CORPORATE FOCUS—Fuel-System Maker Enjoys Stock Rise Despite Losses

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The losses are piling up at Impco Technologies Inc., and investors are excited about it.

The Cerritos-based manufacturer of fuel systems for alternative-fuel engines has posted three consecutive quarterly losses with a fourth projected but the stock has risen more than 80 percent since the beginning of the year. Despite the losses, three “buy” ratings have been issued on the stock in recent months, driving the stock from a 52-week low of $9.75 a share in December to $22.50 as of last week.

What’s so hot about this money loser?

Analysts say the company is making good money in its core market providing fuel systems for natural gas and other alternative-fuel engines. The losses are primarily due to stepped up R & D; expenditures aimed at gaining a technological lead in the exploding market for fuel cells, an odds-on bet to eventually replace the combustion engine.

“It’s the steak in the sizzle,” said Eric Prouty, an analyst with Robertson Stephens. “It has a core existing business which is profitable their alternative-fuels business but it also has the sizzle of the fuel-cell arena.”

Impco, which began making alternative-fuel delivery systems upon its founding in 1957, struggled through the early 1990s under a heavy debt load after a buyout. However, with air-quality regulators worldwide looking to reduce pollution, its performance has been strong in recent years.

Revenue more than doubled from $52 million in fiscal 1996 to $113 million in the fiscal year ended April 30, 2000, as it developed its niche technology of fuel storage, metering and delivery while expanding to Mexico, Europe, Japan and Australia.

“We provide the enabling technology,” said Robert Stemmler, company president, CEO and chairman. “If you try to be all things to all people, you fail.”

The company’s Irvine research center employs about 20 percent of the company’s more than 800 employees. A $53.5 million equity offering last July allowed the company to hike its R & D; spending to $13.2 million in the first two quarters of this fiscal year, more than twice the amount spent in the year-earlier period. And it is that increased expense that accounts for the company’s losses, confirmed company CFO Brian Olson.

“We are at a point in time where the company can accept its opportunity or go about its business, status quo,” Olson said. “We decided we wanted to (reach beyond the status quo and) capitalize on the investments going into fuel-cell technology. We made a deliberate decision to step into the red.”

The company reported a net loss of $1.4 million (13 cents per diluted share) for the second fiscal quarter ended Oct. 31, compared with net income of $1.5 million (17 cents per diluted share) in the like year-earlier quarter.

Second-quarter revenues were $25.4 million, vs. $27.4 million in the year-earlier period.

Third-quarter results are due out in early March. Company officials won’t comment on them, but analysts are projecting a net loss of 22 cents per share.

Analysts also are high on the company because of its aggressive moves to either offer its technology to or form strategic alliances with other companies with an interest in alternative fuels or fuel cell technology, including General Motors Corp. and Ford Motor Co.

Last year, for example, Hyundai hired Impco to develop a fuel-storage-and-delivery system for its prototype Santa Fe fuel-cell powered SUV. Moreover, a key competitor in the hydrogen fuel storage business, Thiokol, a subsidiary of Alcoa Inc., formed an alliance last year with Impco to develop fuel tanks for the automotive fuel-cell market.

Stephen Wing, an analyst with Auerbach, Pollack and Richardson, said that these alliances, along with company patents, are critical in emerging technology. Once one company breaks out into the lead, it’s hard for others to catch up.

“They can possibly put up extreme barriers to entry to anybody else, and once you get to a certain size and capture a certain part of the market, there is a certain amount of momentum. You can spread your R & D; costs out,” Wing said. “This is a company that could be a $1 billion company over the next 10 years. And for a $100 million company that’s saying something.”

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