Shares in Illinois wind turbine tower manufacturer Broadwind Energy (BWEN) have been sluggish over the past couple of years as the US wind energy sector has slumped. The company's sales are concentrated on the US, and it missed out on last year's stunning wind energy boom in China.
In addition, a goodwill and impairment charge of $82.2 million, relating particularly to Broadwind's RBA fabrication subsidiary, took the market by surprise, and led to a big sell-off in the shares after it was announced in March last year.
This has also led to several recent class action lawsuits against Broadwind, further denting investor confidence in the stock.
So it is easy to overlook the fact that there is actually plenty of good news swirling around the company. Here are five reasons to get excited about this stock.
1. US wind energy spending is rising again
In 2008, the country installed 8,413 MW of new wind energy capacity, rising to 9,849 MW in 2009. A depressed economy and financing problems meant this figure crashed to 5,094 MW in 2010.
However, fully 57 per cent of this new capacity was installed in the fourth quarter, and the Global Wind Energy Council reports (.pdf) that the new year began with more than 5,600 MW under construction.
The Council's early forecast was that 2011 could finish well ahead of the previous year (though probably not yet at the 2009 level). In particular, a string of new projects are expected in time to meet the new construction deadline for the Investment Tax Credit for renewable energy, now set to expire at the end of 2011.
Another attraction: wind energy costs have dropped over the past two years, with recent Power Purchase Agreements being signed in the range of five to six cents per kilowatt-hour. With uncertainty around natural gas and power prices as the economy recovers, wind is increasingly becoming cost competitive, and utilities are expected to lock in more long-term contracts.
2. Broadwind has been seeing order inflow increase
In line with the rise in US wind energy infrastructure spending, Broadwind is also experiencing a rise in orders. In the 2009 fourth quarter it received $20 million in orders. In the 2010 fourth quarter it received $64 million.
3. Broadwind is gaining market share in wind towers
The US wind energy market has been dominated by 1.5 MW machines. This is now changing, with growing demand for larger and more technically advanced "next generation" turbines of 2 MW and higher. Broadwind recognized this trend early, and in 2010 its wind tower market share rose (.pdf) to more than 10 per cent, from 5 per cent in 2009. (Wind towers represent about 55 per cent of total company revenues.) Significant capital expenditures in 2008 and 2009 mean the company already has the capacity for large increases in demand.
4. Broadwind is also gaining market share in its gearing business
The manufacturing of high-precision gearing systems, mainly for wind turbines, represents about 36 per cent of revenues. The company's market share for wind applications (.pdf) increased from 7 per cent in 2009 to 17 per cent in 2010. It is also seeing rising demand from the mining and oil and gas industries for its custom-engineered gearboxes and gearing systems, and it is targeting further strong growth from these businesses.
5. Wind farm servicing represents a significant growth opportunity
Broadwind has established a network of service centers strategically located near key wind farm sites, and this business represents about 9 per cent of company revenues. Wind turbines are generally serviced by their manufacturers under warranty for the initial years of operation. However, as manufacturer warranties expire and the size of the installed base grows and ages, there is expected to be strong demand for independent service providers, and Broadwind is looking for a big uptick in business. In February 2011 it opened its new $7 million dedicated drivetrain service center in Abilene, Texas. Other service centers are in California, Illinois and South Dakota.
Of course, things could go wrong. Certainly, the class action lawsuits against the company will scare off some investors.
In addition, the company's main business, building wind turbine towers, is specialized but not high-tech, and the barriers to entry are relatively modest. Competitors include Trinity Industries (TRN) and DMI Industries (part of Otter Tail Corporation - OTTR), along with several smaller companies. There is also the potential for low-cost Asian rivals to try to make inroads.
Nevertheless, with the US wind energy sector moving into full-scale recovery mode, the prospects for many of the relevant stocks - Broadwind among them - appear rosy.