American Superconductor (AMSC) was an accident waiting to happen. If you own the stock or follow it, you know exactly what I'm talking about. Last week on April 5th it closed at $24.88. The very next day it fell 50% to $12.54 and has since bounced back to the $13.50 range. That's a mind blowing loss. The reason the once high-flier got its wings clipped (it was selling at $43 fifteen months ago), is because its biggest customer, Sinovel, declined to receive American Superconductor components for their wind turbines stemming from an inventory buildup.
Sinovel accounts for over 70% of American Superconductor's revenues. According to a ValueLine update: "Negotiations are now under way as to whether the company will will be accepting future shipments and when it will pay for receivables due." There is also no guarantee that Sinovel will continue to use American Superconductor as their supplier. It's not a pretty picture.
In a recent Reuters article they state, "For months, analysts have warned that American Superconductor's customer concentration is a huge risk." Well, the damage is done, its reputation is sullied and there is no telling how long it will take to get American Superconductor off of the mat. There are certain questions to be asked. First, is it still a viable company? Secondly, where is their growth going to come from? Thirdly, is $13.50 or thereabouts an inviting price for the stock?
I contend that American Superconductor is still a viable company because they remain a leader in a viable industry - renewable energy. Maybe they aren't as large of a leader as they were prior to last week, but they are in a young industry with a lot of room for growth. With the problems of disposing of nuclear waste and the issues of carbon emissions from fossil fuels, renewable energy is the future.
If you aren't familiar with American Superconductor's business model they provide: "... wind turbine designs and electrical control systems ... The company also offers a host of smart-grid technologies, including superconductor power cable systems, grid-level surge protectors, and power electronic-based voltage stabilization systems for power grid operators," according to a recent TheStreet ratings report.
I became aware of American Superconductor a couple of years ago from reading about it in three different investing books covering the green-tech "revolution." The most notable of the trio is "Clean Money," by John Rubino and is a very worthwhile read if you are interested in investing in the sector. I don't believe it is a coincidence that American Superconductor, along with the rest of the green-tech stocks, had significant gains right after these publications were released. Investors got starry eyed with the prospect of all the potential profits emanating from this area, and perhaps the stocks suffered from the too much, too soon syndrome. American Superconductor alone had an average annual P/E ratio of 86 in 2009 because speculators bid up the stock in its first year of profitability.
I believe that in order to examine American Superconductor's growth potential going forward, we have to make an assumption that Sinovel will not be in the picture. If they do come back into the fold at a later date, then that will be gravy, but the analyst reports I've read don't believe that Sinovel will work down their excess inventory for at least another six months. Before last week, 80% of American Superconductor's business came from their wind turbine division: 70% from Sinovel and 10% from other customers. The remaining 20% of sales is from the power grid division which is growing 60% year-over-year according to their most recent earnings call transcript.
If we do the math here, the remaining 30% of the business now accounts for 100% of future revenues, 66% from the power grid division with growth growing like gangbusters. That means that 33% of revenues will now constitute all other clients in the wind turbine division. American Superconductor will focus their marketing efforts in the Asia-Pacific region, specifically China. They "expect increased revenue contribution from Chinese customers such as XJ Group ... Shenyang Blower Works ... Dongfeng Turbine Company (DNFGF.PK) ... Beijing JINGCHENG New Energy," as stated in the earlier mentioned conference call.
They also recently closed orders with Doosan Heavy Industries and Hyundai Heavy Industries in Korea, and, Inox Wind in India. There are still sales to be had in the wind turbine division, it's just not the booming business it was when they had a nice revenue stream from Sinovel. There is also the prospect of landing Goldwind (XJNGF.PK), China's second-largest wind turbine maker, but this all hinges on their ability to acquire Finnish company The Switch as reported in ValueLine. Because of the Sinovel fiasco, they may not have enough cash available to pull off the deal. However, wind turbines still show promise, especially after the nuclear situation in Japan.
Every broker report I read which includes Citigroup Global Markets, Morgan/Stanley and ValueLine believes that American Superconductor will operate in the red for at least another year if not longer. Valuations based on 2011 earnings (fiscal year is March 2011-march 2012) are not feasible because of this. Therefore, to value the stock, we'll have to use the Price/Sales metric if you wish to consider a company for your portfolio that does not make a profit.
Citigroup Global Markets is the only report I have that projects sales for fiscal 2011, so we'll have to use these numbers as opposed to the Yahoo Finance consensus. Citigroup states that their previous estimates for American Superconductor's 2011 revenues were $464 million and have now reduced that number to $253 million. With 52 million shares outstanding, that gives us a sales/share of $4.9 and a price/sales of 2.8. In addition to this, they may have to issue new shares to complete The Switch deal, which would dilute sales/share even further and increase the price/sales ratio.
I realize that it is open season on American Superconductor and I'm reluctant to join the fray, but with the high price/sales ratio, lack of earnings visibility and overall pressure on the stock market, I'm inclined to take a more sidelined approach to this equity. Their next conference call is in early May and that should shed more light on the situation and perhaps goose it out of its vegetative state. However, at its current valuation, I consider American Superconductor unattractive, if not radioactive because it seems to have lost its way.