Pioneer Power: Compelling Investment Opportunity Electrification Of Everything (PPSI)

Pioneer Power Solutions (NASDAQ:PPSI) has a long history of providing products that support every function of the power grid. The company has shifted its product offerings to focus on two key products; E-Block systems for power distribution to capture the shift to renewable energy sources and E-Boost systems to fill the void in the availability of electric vehicle charging locations.

My investment thesis is that Pioneer will record its first profitable year since 2015 when it reports fiscal year 2023 results in early April, leading to continued healthy growth and profitability for fiscal 2024 and for the foreseeable future, as Pioneer’s products have almost unlimited potential clients.

E-Block Systems

Pioneer’s E-Block systems are customized to customers’ specifications and are power source agnostic. The majority of E-Block customers utilize power from the electric grid as well as a renewable energy source. The system allows for users to maximize seamless power consumption from more than one source and provides back-up power to avoid power outages, E-Block systems are placed outside, reducing construction costs in addition to cost reduction from improving efficiency.

The company provided a press release in December with details on E-Block sales which supports my belief that this product’s TAM is limitless as evidenced by the new types of customers mentioned, including an airport, a solar microgrid, a titanium smelter, and an airport as well as an EV charging infrastructure developer. E-Block sales included in the press release exceed $10 million and are expected to begin delivery in the second half of this year.

E-Block systems can also be used to charge EV vehicles. Pioneer launched its modular, E-Block Charge Port Series specifically targeted for California’s Charge Ready program and promptly announced initial purchase orders exceeding $2 million. Completion of these orders is expected in the second half of this year. The California program is expected to fund over 100,000 charge ports within the next five years, and it is expected that other states will follow California with similar initiatives.

E-Boost Systems

Pioneer targets E-Boost to serve bus, taxis and truck fleets and offers a variety of different options. The most popular are a transportable pod that can charger multiple vehicles simultaneously in less than one hour and a system carried on a trailer to serve customers in remote locations.

Sales of e-Boost systems have been a laggard on profitability, but management forecasts that e-Boost sales will quadruple this year compared to 2023 sales. CEO Nathan Mazurek said at the 2023 Q3 earnings call:

We believe our recent commercial successes, for example, the City of Fairfield, California, to support their municipal fleet of electric buses, or a Big Three automaker to support the rollout of their autonomous taxi business, foreshadows a massive energy transition market intended to be implemented over a long period of time.

Opportunity

Pioneer’s shift to profitability has been fueled by sales of E-Block systems, which are catching a tailwind from the increasing demand for electricity, the shift to renewable fuels for environmental reasons as well as the incapacity of the current grid to satisfy expected demand.

The E-Boost system is in the early innings of electrification, with EV’s being highlighted. The amount of new fast EV charging stations has been steadily rising but is a nascent effort with much left to be done to create a viable infrastructure. The EV charging industry is forecast to grow at a 23% CAGR over the next five years. But this is just the beginning of a shift to the electrification of everything from mining equipment to street sweepers. The E-Boost like the E-Block products have potentially unlimited customer applications.

Management

Pioneer has experienced year after year of mostly losses since Nathan Mazurek and his management team took the helm at Pioneer in 2009. Is this the right team to carry the company forward? In all fairness to Mr. Mazurek and his team, Pioneer’s industry was undergoing an almost no growth period when they took over. The U.S. added only 645 miles on average of new electric transmission lines per year at that time. Today, we need a 50% increase in power production just to supply the shift to EVs.

Mr. Mazurek leads a team of power industry veterans who haven’t diluted the earnings power of the company through capital raises and endured the slow economic period in its industry. The larger transformer division was divested in 2019, setting course to developing new products to meet the push to electrification, and introducing the new E-Block and E-Boost products in 2022.

Financials

There are about 10 million shares. The market cap is $50 million. The balance sheet is strong with last reported almost $8 million in cash and no debt. The EV is $42 million. Insiders own about 22% of the shares.

Pioneer reported Q3 2023 revenue of $12.4 million, almost 100% year over year for the comparable period. Revenues for the nine months of fiscal 2023 were $17.5 million, 89% higher than the previous year. Sales of E-Bloc increased 156% to $9.7 million, and sales of e-Boost increased 13% to $2.8 million during this nine-month period.

It is possible that Pioneer will record its highest annual revenue since divesting its transformer business in 2019. Management guidance is for 2023 revenue of between $42 and $45 million. Guidance for fiscal 2024 has not yet been provided, A quick back of the envelope calculation taking into account the backlog for the last two quarters has held steady at about $36 million, the reported contract announcements and assuming the annual sales growth is cut down in half for a conservative projection, results in fiscal 2024 revenue exceeding $60 million, resulting in a forward PE of about 14, a discount compared to the average electrical equipment industry PE of 21. I favor using the PE ratio for comparison in this situation, as Pioneer is a profitable company. There is also a net operating loss of $14 million that will carry over to offset taxes on profits.

Competition and Risks

This is a microcap stock and carries additional risks than a larger cap stock. Pioneer competes in a very crowded space against much larger companies such as Siemens (OTCPK:SIEGY) and General Electric (GE) that have vastly more resources available and thousands of smaller players.

EV sales experienced a decline in demand over the last few months, attributed to high interest rates and perhaps the lack of charging infrastructure. The downturn took down any stock associated with EVs, including Pioneer, although Pioneer is currently more involved in power distribution than the EV sector and in the EV sector it is more focused on commercial and industrial applications than in the personal automotive industry.

The chart illustrates the price movement to a new high as the company established early success of its new products, followed by the drop in stock price commensurate with the slowdown in EV automotive sales. The 2023 full-year earnings as well as the financial results expected for 2024 should be instrumental in decoupling Pioneer’s stock price from the EV industry’s outlook.

I caution that the negative major average crossover is a negative technical signal, but I think this is an overreaction by the market for reasons stated.

Conclusion

Pioneer is receiving a strong tailwind from the movement to electrify everything. The rollout of the new E-Boost and E-Block has enjoyed success, particularly with the latter product leading the company to profitability and record revenues since the divestiture of a division in 2019. Each of these two products has virtually unlimited potential customers. Projected sales indicate that the stock is selling at a discount to its peer group and the stock chart indicates that the stock price has declined along with the decline in EV sales, although the company is not dependent on EV sales for its success. There is a strong balance sheet to support the company’s operations. Record revenues and profitability should attract investors should the company continue to enjoy the early success of its new products.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.