want to utilize. Some of the customers here are data centers – it is really difficult to imagine a world where PPSI isn’t a beneficiary of the AI trend.

Why Does This Opportunity Exists?

This micro-cap is off the radar, with a predominantly retail investor base – I saw no funds in the shareholder registry. Furthermore, the CEO doesn’t appear promotional; the company reports only GAAP figures, without adjusted EBITDA or EPS.

Additionally, the company which was (and still is) growing two product lines was losing money due to lack of scale. It has inflected into profitability over 2023 and the next step of this inflection has eluded the market.

Valuation

The company reported Q3 EPS of 10 cents. The CEO mentioned in the Q3 earnings call that e-Boost was a 6 cents drag and that he expects e-Boost to break even during Q2 ’24, and to contribute to EPS during H2.

Let's imagine what Q3 or Q4 '24 might look like. I expect e-Bloc to grow 50% so it should generate ~24 cents of EPS (16 x 1.5), while e-Boost would probably contribute ~5 cents to EPS. So in total 29 cents of EPS, or annualized $1.16. On a $5 stock that is a 4.3x forward PE.

How much topline growth should be expected in 2024? e-Bloc will do $35M in 2023 and should grow ~50%, e-Boost will contribute ~$10M, and there are also legacy services contributing ~$7M to revenues. In total that is $70M. The 2023 guidance is $45M, so we are talking about 55% of topline growth in 2024.

What is the right P/E multiple of a (very) fast growing business enjoying the tailwinds of some of the sexiest trends in the world right now? PWR is trading at a 50x, but if you annualize the most recent quarter the P/E is “only” 32x. PWR is a much larger company but it’s also not growing as quickly as PPSI. Another comp is ETN, If you annualize the last quarter for ETN you would also reach a 31x P/E. Place a 20x multiple on my annualized EPS estimate of $1.16 and it’s a $23 stock or 4.6x upside. This is before we even talk about 2025 potential numbers.

Risks

• Lumpy business dynamics – while not inherently lumpy, the small scale means any single $1-2M contract delay to the next quarter could negatively impact current quarter numbers. I’m concerned this might be the case with the upcoming Q4, but what is more important when they report Q4 is the guidance for 2024.
• Capacity – the e-Bloc facility will reach its full capacity in 2024, and so will the e-Boost facility (when reaching $10M revenues). Demand for the company’s products obviously entails increasing capacity, which will require capex. The risk is for a secondary later this year, though I believe the company can finance this with cash on hand and debt.
• AI could take over the world and kill all humans.

Catalyst

• The company plans to provide 2024 topline and EPS guidance when issuing its annual 2023 numbers (probably towards the end of March). I would be surprised if their EPS guidance approaches my estimate, for two reasons:

1.  They are conservative.
2. Remember my EPS estimate is an annualized Q3 or Q4 number. In H1 there’s still the drag from e-Boost. I expect full-year guidance to be 50 or 60 cents, which still makes this company appear dirty cheap.

• Q3 2024 earnings where the earning power will become more visible with e-Boost starting to contribute to EPS.
• Continued execution and earnings.