Broadwind Energy: Fun with SEC Filings

Broadwind Energy (BWEN.OB) is being touted as the first pure play in the wind industry for US investors.

The Company’s attractive business and the explosive growth of the wind industry in the US, combined with the lack of pure wind companies in the US stock market has driven the stock from $2 at the beginning of 2007, when the company was known as Tower Tech, to $12 at the end of 2007 and lately as high as $29. Tower Tech was a manufacturer of wind turbine towers.

During 2007, they completed acquisitions of RBA, Inc, a manufacturer of, among other things, large metal structures for use in the giant cranes needed to assemble wind turbines. They also acquired Brad Foote Gear Works, a manufacturer of, among other things, the large gears needed in a wind turbine gearbox. They then acquired Energy Maintenance Services, Inc, a provider of services to the wind industry including turbine maintenance, repair and construction management. Finally, this year they have agreed to acquire Badger Transport, a trucking company with specialized equipment used to transport the large turbine towers, blades and other components. Along the way, they changed their name to Broadwind Energy to better reflect their current focus.

Let me preface the next section by saying few are more bullish on the wind sector than myself. A variety of factors have converged which will form the base the for the industry’s continued strong growth for the next 10 or more years. These include increased focus on renewable energy, increased demand for energy security, improving industry economics, improved industry technology, and soaring energy prices. Most of the previously mentioned factors continue to move in a direction supporting the continued growth of the wind industry. Existing state mandates for renewable energy, as well as widespread support at the federal level only brighten the picture.

With all that said, I am very bearish on the prospects for BWEN stock. The company may continue to execute well, but even the biggest wind bull can’t justify the current valuation for BWEN. The Company is currently valued at 38X TTM sales, a ratio GOOG never touched even when it was growing at 100% year over year. Remember, at the end of the day this is still just an industrial manufacturing company with very strong end markets. They’re never going to produce 30% gross margins. Their Tower and Gear segments (86% of revenues) currently produce a combined gross margin of 19%, in line with the industry. There are several other tower and gear manufacturers in the market today, all of whom are ramping up production to meet soaring demand. Vertically integrated wind turbine manufacturers such as Vestas and Suzlon trade for roughly 28X estimated 2009 earnings (I don’t like to use such long term earnings forecasts, but it doesn’t appear as if BWEN will be profitable this year).

If I generously assume BWEN does $350M in sales that year (they did $35M in the first quarter of 2008) and earn a 10% profit on that (they weren’t profitable in the first quarter), that values the company at about $980M, or about $10.30 per share (the company has issued roughly 16M new shares since the end of the last quarter, bringing the total outstanding to 95M). However, shorting overvalued stocks in sectors you like is generally a bad idea. There is an additional catalyst here that makes me bearish which I will elaborate on shortly.

I realize Jim Cramer has picked up on this stock, and many believe his actions are responsible for the dramatic run up in BWEN’s stock price. I generally try to ignore Cramer and that’s what I’ll do here, although I do find it interesting that on May 7th, in a video the TheStreet.com, he said he wouldn’t talk about BWEN on his TV show because it trades on the OTCBB. He was able to contain himself for 21 days, when BWEN was mentioned extensively on the May 28th show as a part of Cramer’s “Windex”. Take that for what you will.

Broadwind’s growth has been funded largely by Tontine Associates, a $7B hedge fund out of Greenwich, CT. Most of BWEN’s acquisitions have been funded by a combination of cash and stock, with the cash portion of the deal coming from sales of stock to Tontine. Tontine’s first investment came in March 2007, when they bought over 12M shares from the company and insiders for $1.50 per share, when the common stock was traded for $2.30 per share, a generous 30% discount. This could perhaps be justified by the size of the transaction, liquidity and profile of the company at the time.

This trend has since continued. To complete the Brad Foote acquisition, the company issued stock at $4 per share to Tontine, a more reasonable 17% discount to the prevailing market price. The EMS acquisition was completed with stock and Tontine funded cash at a 10% discount to market value. Finally, on April 22nd of this year, the company agreed to sell Tontine $100M in stock at $7.96, an extremely generous 27% discount considering the profile of the company at that point in time. The Company also issued stock under the same terms to a director who is a Tontine-appointed member of the board (Tontine has the right appoint 3 board members). At this point the company had an excellent story to take to the capital markets and could have raised money in a variety of less dilutive ways. The implications are twofold: 1) Insiders appear to value the Company at well below the current market price and 2) The Company is not being run for the benefit of all shareholders on an equal basis.

