Tuesday, November 8, 2011

Amerigon ( Nasdaq - ARGN ) -- Achtung Baby !

Amerigon (ARGN $15.00) reported excellent on target Q3 results.  Performance was slightly ahead of our estimate due to good European sales by the recently acquired W.E.T. business, and a somewhat lower tax rate.  That stemmed from Amerigon's entry into the European market, as well.  Amerigon is the leading provider of automobile seats that can be both heated and cooled.  The company employs a patented technology that allows passengers to dial up whatever seat temperature they want.  Competitors can heat seats as well as Amerigon does.  But nobody else can deliver air conditioned comfort.  Alternative seat cooling systems recycle ambient ("ventilated") air.  Over the past few years Amerigon has extended its technology to cup holders which actively cool or keep drinks warm.  It also has a deal with a bed manufacturer. 

Earlier in 2011 the company commenced a two stage acquisition of a major German manufacturer of heated seats.  That transaction also brought some related product lines, like heated steering wheels.  Amerigon bought 76% of W.E.T.'s shares in the first go around.  It now is going to court in Germany to force the holdouts to sell the rest.  Once the transaction is complete the two companies' operations will be integrated.  That could boost pretax margins by 1%-2% directly.  Product development and cross marketing opportunities could yield additional leverage. 

Q3 performance was solid despite the fact W.E.T. had to be run as a completely separate company.  New auto platforms continued to be added.  Costs were kept under control.  And sales to existing customers remained vibrant in spite of the weakening European economy.  Earnings (excluding stock option and acquisition related costs) advanced 55% to $.17 a share after deducting W.E.T.'s minority ownership's share.  Revenues reached $125.7 million.  Factoring out the acquisition's contribution, Amerigon's sales advanced 15% to $35 million.  (The company redirected $4.5 million of that to W.E.T.'s production facilities.)  Fourth quarter results usually dip sequentially due to seasonal factors.  Still, we are raising our full year sales estimate by $5 million to $360 million.  We also have lifted our earnings estimate by a nickel to $.55 a share.

Margins should widen in 2012 if the remaining W.E.T. shares are bought in.  Earnings also will benefit from a full year of the combined company's sales.  We estimate they'll reach $500 million to provide earnings of $.90 a share.  (See "Accounting Notes.")  Organic revenue growth of 15% appears sustainable over the long haul.  Earnings could rise more rapidly if margins keep widening.  Cash flow probably will be applied to repaying debt incurred to make the acquisition. 

Development of another high potential product is in the pipeline.  Amerigon has been working for years on a system that captures waste heat and recycles it into electricity.  It recently began testing a redesigned system on Ford and BMW vehicles in conjunction with the U.S. Department of Energy.  The previous generation produced 700 watts of output.  The new less cumbersome version delivers similar power but is being streamlined to fit into standard engine blocks.  Fuel efficiency could improve by 2-3 mpg.  If the project succeeds gigantic sales could develop in the auto industry directly.  The technology also offers huge potential in a range of other industrial applications.

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