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Power Solutions Lowered To Hold At Lake Street After Reporting Delay

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Power Solutions Lowered To Hold At Lake Street After Reporting Delay

Lake Street has downgraded Power Solutions International Inc (NASDAQ: PSIX) to Hold from Buy on uncertainty due to questions surrounding revenue recognition, which has resulted in a delay of reporting its second-quarter results.

"Although we like the company's strategic position and track record, we believe a HOLD rating is appropriate in this situation. Shares are currently trading at 10x EV/EBITDA on 2017 estimates. We see downside risk to this multiple as uncertainty surrounding the revenue recognition could weigh on the multiple near-term," analyst Robert Brown wrote in a note.

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In addition, the analyst believes shares are "fully valuing in a recovery starting in the second half and into 2017," but noted that achieving 2H-2016 estimates could pose a challenge "given end market trends and the implied improvement required."

Further Justification

Power Solutions, one of the largest providers of alt-fueled engines to equipment makers in the industrial, off-road and on-road markets, is facing weaker market conditions as pointed by the reduced forecasts from Cummins Inc. (NYSE: CMI) and Generac Holdings Inc. (NYSE: GNRC).

"These companies are small customers for PSI and are not a direct overlap, but we believe they are bellwethers in the industry that reflect comparable conditions in portions of PSI's business," Brown highlighted.

The analyst also noted that the recent credit agreement contains steep TTM EBITDA covenants beginning in October 2016 that include needing to reach $12.4 million in TTM EBITDA in October and $17 million in TTM EBITDA in November.

That said, Brown remains bullish on the potential of the on-road business and expects investor confidence to return on better execution from the company. Brown estimate PSI can achieve $1 billion in revenue and over $5 per share in earnings including $500 million from the on-road engine market.

At the time of writing, shares of Power Solutions plunged 12 percent to $13.56, while the analyst has a price target of $16.

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Latest Ratings for PSIX

DateFirmActionFromTo
Aug 2016Lake StreetDowngradesBuyHold
Apr 2016Lake StreetMaintainsBuy
Jan 2016PiperJaffrayDowngradesOverweightNeutral

View More Analyst Ratings for PSIX
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