This is still something of a hobbyist niche in the US, where the 123,000 natural gas vehicles (NGVs) on the road at the end of 2011 amounted to just one-twentieth of one percent of the national fleet. The benefits of cheap CNG have been overshadowed by public subsidies encouraging ethanol use.

But NGVs are a growth industry all over the world, especially Asia, where the NGV fleet has grown at a 40 percent compounded annual rate for the last decade, according to statistics from an industry group.

In China, the natural gas fleet grew 48 percent last year alone, totaling nearly 1.5 million vehicles, according to a recent Citigroup report. But both Iran and Pakistan have NGV fleets twice as large, and in Pakistan NGVs outnumber gasoline-guzzlers by a nearly 2-to-1 ratio.

Even in the US, change is coming, driven by the shale fracking revolution that’s released a flood of relatively costly crude but an even greater abundance of natural gas, extracted in places as cheaply as any from the conventional vertical wells. The spread between high gasoline and modest CNG prices is now wide enough to recoup the cost of CNG modifications in as little as five years. The economics are likely considerably more attractive than that to operators of high-mileage urban fleets with a central fueling location.

And indeed strength in US automotive revenues was the highlight of the strong recent quarterly report by Fuel Systems Solutions (Nasdaq: FSYS), a leading global supplier of CNG and propane fuel systems and components. Sales rose 2 percent as a surge in demand for US CNG conversions nearly offset the recession-fueled decline in Europe, which still accounts for 35 percent of revenue.

In addition to the automotive fuel systems, electronic controls and fueling equipment and parts, Fuel Systems also has an industrial business supplying gas compressors and auxiliary power systems, notably for the rail and trucking industries. This industrial business accounted for 30 percent of sales in the most recent quarter but it was a relatively fast grower, increasing 8 percent thanks mainly, once again, to North America.

Yet Fuel Systems Solutions also derives 20 percent of sales from Asia. It’s unusually global for a company with a market capitalization of just $400 million, with distributors and dealers in 60 countries and manufacturing facilities in Italy, Canada and Argentina in addition to domestic ones in California and Indiana. South America, mainly Argentina and Venezuela, account for 14 percent of revenue.

As for profits from this diversified revenue stream, they were modest. Second-quarter net income came in at 13 cents per share, a nickel ahead of estimates and two cents ahead of the year-ago numbers adjusted for a one-time tax benefit.

In sum, Fuel Systems is a slowly growing, modestly profitable business selling for 14 times trailing Enterprise Value/Ebitda, not cheap considering it’s targeting an annual operating margin of just 2 to 4 percent.

Then again, the point is here is not what Fuel Systems has done in the last 12 months but what it might do three or four years down the road if CNG takes off, and especially if it’s bought by a larger entity better able to leverage its technology, brands and relationships.

The balance sheet is solid with no debt, and cash and investments of $83 million. This was a $50 stock four years ago, and while the pipe dreams that fueled that valuation haven’t come true, FuelSys is still here, profitable and expanding while so many smaller competitors have didn’t make it.

The stock enjoys strong institutional support, attracting several successful deep-value aficionados among prominent mutual fund and hedge fund managers.  It’s also been the favorite of notable small-cap investor Kevin Douglas, who has amassed a 5 percent stake by buying at $24 in early 2012 and at $15 to $18 earlier this year. Douglas has a similar stake in Westport Innovations (Nasdaq: WPRT), a Fuel Systems competitor and a holding in our Aggressive Portfolio.

Fuel Systems shares jumped 17 percent the day after last month’s earnings report, and have since successfully retested the rising 50-day moving average.

The best days lie ahead as interest in CNG heats up in the US. For example, next year Ford (NYSE: F) will offer a CNG version of its best-selling F-150 truck. Fuel Systems is gering up for that business even as it extends its relationship with General Motors (NYSE: GM), for which it will supply bi-fuel (i.e., switchable) versions of the Crew Cab, Chevy Silverado and GMC Sierra pickups.

The European recession seems to have run its course, and Fuel Systems has noted a tentative pickup in some peripheral European markets like Turkey and Poland. With Asian demand for NGVs as strong as ever and North American business on the rise, this is a strong near-term story with big upside should a suitor seek to capitalize on CNG’s long-term global potential.

We’re adding FSYS to our Aggressive Portfolio. Buy below $23.