Pioneer Power Solutions: Successful Pivot To EV Products But Expensive At The Moment

Introduction

At Microcap Review, we like to write about micro-cap stocks on SA, and today I’m taking a look at Pioneer Power Solutions (NASDAQ:PPSI). It’s an electrical power systems provider with no debt and over $10 million in cash as of December 2022. In 2022, revenues grew by over 47% year on year and are expected to soar by over 50% in 2023 thanks to the launch of new products. In addition, Pioneer Power Solutions returned to the black in Q4 2022 and 2023 is likely to bring further margin improvement thanks to economies of scale. Yet, I’m concerned that the company is starting to look expensive. Let’s review.

Overview of the business and financials

Pioneer Power Solutions is involved in the design, manufacturing, service, and integration of electrical power systems, distributed energy resources, and mobile electric vehicle (EV) charging solutions. The company has two manufacturing facilities in California and Minnesota and employed 99 people as of December 2022. The business is split into two segments, namely transmission and distribution solutions, and critical power solutions. The transmission and distribution solutions segment focuses on the manufacturing of power systems as well as switchgear, switchboards and automatic transfer switches. Its flagship product is an outdoor integrated power center solution named E-Bloc which combines an automatic transfer switch, circuit protection and special programmable controls. The latter is aimed at the EV infrastructure market and Pioneer Power Solutions received a $12 million order for it in December 2021 which was about 75% completed at the end of 2022.

The critical power segment, in turn, specializes in the manufacturing of self-contained EV charging products, engine-generator sets, and uninterruptible power supply systems. Its focus is on a suite of mobile EV charging solutions under the e-Boost brand.

Turning our attention to the financial performance of Pioneer Power Solutions over the past decade, you can notice that revenues declined sharply a few years ago. The reason for this is the transformer business was stagnant and struggling to remain profitable and the company eventually sold it for $68 million.

Pioneer Power Solutions then decided to focus on solutions for the EV sector and E-Bloc and e-Boost were both launched in 2021, with their first orders coming in December 2021 and January 2022, respectively. This led to a significant increase in revenues and orders in 2022, mainly thanks to E-Bloc.

The net loss for 2022 soared by 67.8% year on year to $3.6 million due to higher selling, general and administrative expenses as a result of payroll-related costs and product development and promotional costs related to the e-Boost. Yet, it’s worth noting that revenue and net income for Q4 2022 saw a significant improvement compared to a year earlier. Considering revenues are expected to grow by more than 50% in 2023 to $42 million and $45 million (source here), I think that that EPS could surpass $0.50 thanks to economies of scale. EPS in Q4 came in at $0.10 with revenues of $9.5 million and sales of $42 million for 2023 translates in average quarterly revenues of about $13.5 million.

Turning our attention to the balance sheet, I think that Pioneer Power Solutions is in a solid position at the moment as cash stood at $10.3 million as of December 2022. There were no debts and I’m optimistic that the company can grow its business in 2023 without an equity offering. As you can see, the company has an asset-light business model and cash, and receivables account for over half of the asset base.

In addition, Pioneer Power Solutions has a $14.3 million net operating loss (NOL) carryforward which should come in handy if the business remains profitable.

Despite all the positive developments over the past two years, I’m concerned that there is significant customer concentration here, and that the loss of any major client could result in a deterioration of the financial results. In 2022, Pioneer Power Solutions sold its products and services to more than 900 clients, but the top 20 customers accounted for 78% of revenues (check page 7 here). The top client in 2022 accounted for 45% of sales.

Turning our attention to the valuation, I think that Pioneer Power Solutions is starting to look expensive as its market capitalization has soared by over 140% since March 29. In my view, it’s possible that one or more institutional investors have been accumulating shares over the past few weeks as the trading volume has been unusually high. Over the past month, the daily trading volume surpassed 200,000 shares on eight separate occasions.

Investor takeaway

I think that Pioneer Power Solutions is making a successful pivot to EV charging solutions as its revenues and backlog have increased significantly since the launch of E-Bloc and e-Boost solutions. Margins improved significantly in Q4 2022, and I think that EPS could surpass $0.50 in 2023 thanks to economies of scale. I find Pioneer Power Solutions an interesting growth story and I’m putting it on my watchlist, but I think that the company seems expensive based on fundamentals at the moment. Considering management warned during the Q4 2022 earnings call about quarter to quarter volatility in regard to both top and bottom lines during 2023, I think there could be lower share price levels to open a position soon. Personally, I would start considering opening a position if the share price dropped below $4.00.

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