Power Solutions International (NASDAQ:PSIX) Presents a Compelling Growth at a Reasonable Price (GARP) Case

For investors looking to balance the search for growth with prudence, the Growth at a Reasonable Price (GARP) or "affordable growth" strategy offers a practical middle ground. This method seeks to find companies that are increasing their earnings and revenue faster than average, while also trading at prices that do not require flawless future performance. By filtering for stocks with good growth scores, firm profitability and financial condition, and a valuation that is not extreme, investors can search for chances where the market may not yet fully reflect a company's prospects. Power Solutions International (NASDAQ:PSIX) appears from such a filter, presenting a profile that justifies further examination for those using this strategy.

A Profile of Firm and Affordable Growth

The central idea of affordable growth investing is finding companies where the growth path is clear and the price paid for that growth is rational. Power Solutions International, a designer and maker of power systems for industrial and electrical power generation markets, scores a 7 out of 10 on the ChartMill Growth Rating. This score is supported by notable recent performance and positive forward-looking estimates.

• Strong Recent Earnings: The company's Earnings Per Share (EPS) grew by 150% over the last year, with an average yearly EPS growth of more than 51% measured over recent years.
• Firm Revenue Increase: Revenue rose by 54.78% in the last year, pointing to solid demand for its power systems.
• Improving Outlook: Perhaps more significant for growth investors, this pace is projected to continue. Analysts forecast an average yearly EPS growth of almost 20% and revenue growth of more than 29% in the next few years. The report notes that the revenue growth rate is improving compared to its past trend.

This mix of firm recent results and a positive forecast forms the "growth" part of the GARP case for PSIX.

Valuation: The "Reasonable Price" Case

A stock can show strong growth but still be a bad investment if its price has risen to unreasonable levels. This is where the "reasonable price" filter is essential, and PSIX's ChartMill Valuation Rating of 8 out of 10 implies the market has not yet pushed its growth story to an extreme.

• Appealing Multiples: With a Price-to-Earnings (P/E) ratio of 12.33, PSIX is valued lower than 92% of similar companies in the Electrical Equipment industry. It also trades at a notable discount to the wider S&P 500 average P/E of 26.26.
• Forward-Looking Metrics Stay Positive: The valuation case remains when looking forward. Its Price/Forward Earnings ratio of 16.18 is lower than 87% of industry peers and below the S&P 500 average.
• Growth Adjustment: The PEG ratio, which modifies the P/E for projected growth, points to a "rather cheap valuation," according to the fundamental analysis. This directly meets the GARP investor's aim: obtaining growth without paying too much for it.

The Supporting Elements: Profitability and Financial Condition

An affordable growth strategy must consider more than just growth and value. A company requires a lasting engine to maintain its increase, which is where profitability and financial condition become important. These factors lessen investment risk by showing capable management and a firm balance sheet. PSIX performs well here, with a Profitability Rating of 8 and a Health Rating of 8.

The company's profitability numbers are notable. It has a Return on Invested Capital (ROIC) of 27.37%, doing better than 100% of its industry peers, and a strong Return on Equity of 74.60%. These numbers imply the company is very effective at creating profits from the capital it uses. Also, its profit margin of 17.94% places it in the top group of its industry and has been rising steadily.

Financially, PSIX seems to be on firm footing. It has a good Altman-Z score of 5.80, showing low near-term bankruptcy risk, and a Debt-to-Free-Cash-Flow ratio of 1.87, meaning it could pay off all its debt with less than two years of cash flow. Its current ratio of 2.28 shows sufficient liquidity to meet short-term needs. This firm financial condition provides a buffer and operational freedom to handle difficulties and support future growth projects.

Conclusion

Power Solutions International presents an example in the affordable growth filtering method. It shows strong growth in both earnings and revenue, supported by firm analyst projections for continued increase. Importantly, this growth is available at a valuation that seems moderate compared to both its industry and the wider market. The investment case is made stronger by the company's excellent profitability, implying the growth is high-quality, and its good financial condition, which reduces fundamental risk.

For investors wanting to examine other companies that match this profile of good growth, rational valuation, and firm fundamentals, more results can be found by checking the Affordable Growth stock screen.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis is based on data and ratings provided by ChartMill.com, and investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results.