TPI (TPIC) went public last week it what can be considered to be a success. The manufacturer of wind blades managed to raise cash and thereby has eliminated most of its debt. This move, continued growth, margin expansion, and a promising future for the wind sector seems to favor an investment. This is certainly the case as the valuations do not seem too demanding.
While there are many pro's for an investment into TPI, there are a lot of moving parts in the wind business which creates uncertainty for investors. I think about long term margin developments in particular, as spectacular growth might already be a thing of the past. On dips I am willing to buy a small stake in the business, although I miss the conviction to go in big.
TPI is a producer of wind blades, being a provider to many OEMs which long have relied on in-house manufacturing. Many of these OEMs have shifted towards a sourcing strategy as specialists can create better quality blades which improve energy capture as well.
TPI acts as such a specialist, having many long term minimum commitment volumes for wind blades with these OEMs. These commitments have a contract value of $3 billion through 2021, providing some visibility for TPI.
Some of TPI's customers include GE Wind, Vestas, Gamesa and Nordex, being the dominant players in the global wind market. It is important to understand that TPI is not the sole provider of blades to these manufacturers. It is a very important supplier however, being the largest US independent manufacturer with 6 plants in the US, China, Mexico, and Turkey.
The company initially started with GE Wind being the main customer, generating over 90% of sales in 2013. This share has fallen towards the 50% mark, but the reliability on this company remains a risk.
A Growing Market
The market for global wind energy is growing rapidly, as the wind blade industry alone has a size of $12 billion in 2014. The growth projected by BNEF is rather disappointing in my eyes. According to this association, this market is expected to grow to just $20 billion by 2040.
Fortunately, the addressable market should grow a little faster thanks to the continued shift towards outsourcing, as OEMs still make roughly half the blades themselves.
The good thing is that TPI has a sizable share of this $12 billion market with revenues amounting to $588 million in 2015, for a 5% market share. Current growth rates exceed the overall industry by a comfortable margin with first quarter revenue growth coming in at 85% per annum.
The Very Important Valuation
TPI ended the first quarter with a net debt load of $101 million. A sizable portion of this debt load will go away following the offering of 6.25 million shares at $11 per share, for a net debt load of roughly $35 million on a pro-forma basis. Following the offering there are nearly 33 million shares outstanding. These shares have risen to more than $14 per share, valuing TPI at $462 million, or close to $500 million including net debt.
The company did report revenues of $585 million in 2015, a 83% increase compared to the year before. Gross margins came in at merely 7.1%, up from 4.5% in 2014. The company reported relatively healthy operating earnings of nearly $28 million last year. Assuming a normal cost of debt on a $35 million pro-forma debt load and normal tax rates, earnings should be able to come in at around $17 million. That would translate into earnings of $0.50 per share, for a 28 times earnings multiple.
The good news is that TPI has continued to grow at a rapid pace into 2016. Based on the first quarter revenues, annual revenues come in at a rate of $700 million as gross margins improved to 7.3% of sales. If we annualize the run rate in terms of operating profits, we could see earnings of $32 million, for after-tax earnings of roughly $20 million, or $0.60 per share.
Growth is slowing down a bit. Second quarter sales are seen around $194 million, up 29% on the year before, although gross margins are anticipated to reach 11.5% of sales. Based on such numbers, operating earnings might improved to $72 million a year following the speculator improvements in margins. That could lead to earnings of $45 million, or close to $1.40 per share. Such an earnings achievement makes shares look like a bargain.
How To Value, What Are The Risks?
Based on the Q2 guidance, shares trade at 10 times forward earnings while leverage is very contained. This makes TPI look like a bargain, certainly given the impressive growth rates being reported.
The reality is somewhat more troublesome. While first quarter revenue growth exceeded 80% on an annual basis, growth has slowed down to 30% in the second quarter of the year. The real threat is my eyes is the potential for long term margins, although they continue to expand at the moment.
A good example is seen by the second quarter guidance. TPI looks to produce 551 sets of blades, for an average price of $352,000 in the second quarter, while the average price still amounted to $420,000 in the comparable period a year earlier. While the company has been able to offset lower selling prices by cost reductions and manufacturing efficiencies, there is a limit to these margins. Chinese competition might benefit from potential subsidies. If TPI would report further margin gains more competitors are likely to enter this industry, or OEMs might start to produce blades themselves again.
This is on top of the risk related to warranties, customer concentration and the fact that billings actually came in lower than the second quarter revenue projection. This actually indicates that the backlog might come under pressure a bit.
While a 10 times earnings multiple based on the Q2 run rate looks appealing, given the solid balance sheet and long term growth prospects for the wind industry, recognize that there are a lot of moving parts to this business. On dips I might buy a small stake, although I miss the real conviction given the uncertain outlook for the industry and its players.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.