Sevcon ( Nasdaq - SEV ) -- Boosts Battery Performance

Sevcon (SEV $6.50) is a leading provider of microprocessor based controls that maximize engine output in electric and hybrid vehicles.  The alternative vehicle market has bogged down in recent years due to economic reasons.  But a bigger factor has been the lack of progress in battery technology.  Incremental improvement is likely over the next several years.  But major breakthroughs are not in the pipeline and are unlikely to enter large scale production through the end of the decade.  Despite that, the electric vehicle market is poised to deliver substantial growth.  And those gains are likely to be amplified by hybrid vehicles, a market the company also serves.  Electric vehicle manufacturers are improving their products's price performance by introducing a higher concentration of computer controls.  Those microprocessor based units regulate temperature and other variables to minimize wasted power.  They also regulate the environment so batteries retain their ability to charge up at full capacity.  With the addition of more software electric vehicles promise to become increasingly powerful and long lasting.  Gasoline powered cars and natural gas fueled trucks and buses are likely to dominate the high volume transportation market for the foreseeable future.  But plenty of niche markets remain to be exploited. 

Most of Sevcon's business historically focused on off-road and industrial vehicles.  Sales reached $39.2 million in 2008, most of which was generated by work machines.  The subsequent recession collapsed demand, forcing Sevcon to develop new markets.  The company landed a large number of small deals with on-road electric vehicle makers, aided by its track record in the industrial area.  Most of the rebound witnessed over the past three years was produced by those relationships.  Last month Sevcon landed its largest partner to date (Renault).  The contract calls for the company to supply controls for two new lines of city-cars the auto giant plans to manufacture.  Sevcon also recently signed a manufacturing subcontracting arrangement with Flextronics.  That relationship will cover new business signed either by Flextronics or the company.

Growth is threatened by near term economic and political factors.  Sevcon's traditional off-road and industrial markets have gained momentum in recent quarters.  The company didn't lose any customers during the downturn -- just order volume.  That business now is coming back, albeit gradually due to the weakness in Europe and around the world generally.  The on-road market still is advancing.  But government subsidies are still required to underpin that segment.  And those are being threatened by deficits and other fiscal problems.

Sales advanced 24% in Q1 (December) to $8.52 million.  Earnings improved to $.08 a share from a break even showing the year before.  The near term outlook is difficult to predict due to the political and economic headwinds.  Despite those obstacles we estimate fiscal 2012 (September) sales will climb 24% to $40 million to provide earnings of $.40 a share (+90%).  Longer term margins promise to expand on rising sales.  Assuming no real change in character in the electric vehicle industry we estimate sales will attain $75 million in 2-3 years to produce earnings of $1.20 a share.  We use GAAP figures because stock option expense is minimal and there aren't any other material adjustments that need to be made.  Applying a P/E multiple of 16x to those earnings suggests a target price of $20 a share, potential appreciation of 200% from the current quote.

Sevcon is based in the United Kingdom.  It's official corporate headquarters are in Southborough, Massachusetts.

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