In an effort to differentiate their top-selling pickups and SUVs, the big automakers have been seeking a keen edge when it comes to engines and fuel economy. Ford’s (NYSE: F) small-displacement EcoBoost engines deliver decent highway mileage at 21 to 22 mpg, and Ram (formerly known as Dodge) goes one better, with a 6-cylinder engine mated to an 8-speed transmission that can deliver a carlike 25 mpg on the highway.#-ad_banner-#

GM (NYSE: GM) is escalating the arms race, rolling out new bi-fuel trucks this summer that can run on either compressed natural gas (CNG) or gasoline. CNG will often be the preferred choice simply because it is so much cheaper than traditional gasoline. According to Consumer Reports, CNG costs about 30% less than gasoline on average. The fact that CNG burns cleaner, with fewer carbon emissions, is an added benefit. [Related: This Fast-Growing Company Could Kill The Gasoline Engine]

GM won’t actually be making these bi-fuel engines. It is turning to Fuel Systems Solutions (Nasdaq: FSYS), a microcap that provides alternative fuel components and systems to more than 170 original equipment manufacturers worldwide.

Despite its global reach and extensive industry presence, Fuel Systems Solutions has recently been mired in a deep slump. The company’s sales peaked at $450 million in 2009 and slipped below $400 million last year.

The ongoing implosion in the European car market gets most of the blame. Adding insult to injury, this used to be a nicely profitable business, with operating margins in the mid-teens near the end of the past decade. Yet in the past few years, those margins have nearly evaporated due to lower absorption of overhead.

However, at this point, a series of budding relationships in China, India and Thailand looks set to bear fruit in coming years after Fuel Systems spent heavily to establish relationships in those countries. That could make this stock a compelling long-term investment, as it trades at just 5 times EBITDA (earnings before interest, taxation, depreciation and amortization), on an enterprise value basis, according to analysts at Lake Street Capital Markets.

And it’s the relationship with GM that makes this an intriguing short-term trade. As some buyers opt for the bi-fuel trucks this summer, Fuel Systems may again be seen as a growth stock. Quarterly sales have been stuck below $100 million in both of the last two quarters of 2012, and are estimated to remain below $100 million in the first quarter of 2013 as well (the company is scheduled to release first-quarter results on April 29).

Yet in the current quarter (which ends in June), analysts expect Fuel Systems’ sales will rise to around $105.6 million. And analysts forecast that sales may keep rising in subsequent quarters as the GM relationship builds, setting the stage for an anticipated 10% jump in sales in 2014 to around $451 million, from an estimated $412 million in 2013.

Make no mistake, the GM relationship will likely only account for roughly $50 million in sales this year. CNG engines are still unfamiliar to most buyers, and GM is counting on word of mouth, along with an expansion into SUVs in 2014, to fuel higher sales in the future.

But there is a series of events that could get this stock moving higher long before the GM relationship comes to full fruition. First, both Fuel Systems and GM will be reporting quarterly results (on April 29 and May 2, respectively). In each instance, expect to hear a more focused discussion about the timing and potential size of the CNG rollout.

Then, as the actual sales of these vehicles begin this summer, a number of fleet buyers will have a chance to test-drive these trucks. Hopes are high that reasonably large orders will follow. We’ll have a clear read on this dynamic by June or July, right before these two companies provide their next quarterly outlook.

Risks to consider: CNG engines hold a great deal of appeal when gasoline prices are in the $3 to $4 range. If oil prices keep dropping, and gasoline falls below $3 per gallon, then the logic of CNG engines will become less compelling. Assuming the catalysts cited above play out, it’s wise to have a three- to four-month time frame for a Fuel Systems trade.

Action to Take –> Buy FSYS at up to $16. Set stop-loss at $12.50. Set initial price target at $20 for a potential 25% gain in four months.

This article originally appeared on ProfitableTrading.com:
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