Friday, February 18, 2011

Amerigon ( Nasdaq - ARGN ) -- Lower than Expected Q4 Margins

Amerigon (ARGN $12.50) reported Q4 sales that were consistent with our estimate.  Margins contracted, however, leading to a lower than expected earnings report.  A nonrecurring non cash tax adjustment enhanced the headline number.  Sales advanced 34% to $28.9 million.  Fully taxed earnings increased 14% to $.08 a share.  Manufacturing margins decreased as a result of higher tellurium costs.  That's the key ingredient in Amerigon's air conditioned car seats.  Research expenses also jumped after the company bought out its 15% development partner.  Amerigon now owns any future applications outright but will be responsible for 100% of the expenses, too.  The company also created a reserve to pay legal costs that are expected to be incurred in 2011 in a patent dispute.  For the entire year income finished at $.39 a share (+457%).  That number does not include non cash stock option expense but is taxed at a full 37% rate.  Sales were up 85% at $112.4 million.

We are reducing our 2011 earnings estimate by a dime to $.45 a share.  Manufacturing margins may stay under pressure as rare earth commodity prices remain at elevated levels, bolstered by demand and political factors in China.  Amerigon isn't likely to experience shortages, since most of its production facilities reside within the communist state.  Unit volume on existing auto platforms is likely to widen in 2011 as people replace their aging vehicles with new ones.  Amerigon focuses on high end cars, which continued to sell pretty well last year.  It's unclear how big a lift the company will enjoy from a rebound in the mid- and low-price segment.  Take rates remain lofty but might not expand if car buyers adopt a price conscious approach towards optional equipment.

Non-auto applications remain in development.  Those projects have power hitting potential but still are in the low minors, to use a baseball analogy.  Development has taken longer than originally hoped.  It remains to be seen whether those efforts can overcome the engineering hurdles involved.  Meantime, a line of heated and cooled beds (king and queen sized) is providing an element of diversification but is unlikely to contribute more than 1%-2% of total revenue in 2011.  Our advice is to close out positions and reinvest the proceeds in a Special Situation with better defined near term prospects.

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