Broadwind Energy: Still A Buy After November Gains

Nov.25.11 | About: Broadwind Energy, (BWEN)

Broadwind Energy Inc. (NASDAQ:BWEN) provides products and services to the United States wind energy industry. The company operates in five segments of services or products, which are industrial gearing, specialty weldments, wind turbine gearing, wind turbine services, and wind turbine towers. The company's segments operate in three industries: wind, oil & gas, and mining, which combined present countless opportunities for this company's future.

Over the last month the $89.44 million company has increased its value by approximately 47.39% on a string of encouraging news. However, the stock is trading with a 61% loss on the year, and a near 90% loss since April of 2009. In 2009 the company was trading with a valuation of more than $1.5 billion, but in just two years it's now trading as a speculative small cap stock.

The stock is highly debated and has lost a great deal of investor confidence after capital raising issues, resorting to public offerings, lower revenue, higher net loss, and questions surrounding its strategic plan. Yet the stock has increased by nearly 80% in November and has left investors wondering if it's bottomed out or if the stock is on its way to higher gains.

Let's look at the three developments that were catalysts to the stock's large gains in November. The first round of gains occurred on November 3, when the stock increased from $0.39 to $0.51. The gains were a result of two announcements: the company's earnings and a deal with Siemens (SI). The company's Q3 earnings report reflects progress in many areas of its operations, including lower costs, higher sales, strengthened backlog, and encouraging guidance regarding its restructuring. The company posted revenue of $47.9 million which is a 46% gain year-over-year, which was driven by a 82% improvement year-over-year in its services segment. Yet despite the company's earnings report showing improvements I believe the majority of the gains were a result of the Siemens deal.

Broadwind announced that it was selected to supply towers for Siemens' Iowa wind project. As part of the agreement, Broadwind will supply 36 locally manufactured towers for the expansion of the MidAmerican Energy wind project in Iowa. This deal will allow an option for an additional 25 towers, that's expected to be delivered in 2012. This deal is huge for the company and will bring a sizeable amount of revenue and potentially result in further deals with Siemens that would provide a consistent revenue stream for the company.

Investors should be encouraged that a large company such as Siemens would choose Broadwind to supply this service, and investors should be even more optimistic that Caterpillar (NYSE:CAT) has chosen to use the company as well. Only 20 days after the company's deal with Siemens was announced ,Caterpillar chose the company to manufacture mining machinery components.

This announcement drove the stock from $0.53 to a high of $0.71 as investors realize the importance of working with CAT in its fast growing mining segment. Broadwind will manufacture welded sub-assemblies for CAT's line of large draglines, crawlers & excavating equipment. Caterpillar's mining ventures has been a catalyst for its growth and I believe that this relationship with CAT will be of great importance to the company's future.

A large problem for this company has been its declining revenue and its inability to grow beyond the wind industry. However, the company is showing substantial progress in creating a more diversified revenue stream with a growing services segment and its work with two mega companies: Siemens and Caterpillar. I believe these two jobs and its improved fundamentals could be the start of good things, and that this company's stock is just getting started.

My only problem with this stock is its volatility, which is 124% more volatile than the market, and everytime it posts large gains it falls quickly as investors take profits. I believe this is a natural reaction from investors that have been burned by this stock over the last two years. Yet I honestly believe this is a new company with a new found level of optimism and a bright future. However, it could remain volatile over the next few months, but if earnings continue to show improvements then I expect it to create some stability with less negative volatility.

I believe that one of the best indicators an investor in small cap stock can use is insider trends. A CEO or other executives aren't going to purchase a small-cap stock before horrible earnings or a lost contract. But on the other hand, they will purchase before new contracts, increased earnings, or major developments. Therefore I view the strong insider purchases of BWEN to be quite encouraging and that it could signal further growth.

With a market cap under $90 million and constantly improving fundamentals I believe that BWEN is a steal. The company must continue to improve its profit margin along with its return on equity but assuming that the jobs with Siemens and Caterpillar are successful and that the company continues to improve I see few risks, at this price, with high rewards. The company has been beaten down over the last two years, yet I believe it's making strides in the right direction and that it will continue to post large gains over the next year as its revenue streams grow larger.

Disclosure: I am long CAT.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy, but rather are for informational purposes only.