American Superconductor (AMSC) has recently languished – falling from its October high of just over $38 to Monday’s close of $27.27 – a decline of almost 30%. This partly reflected AMSC’s decision to access the secondary market late last year – but also reflected increasing concerns over its heavy reliance on Sinovel (601558.SS), its main customer, and its resultant exposure to bottlenecks in the Chinese wind market. Yesterday’s earnings (see conference call transcript here) addressed these concerns on a number of levels and suggest that AMSC’s share price will continue to recover.
American Superconductor licenses wind turbine designs, provides the related electrical control systems and is increasingly developing a business in Smart Grid integration systems and superconductor transmission lines.
The company saw third quarter revenues grow 42% on the year in Q3 to $114.2m. This produced net income of $16m or 33 cents per diluted share compared to 11 cents in the third quarter of FY 2009. On a non-GAAP basis those numbers were 40 cents and 20 cents.
Moreover, AMSC raised forward guidance and now expects FY 2010 to produce net income of $0.99 to $1.04 per share – against previous guidance of $0.95 to $1.00 and analyst expectations of $0.95 according to Bloomberg’s analyst survey. In terms of long-term prospects, AMSC has been targeting $1bn in revenues with an operating margin of greater than 20% by 2015. They now believe that they can make that target by 2014.
This obviously implies a solid medium-term outlook for net income – and AMSC appears to have the ability to make those targets in an environment where renewable energy continues to be built out globally. Moreover, their recent stock offering has left them with $260.5m of cash on hand for an investment schedule which looks to be around $50m a year. CEO Greg Yurek stresses that since they don’t manufacture the wind turbines themselves they face a low capital intensity, high value added environment. It seems reasonable to conclude that they now have the funds in place to deliver the investment required to meet the $1bn revenue target. If you accept their ability to achieve that target there is clearly a lot of upset for the stock.
These numbers are difficult to argue with and I would expect some analyst upgrades over the next 24 hours. That leaves us with the question of AMSC’s over-reliance on orders from Sinovel and concerns about bottlenecks in China’s wind turbine market. The issue here is that China has rapidly built out its wind turbine capacity – but at a much faster rate than it has been able to connect that capacity to the grid. This is true. However, for AMSC this seems largely to be a red herring and is unlikely to slow growth in its order book.
Five points are relevant –
- Greg Yurek suggests that about 25% of China’s wind turbine installations were not connected to the grid in 2010. However, the Chinese now appear to be moving faster to resolve the situation. Moreover, the continued build out of wind is locked into China’s five year plan – consequently, he does not expect new wind turbine construction to falter. This is particularly the case since China has the objective of being a net exporter of wind technology in the years to come. And Sinovel will be the major export player – largely using AMSC’s electrical control systems.
- In Q3 Sinovel accounted for 73% of AMSC’s new orders. However, the company has been adding new customers – for example in India with recent deals with Inox Wind (IWL). They also see Brazil as a new growth opportunity, particularly given the fact that the country currently has no domestic wind turbine manufacturer. And they expect to benefit from the roll-out of more wind capacity in the US – mainly through foreign clients entering the US market. However, Greg Yurek also hinted on the analyst call that a deal with a US player is possible.
- Most importantly, the non-wind contribution to AMSC’s revenues is expected to grow significantly. This relates to their Smart Grid infrastructure solutions and particularly their Amperium superconductor power cables which represent a key technology in the roll-out of the Smart Grid. Initial superconductor cable systems are already in place in Ohio and Long Island. AMSC has also recently secured an order for 3 million meters of Amperium superconductor wires from South Korea’s LS Cable – currently the world’s largest superconductor wire order.
- With regard to AMSC’s $1bn revenue target by 2014, only 50% of that is expected to be directly related to their wind business. They appear confident in seeing superconductor cables as being their strongest growth area.
American Superconductor’s stock price languished for most of 2010 despite good earnings growth and suffered in the later part of the year on concerns over China’s wind market. However, AMSC’s earnings have only strengthened and concerns over the continued build out of wind capacity in China seem overdone. Following the earnings numbers AMSC has already rallied. However, that rally looks likely to continue and AMSC looks to be a solid medium-term bet.