Wednesday, September 21, 2011

Amerigon ( Nasdaq - ARGN ) -- Delivering on its High Wire Act

Amerigon (ARGN $12.75) still needs to jump through a number of hoops before its acquisition of W.E.T. is finalized.  But a substantial payoff has grown more likely.  The company bought 76% of the German auto supplier in the June quarter and began consolidating results on May 16th.  W.E.T. makes heated seats for a wide range of European carmakers and intermediate suppliers.  It also manufactures ventilated seats, which have been an indirect competitor to Amerigon's air conditioned systems, and heated steering wheels.  At this point W.E.T is being operated as a separate company.  Cost saving and cross marketing initiatives haven't been implemented, and probably won't be until the remaining 24% of W.E.T.'s stock is acquired either in direct transactions or through the court system.  The latter is a lengthy  process.  While Amerigon is likely to get full control that might not occur before mid 2012.  Meantime, the  companies are informally working together and performing well in light of the contraction now underway in the world economy.  We estimate 2011 income will finish around $.50 a share, excluding acquisition related one time expenses.  Next year we think margins will improve even if an official consolidation doesn't occur.  Our earnings estimate is $.90 a share.  That assumes zero organic sales growth.  Our $500 million sales estimate reflects the two companies' current run rate.  A stronger performance is possible if the overall automobile market performs better than we expect (minus 5%-10%). 

Earnings leverage could be substantial after W.E.T. is consolidated from an operational standpoint.  Amerigon's air conditioned seats have been well received by American and Asian carmakers but have generated little penetration of the European market to date.  High end cars made in Europe typically employ ventilated seat cooling.  W.E.T. has strong relationships with BMW, Porsche, Volkswagon and other European producers.  That could open the door to Amerigon's more expensive but better performing systems.  Amerigon's new heated and cooled cupholders are growing rapidly in America and Asia, too.  The merger might speed up their adoption in Europe.  Amerigon's existing relationships might facilitate orders for some of W.E.T.'s systems, as well, particularly the heated steering wheels.

In 2-3 years sales could reach $675 million as the auto market recovers and Amerigon advances its own business.  Pretax margins could expand to 12%.  The company issued $65 million in preferred stock earlier this year to help finance the W.E.T. transaction.  Amerigon has the option to retire that obligation with either cash or stock over the next three years.  Our projections assume a big proportion will be paid in stock to preserve working capital.  Despite the higher share count income could reach $1.95 a share.  Applying a P/E multiple of 16x suggests a target price of $30 a share, potential appreciation of 135% from the current quote.

Amerigon also appears to be making progress with its BSST technology.  Funding from commercial partners and federal agencies continues to rise.  The technology is intended to convert waste heat into electricity.  If the company can approach the commercialization stage the stock could move on the prospect of substantial royalty income.  Of late, the company has become increasingly tight lipped in its comments about BSST, although what it has said is upbeat.

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