FSYS Misses Earnings, So Sell This Stock

On Thursday, Fuel Systems Solution (FSYS) came out with its fourth-quarter earnings report and the numbers were just plain awful. First, let me apologize for recommending this stock. Needless to say, I’m very upset with this company.

Here are the details: Fuel Systems, a maker of alternative fuel components, posted lower quarterly earnings and forecast weak revenue for 2009.  The shares slumped by about 25% on Friday. The company posted fourth-quarter net income of just $641,000, compared with $4.8 million a year earlier. Equally troublesome was that Fuel Systems forecast revenue of $330 million to $360 million for 2009 which was far below what I expected. That kind of guidance is just inexcusable.

So how could an A-rated stock like FSYS post such dismal earnings? Well, the quarterly results included $5.9 million of additional provisions and expenses–that’s 22% more than the PROFITS from this period last year. Such big losses erased all the good things this company did. These losses were due mostly to currency hedging and exchange rates. Since FSYS does a lot of business overseas, it relies heavily on a “currency tailwind” created by a weak dollar and a favorable exchange rate with other currencies. The dollar has had an artificial rally recently, and unexpectedly ate into this stock’s profits.

I won’t sugar coat this–this is very bad, and I apologize for not spotting Fuel Systems’ problems. I was counting on a standout earnings report, but these one-time expenses ruined things.

Looking forward, I don’t expect the greenback’s artificial strength to last. The U.S. dollar’s rally has been prompted by the market’s woes as investors look for a safe haven. After gold, the greenback has always been a good place to hide in rough times. But clearly this flight to the dollar won’t last because Washington’s massive spending spree is causing America’s deficit to soar and is calling into question just how “safe” a currency the greenback really is.

But the future is irrelevant to FSYS–the damage has already been done, and the losses realized. The market is likely to move upward from the current lows and pull the stock with it, but don’t count on a big rally. I recommend you move out of your position soon, because the lowered guidance for 2009 indicates more trouble is ahead for this stock.

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