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By Sagarika Jaisinghani
Aug 18 (Reuters) - Weak demand for alternative fuel vehicles and increasing competition in Europe are hurting Fuel Systems Solutions Inc at a time when its peers are riding a recovery in the U.S. auto industry.
New York-based Fuel Systems, whose products allow vehicles to run on propane and natural gas, said it has lost customers in Europe, which contributes about 40 percent to the company's revenue and is its largest market.
The company's shares fell as much as 9 percent on Monday after it cut its revenue forecast for the year.
Where the Dow Jones U.S. Auto Parts index has risen more than 20 percent in the past year, Fuel Systems shares have nearly halved.
"Their (Fuel Systems) issue is that where they've been historically strong has gotten weaker," Lake Street Capital Markets LLC analyst Robert Brown told Reuters, referring to the European auto market.
"The adoption of alternative fuels in the U.S. is actually expanding quite nicely but the dynamics in Europe have been a headwind," he said.
U.S. automakers are increasingly using alternative technology to boost fuel economy and meet stricter mileage and emissions standards.
Europe is still playing catch-up after a euro-zone crisis that weakened automotive demand.
But Fuel Systems expects new European emissions standards due to kick in from 2016 to boost demand for its conversion systems.
In the second quarter ended June 30, the company posted a 21 percent fall in revenue.
In contrast, smaller rival Quantum Fuel Systems Technologies Worldwide Inc, which sells most of its products in the United States, reported a 7 percent rise in revenue.
BorgWarner Inc, one of the largest suppliers of turbocharging technology used by automakers to boost fuel efficiency, last month raised the low-end of its sales growth forecast for the year.
BANKING ON EUROPE
Lake Street's Brown said Fuel Systems' recent performance has been pressured by the loss of a contract with Peugeot SA to Italian rival Landi Renzo SpA.
The company has also lost Volkswagen and Honda Motor Co in China and Thailand, respectively, as the automakers brought the services outsourced to Fuel Systems in-house, Brown said.
Fuel Systems, which gets most of its revenue from Ford Motor Co's European unit, said it expects volumes to rise in the fourth quarter ending December 2015.
Activist investment firm Becker Drapkin Management LP reported a 6.4 percent stake in Fuel Systems on Friday, calling the shares undervalued.
Fuel Systems' shares trade at 137.9 times their forward 12-months earnings estimate, compared with a median 12.6 time for the automotive industry, according to Thomson Reuters StarMine.
They were down 4.7 percent at $10.08 in afternoon trading on the Nasdaq. (Editing by Don Sebastian and Maju Samuel)