Founded in 2003, Tower Tech (TWRT) manufactures wind turbine extension towers, including the building of tower sections, complete towers, as well as modifications to existing towers. The company’s key customers include Vestas Towers and Gamesa Eolica. This is a high risk play tied to the wind power market. With surging oil prices and alternative energies in hot pursuit, Tower Tech should benefit from the push for green energy. While the stock trades at high multiples, we believe the company will grow into its rich valuation, as its base business ramps up and it continues to make acquisitions.
Tower Tech’s “base” business involves the engineering and manufacturing of wind turbine extension towers from a unique site in Manitowoc, Wisconsin that has direct access to a deep water shipping channel (a major positive since key customers are located in Europe). Tower Tech provides the labor while its customers supply the materials. The Company started its manufacturing process in July 2004. Since then it has worked to secure production contracts and make significant capital improvements.
Management believes that it has exited the development stage of its business cycle and looks forward to expanding its business by offering additional revenue opportunities such as providing materials in addition to labor. The base business reported approximately $8.0 million of sales through the first nine months of 2007, which is up from $1.3 million in the same period of 2006 or over 500%. Going forward, the base business should see tremendous growth as we are very bullish on the prospects for the wind industry. The following are some interesting quotes we have pulled together from various sources, such as the Wall Street Journal, that clearly demonstrate the potential for strong growth of wind farms.
Wind power is on the rise as oil prices and environmental concerns soar. Governments are showering the wind turbine sector with subsidies in an effort to boost clean energy production.
Europe expects to produce 20% of its energy from renewable sources by 2020, up from 6% today, with wind playing a key role.
Only 1% of power in the US comes from wind.
The key risk to sustained US wind growth is long-term regulatory support. Currently, wind power is slightly more expensive than coal-fired plants and therefore requires some state and federal price support. There is no US federal requirement for utilities to buy green energy. Rather, the wind market relies on tax credits that depend on biannual approval from Congress." MADreturns believes the federal tax credit support will continue, as clean energy is a key issue in Washington.
The price gap between wind and traditional power sources is closing quickly.
World-wide, wind capacity has increased from 17,800 megawatts in 2000 to 74,300 in 2006.
In addition to organic growth in the wind power market, Tower Tech should benefit from growth from acquisitions. Specifically, the Company completed two deals recently. In October 2007, Tower Tech purchased Brad Foote Gear Company, which added sales of over $60 million (versus $8 million for the pre-existing base business) to the company. Brad Foote manufactures gearing and other products for the wind power industry, as well as many other industries.
Also in October, Tower Tech acquired RBA, Inc., a subcontractor of machining and fabrication processes. RBA added nearly $5.0 million in sales. The Company funded these deals with equity and cash raised from a private placement deal with Tontine Capital Management. Tontine is a very savvy Wall Street investor. As such, we view Tontine’s investment very favorably.
All told, after the deals Tower Tech has roughly $80 - $90 million in sales. At current prices, the shares trade at 9x sales, which seems high but not in recognition of the tremendous long-term growth prospects. Overall, we believe that continued growth in wind turbine and bolt-on acquisition will drive Tower Tech's shares to new highs.
Disclosure: Author is long TWRT.OB