Here is some good news for IMCO
THE WALL STREET
JOURNAL / CALIFORNIA
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Heard in California:
Impco Stock Is Seen Accelerating
Along With Demand for Clean Fuel
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By Mark Veverka
Staff Reporter of The Wall Street Journal
Impco's idling stock may finally be ready to shift into high gear.
Since the 1950s, the Cerritos-based company has been designing and making
specialized equipment for engines that run on cleaner-burning alternative
fuels, mostly propane and natural gas. And now, thanks to a confluence of
events -- the approach of federal clean-air deadlines for government-owned
car and truck fleets and a new deal with General Motors -- analysts are
revving up their forecasts.
"We are increasingly confident that next fiscal year will be a breakout year
for the company," says Blair Brumley of Dain Rauscher in Minneapolis, who
rates Impco a "strong buy" with a 12-month price target of $17. The stock is
trading around $10.
Much of what's driving Mr. Brumley's bullishness is that under the Energy
Policy Act of 1992, state and federal agencies are required to buy an
increasing number of vehicles that run on alternative fuels. For instance, 50%
of all new vehicles bought by federal agencies this year must use alternative
fuels, and that figure jumps to 75% next year. Every state has similarly
escalating quotas that must be met over the next few years, analysts say.
As the world's largest supplier of alternative-fuel systems, company officials
and industry observers say, Impco stands to benefit. Though the company
may be "unsexy" and its end market a mere fraction of the automotive
universe, its stock is "way undervalued' and should perform "very well over
the long haul," says analyst Deborah Lowenthal, of Red Chip Review, a
Portland, Ore., research firm specializing in small-cap stocks. She rates it a
"buy" with a 12-to-18-month target of $15.25.
One thing analysts like about Impco is that it has few, if any, major
competitors. Although the field was crowded two decades ago, many rivals
couldn't get through the industry's lean years and went out of business. The
people at Impco "have worked their tail off for a long time, and I think their
day has come," says Bart Blout, president of Sawtooth Capital, a Santa
Monica hedge fund that owns about 300,000 shares, or nearly a 5% stake.
How did Impco manage to outlast the competition? The company survived, in
part, because it developed some solid niches away from the slow-to-emerge
car and truck business. For one, Impco provides clean-burning fuel systems
to forklift makers. In addition, it sells alternative-fuel systems and parts to
makers of back-up electric generators and small engines.
Yet the long-term play is clearly in cars and trucks, a market that should
account for about 40% of Impco's estimated $82 million in revenue for the
fiscal year ending April 30.
Analysts point out that there are roughly 19 million government-owned
vehicles in the U.S., giving Impco a steadily growing sales stream. Beyond
that, of course, are the fleets of private businesses, which also are switching
over to alternative fuels. For example, more than 350 New York taxis
already use natural gas. And there are burgeoning markets overseas.
"We know the market for their products is coming," but "we just don't know
when for sure it's going to pop," says Ms. Lowenthal, who is advising clients
to buy Impco now "so they don't miss any of the upside."
The stock isn't entirely risk-free, though. For one thing, Impco still has to
prove that its new assembly facility in Irvine is up to speed. For another,
Impco's strategy is inextricably tied to federal energy policy. If for some
reason Congress were to reverse itself and lift the new alternative-fuel
quotas, much of Impco's market would vanish.
That scenario, though, is something Impco's fans dismiss as extremely
unlikely. "Obviously, they're betting on this one horse, but I think its a pretty
safe bet," says Ms. Lowenthal.
So why, then, hasn't Impco soared sooner? The problem thus far, analysts
and investors say, is that the alternative-fuel vehicle market has simply been
slow to develop. Auto makers haven't even been producing enough vehicles
to meet the government-mandated demand. Observers describe what
amounts to a chicken-and-egg dilemma: Detroit hasn't made alternative-fuel
vehicles a priority because the sales volume is relatively small. Meantime,
government agencies haven't been keeping up with their full quotas of
alternative-fuel cars and trucks because there aren't enough out there to buy.
That, however, should begin to change. Just last month, Impco signed a
five-year partnership agreement with GM to develop clean gaseous
fuel-delivery systems. The deal is actually an extension of an earlier accord
between the two companies in which Impco was subcontracted by GM to
essentially act as the auto giant's research-and-development arm for
converting gasoline-running vehicles into those that use alternative fuels.
Analysts note that Impco's GM-related revenue will double in fiscal 1998 to
12%, in large part on the strength of about 1,000 alternative-fuel vehicles sold
by GM.
But under the new pact, the relationship has reached an entirely different
level: Impco has secured a coveted "original equipment manufacturer"
designation. That means GM will directly install Impco's alternative-fuel
systems into its cars and trucks. Previously, GM would take a factory-fresh
gasoline-burning vehicle and convert it to alternative fuel by using an
authorized outside contractor.
What's more, GM is sharing staff, facilities (such as crash-test sites) and
technology licenses with Impco. And perhaps even more important, Impco
will be able to shave its costs by buying parts and materials through GM,
giving it similar price breaks to what the auto maker gets.
Finally, because of Impco's OEM imprimatur, GM will begin providing buyers
of its alternative-fuel vehicles with the same warranty coverage enjoyed by
purchasers of its gasoline-powered cars and trucks. And that's something
critically important to government fleet managers, according to Impco's
president and chief executive, Bob Stemmler.
"The fleet managers have been stuck in the middle," he says. "They would
vastly prefer to buy alternative-fuel vehicles from the original-equipment
manufacturers" such as GM instead of buying them from smaller,
after-market conversion firms.
"And that is why the time is now" for the alternative-fuel market heat up, he
adds. "All of the ingredients are in the recipe." |
