Why Power Solutions International Inc. Stock Is Powering Higher

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of alternative-fuel power systems maker Power Solutions International (NASDAQ: PSIX  ) hit the gas pedal as much as 5.8% earlier this week following the announcement that it has acquired Professional Power Products.

So what: Professional Power Products is described as "a leading designer and manufacturer of large, custom engineered integrated electrical power generation systems serving the global diesel and natural gas power generation market."

In 2013, Professional Power generated revenue of $40.3 million and $7.9 million in net income.

Now what: CEO Gary Winemaster stated, "We are delighted with the acquisition of PPPI and the tremendous opportunity it presents us." He describes how it's a "complementary product offering," and that the company's "extensive customer relationships ... should expand our customer reach and position us very well for growth in the years ahead."

That reads as though Power Solutions expects to potentially sell its current products to this acquisition's current customers, and possibly vice-versa. Any time you see the phrase "complementary product offering" it generally means the two products could be sold to each other's customers.

The best part appears to be the purchase price. Power Solutions paid $46 million in cash and will also issue between $5 million and $15 million worth of stock; using the midpoint of $10 million results in a total purchase price of $56 million.

To show how Power Solutions looks to have gotten a bargain for Professional Power Products we can look at relative valuation. At $7.9 million in net income in 2013, the purchase price is only seven times the net income (the same as a P/E of seven). Based on last year's earnings for Power Solutions, it trades with historical P/E of 86 based on the current share price and EPS of $0.92 for 2013. Had this acquisition been made a year ago, it would have added over $0.70 per share to the EPS and potentially would have commanded a much higher stock price. 

On an adjusted basis, the company expects the acquisition to be accretive in 2014, which should mean higher earnings per share immediately this year. Power Solutions International is financing the cash portion of the purchase price, so expect to see the earnings that this acquisition brings to be far higher than the financing or interest expenses. It will be more interesting to see how much new business this acquisition brings on top of what seems like a reasonably cheap purchase price.

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