I’m not alleging the Company or Tontine has done anything illegal, or even that the Company has seriously breached its fiduciary duty to shareholders. My problem is that I don’t want to buy stock at a premium to where knowledgeable insiders are buying. Given the rights granted to Tontine and their controlling position in the Company, I, as a minority shareholder, should buy shares at a discount to a controlling valuation. At the very least, it gives me a window into where they believe the value of the Company lies. That indication puts me between $8-10, well below the current $25 trading range. This serves to verify my earlier back of the envelope valuation of the company.

In summary, I believe the company will likely post excellent operating results for the next few years. However, my qualitative and quantitative analysis has led me to believe the fundamental value of the stock is significantly below the current trading range. A medium term catalyst is the pending expiration of the federal PTC, which will certainly hurt orders into 2009, even if the PTC is retroactively renewed (although this may be a long-run positive for the stock, but that’s for another column).

It’s a momentum stock at this point, so it may be a bumpy ride, but ultimately this stock will return to fundamental value, which both my analysis and insider activity indicates is will below the current stock price.

Disclosure: Author has a short position in BWEN.OB

Comments

[Manup:]

"Njord Wind (a pseudonym) is a new contributor to Seeking Alpha who will soon submit a bio."

Why don't you man up and tell us who you are? Seeking Alpha puts out conflicting stories - just last month - BWEN made a profit and was going places now it is troubled company that can't possibly grow to its current valuation.

2008 Jun 11 09:18 AM

[FarmBoy:]

Good information and comments. I just buy low and sell high. Bought 1100 shares of Tower Tech when it was struggling to get going, and before wind started to emerge as a trade. I sold much of my position over the last couple of weeks for great profits. More ETF's are being formed right now who will be buying BWEN soon, so just enjoy the roller coaster ride. It's no different than FSLR, SPWR, POT, RIMM, MELI, CSIQ, DRYS, GRMN, in that it has become a momentum stock, and will stay that way for another year. Check out Vestas Wind Systems (VWSYF). Bought it last July at $68, now its $138.00!! Go Go Go BWEN !!!!!! Other wind sleepers: CPTC, SATC, NKWFF, and AWNE (being bought soon). AMSC was a sleeper.

2008 Jun 11 09:47 AM

[Gary Holdsw...:]

Always good to know "where your bread is buttered" in these small companies. Institutional sponsorship by hedge funds is nothing new, but the average investor does need to pay attention to such things. Some investors are "more equal than others".

2008 Jun 11 11:36 AM

[gadflea:]

Well, what pov should we expect from somebody who is short BWEN? When it was bumping 29 I assume your bowel movements must have been irregular. Your facts are interesting, but may be besides the point. How does one justify the 100+ PE of FSLR when it exceeded $300? I tend to agree with Farmboy........momentu... matters.

2008 Jun 11 08:06 PM

[gobwen!:]

Can anybody guess what is the short position for this author? How about 8 - 10.

I hope your option is not ending soon.

2008 Jun 17 05:11 PM

[Njord Wind:]

Unfortunately, I can't reveal my identity or cost basis in BWEN. I don't think there's anything fundamentally wrong with the company, in fact I think they're executing well and have been reasonably impressed with management thus far. I'm flat out jealous of Tontine, the foresight to be buying this stock 2 years ago at $1.50 is tremendous. However, as I've outlined, I think there are several indicators that the fundamental value of the company is significantly below the current trading value, and thus the short position.

For me, investing is a business and I don't become emotionally involved in stocks. Ergo, the movements of stocks in my portfolio has 0 correlation to my bathroom visits.

2008 Jun 18 01:05 AM

[10Q Detective:]

Well-Done! Echoing my concerns, too:

industry.bnet.com/ener.../

Does anyone else see a financial storm brewing at Broadwind Energy?

2008 Jun 21 01:04 AM