TechPrecision: Exploiting The Demand For Large-Scale Precision Components In Alternative Energy Markets

Nov.23.11 | About: Techprecision Corp. (TPCS)

TechPrecision Corporation (OTCQB:TPCS) globally manufactures large-scale, metal-fabricated and machined precision components and systems. These products are used in a variety of markets including: alternative energy (solar, wind and LED), cleantech, medical, nuclear, defense, industrial, and aerospace. The company is one of the few companies manufacturing these types of products in the United States and China:Click to enlarge

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Strong Solar and Sapphire Near-Term Growth in China

Despite the turmoil in the US Solar industry in the past 12 months, including high profile bankruptcies like Solyndra, Sun Power, and Evergreen Solar’s (ESLRQ: Pink Sheets) management recently expressed the sentiment that both medium and long-term opportunities have never looked better.

What is fueling such management optimism is its quick and decisive decision to initiate production capacity in China late last year via the formation of its Wuxi Critical Mechanical Components Co., Ltd., or the WCMC division.

In the past year and a half, the Chinese government has poured $34 billion in solar manufacturing alone, and is forecast to spend $50 billion by 2014 via direct stimulus and initiatives. China now dominates about half the sector's supply chain, and has vaulted past the west to become the world's largest manufacturer of solar panels.

The increased demand has caused prices paid for end products in the solar and sapphire markets to drop dramatically worldwide. TechPrecision’s largest customer - GT Advanced Technologies (Nasdaq: GTAT) - started last year to move manufacturing closer to its end customers, and expressed its need for lower cost production alternatives.

Management’s decision to launch WCMC is starting to pay dividends. It is uniquely positioned to serve this need as one of the few entities that can provide both superior quality and competitive pricing.

Last week, the company reported 2nd quarter 2012 revenues for the period ended September 30, 2011 of $7.1 – up from $8.4 million in the year-ago period – and a 23% decrease sequentially from $9.2 million in the first quarter of fiscal 2012.

Not included in the 2nd quarter 2012 revenue was $3.4 million worth of products that TechPrecision manufactured for customers that were qualified and accepted by the customer, but did not ship until the first few days of October. The $3.4 million of finished and accepted products will be recognized as revenue in the third quarter, and contribute incrementally to third quarter results. Approximately one-third of this production was produced by the company’s WCMC China subsidiary. If this order had been accepted two or three days earlier, WCMC would have accounted for 12% of total revenue.

Management provided guidance for 3rd quarter 2012 revenue in the range of $12.5-$14.5 million, inclusive of the $3.4 million of solar production described above, and expects its China subsidiary to contribute more than 20% of the company's consolidated third quarter revenue. The company had previously stated that it expected WCMC to contribute 50% of 2013 revenue. Based on a 2013 forecast, the company is predicting 28 million in revenue from WCMC.

This is extremely impressive growth when you consider that TechPrecision launched its WCMC China operation less than one year ago with one customer, GT Advanced Technologies and one product line. Now the company has up to five tier-one customers and five new solar and sapphire product lines. The company defines a tier-one customer as one having global needs and requirements with 500 million+ in annual revenue.

Nuclear is the Company’s Largest Long-Term Opportunity

Nuclear fabricators and precision tool manufacturers are few and far between. Since 1980, there has been a 75% reduction in the number of companies that are ASME N-stamp certificate holders in the US, and a 60% reduction internationally.

In January 2010, the Obama administration increased the level of government-backed debt guarantees from $18 billion to $56 billion as an incentive to support the construction of new nuclear plants in the U.S.

The recent tragedies in Japan have bolstered demand for advanced nuclear reactor designs with passive safety systems. Over the next ten years, 16 nuclear power plants are scheduled for construction in China, six in the United States and five in Europe (including three in the United Kingdom).

Because TechPrecision’s Ranor subsidiary is one of the few facilities left in the United States that has the certifications required to produce the necessary components for these plants, this pipeline of new nuclear projects creates a significant opportunity - estimated to be $12 to $60 million per reactor in any given year.

The company is ramping up manufacturing capacity to meet potential demand, including the completion of a 19,500 sq. ft. expansion of its Massachusetts gantry mill facility in late September 2011, and the pending announcement of its new waterfront manufacturing facility.

Attractive Valuation; Stock Trading at a Discount to Long-Term Growth Prospect

Over the past year, the solar sector has been beat up and the average stock is down an average of approximately 60%. A number of industry analysts believe that beaten-down solar stocks will bottom out in the first quarter of 2012 - traditionally the weakest quarter for solar stocks. TechPrecision is rated as a buy by both Singular Research and Wunderlich Securities - the only two US analysts covering TPCS, with consensus estimates of FY 2011 revenue of $43 million and EPS of $0.16, and FY 2012 revenue of $57 million and EPS of $0.27. TPCS is trading at 6.875 X fiscal 2012, and 4.1 X fiscal 2013. Both analysts have $4 price targets over the next 12 to 18 months. TPCS closed Friday at $1.10 up $.13 or 13%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCQB:TPCS over the next 72 hours.