To say American Superconductor (AMSC) has had a hard two months would be a huge understatement. Trading near five-year lows, AMSC has surprised the Street multiple times, resulting in the stock plummeting from $25.00 in early April to $7.730 last week (6/03/11). Since the beginning of 2011, AMSC has dropped 74%.
The catalyst for the last gap down is news that the company needs a filing extension for its fourth quarter and annual results for another 15 days and, as a precursor to bad news, the company announced that it is laying off 10% of its employee headcount. Doesn't sound good nor a minor disappointment for current AMSC shareholders. The company explained that it needed more time to determine what exactly is the revenue that can be recognized from customers in China - a clear reference to a previously announced bombshell in early April (the first gap down) that the customer representing 75% of its reported revenue, Sinovel Wind Group Ltd, would not only not reorder, but also has not paid for already shipped product. A restatement of financial results of the past few quarters is likely.
Citigroup analyst Timothy Arcuri notes that AMSC may have booked only $10 million in its fourth quarter vs. the Street estimate (as of April) of $119 million. There is no other way to slice it - a negative surprise that can only be assessed after the actual results are reported.
James Ricchitui, an analyst with Needham Co., reacted to the surprise announcement by putting the stock "under review," Wall Street jargon for "we need more time to assess this surprising news and consider a downgrade, if not, dropping coverage." Ricchitui did remind shareholders that the company reported its cash on hand as $240 million as of March 31, 2011. (or about $4.50/share in cash). But how do you value a company that has yet to determine what its actual financial results were for fiscal year 2010 after discovering that the largest customer will not be ordering what has been expected going forward. Sinovel has a great incentive to design future wind turbine components without AMSC and design with Dalian Guotong Electric, which Sinvovel has a 22.5% stake in.
And complicating matters on where AMSC goes from here is the pending $270 million acquisition of The Switch, a Finnish company that manufactures power converters, which offers the diversification that is even more important now. Still one could argue, how smart does The Switch acquisition look when you consider that The Switch's largest customer is Goldwind, a Chinese wind turbine manufacturer. From the pan into the fire? Continued concentration in both customers and country does not seem to solve AMSC's problems.
So far, the shorts have been right on AMSC. As of 5-13, the short position was 11.26 million or approximately 32% of the public float.
When investors learn of the actual financial results for 2010, the future of the Sinovel relationship, the prospects of financing of The Switch acquisition and more clarity on future financial guidance, AMSC will most likely see a bottom. Until then, only speculative traders need apply.