Somebody said to me, 'But the Beatles were anti-materialistic.' That's a huge myth. John and I literally used to sit down and say, 'Now, let's write a swimming pool." - Paul McCartney
Today, we take an in-depth look at an 'off-the-radar' small-cap concern in the alt-energy space. The shares have been beaten down in 2019, but it appears the company's long-term future is bright.
TPI Composites, Inc. (TPIC) is a Scottsdale, Arizona-based manufacturer of composite wind blades for wind turbine OEMs, producing over 47,000 since making its first one back in 2001. Founded in 1968 as a sail and powerboat manufacturer, the company split from its boat operations in 2004, eventually going public in 2016, raising net proceeds of $67.2 million at $11.00 per share. The company now operates ten blade manufacturing plants, four tooling and R&D facilities, and two transportation facilities across six countries. It is the only independent manufacturer of wind blades with a global footprint, providing product to five of the seven largest OEMs and ~56% of the global onshore wind market. It currently has 52 production lines under contract and employs ~11,000 globally. The market values TPI at ~$850 million.
The company operates on a dedicated supplier model, which essentially means each assembly line is dedicated to one customer. From a financial reporting standpoint, TPI is split into four geographic segments: U.S.; Asia; Mexico; and EMEAI.
The U.S. division consists not only of its blade manufacturing capabilities but also its transportation operations where it applies its expertise in composites to manufacture bus and tractor trailer bodies for the electric vehicle market and its domestic precision molding and assembly systems production. In total, these ancillary businesses accounted for ~30% of the segment's top-line. Overall, the U.S. business contributed net sales of $163.7 million in 2018, or 16% of the company's total.
Asia consists primarily of its blade production out of its three manufacturing plants in China. This region was responsible for 2018 revenue of $306.3 million, or 30% of total. This outcome represented an 18% drop off from 2017 - more on this shortly.
Mexico comprises five blade manufacturing plants, including one that went online in 1Q19. This segment accounted for 2018 revenue of $268.8 million, or 26% of total.
EMEAI includes two wind blade facilities in Turkey and one that is slated for India in 1H20. This division contributed $290.9 million to the top-line in 2018, or 28% of total.
The Wind Energy Industry
With its global footprint, TPI has taken advantage of the shift towards decarbonization, growing revenue ~400% and market share from 3% to 14% since 2013 (and ~53% of outsourced business ex-China). Worldwide installed wind capacity has grown at a 22% CAGR since 2000 to 580 gigawatts (GW) and is projected to grow at an average annual rate of 69 GW between 2018 and 2027, with offshore wind and emerging markets expected to be the main drivers of that growth. This progress has been made possible by a combination of international and U.S. government policy initiatives as well as increasing cost competitiveness versus traditional energy sources through technological advancements. Although some incentives, like the U.S. Production Tax Credit, are scheduled to be phased out after 2020, other areas of the world, such as the EU, are mandating a greater percentage of its energy supply come from renewable sources such as wind. According to research from Lazard, in many scenarios, onshore wind's levelized cost of energy (i.e. lifetime costs divided by energy production) has crossed through the marginal price of coal.
Source: Investor Presentation
Part of the efficiency gains have come from the use of ever-lengthening blades to generate more power per turbine. Blades represent about 22% of an installed turbine's cost and are the most leverageable component of the turbine in terms of efficiency gains. This elongation trend is anticipated to continue with blades 60 meters and longer expected to comprise 87% of the market in 2022, up from 34% in 2018. Owing to its expertise in an ever-increasingly complex technology, robust track record, and strong customer relationships, TPI has created significant barriers to entry.
As a result, TPI's largest competition comes mostly from OEMs insourcing their own blades; however, the trend in the industry is toward outsourcing, with 59% of all blades manufactured by third parties in 2018, up from 38% in 2009. This drift has been aided by the need of OEMs to accelerate access to emerging markets while optimizing their supply chain.
Source: Investor Presentation
As for the wind turbine industry itself, it is highly concentrated, with the top seven players accounting for ~73% share of the onshore global wind market between 2016 and 2018. Vestas (OTCPK:VWDRY) is the market leader with an ~18% share. If China is removed from the equation, the top five OEMs comprise ~87% of the market, with Vestas controlling 28% of it. As a result, TPI is highly leveraged to four customers (Vestas, General Electric (GE), Nordex (OTCPK:NRDXF), and Siemens Gamesa (OTCPK:GCTAF)), who comprised 94% of its 2018 revenue.
Source: Investor Presentation
This exposure came into focus in 2017 when GE purchased TPI's main competitor and (at the time) world's largest independent blade manufacturer, LM Wind Power, for $1.65 billion. Prior to the acquisition, GE outsourced all of its blades and was TPI's number one customer, accounting for 2017 revenue of $426.1 million, or 44.6% of its total. As a result of the merger, net sales from GE dropped by $100.1 million to $326.0 million, or 31.7% of its total business in 2018. Much of this impact was felt in the China segment, resulting in its 18% decline YoY. This deterioration in business from GE was in sharp contrast to its other three top customers, from whom TPI saw a total revenue increase of 25% to $640.4 million in 2018.
1Q19 Results and Revised 2019 Outlook
Against this backdrop, the company reported disappointing 1Q19 earnings on May 8, 2019. Specifically, the company lost $0.35 per share (GAAP) on revenue of $299.8 million versus a gain of $0.24 per share on revenue of $254.0 million in 1Q18. Although revenue did beat Street consensus by $6 million, the earnings were short of expectations by a substantial margin: $0.41. 1Q19 Adj. EBITDA was $2.9 million, down from $27.4 million in the prior year period. Most of the miss was caused by a 12% increase in the cost of goods sold, attributable to 13 assembly lines in start-up phase and another five in transition phase as well as several unforeseen factors.
First, German wind turbine maker Senvion, who accounted for ~4% of TPI's blade production capacity, recently filed for insolvency. This event dictated the deduction of revenue now unlikely to be collected and higher depreciation charges on equipment used to manufacture blades for Senvion. TPI should be able to sell the Senvion blades for which it still has title to directly to the wind farm owners, but the blades shipped to Senvion have been impaired.
Second, a two-week labor strike at the company's newly opened Matamoros, Mexico facility in late-February/early-March hurt production significantly. The cost to settle the strike as well as replace and retrain ~50% of its workforce lost due to company actions taken during the strike will cause TPI to produce only 60% of the blades it initially forecasted at Matamoros in 2019. As a result, the company will also have to bear liquidated damages under its customer contract (with Vestas) for the loss of production. It also increased wages at another Mexican facility in Juarez by 15%, or $2.7 million. The situation at Senvion will lower 2019 Adj. EBITDA by $16 million while the developments in Mexico will decrease 2019 Adj. EBITDA by $25 million.
To add to TPI's issues, the company stated that it would be taking a restructuring charge of $12 million in 2Q19 to shutter two blade manufacturing lines in China. The annual cost savings from this move is expected to be $11 million. Also, in what could be described as a double-edged sword, the company stated that it was experiencing a raw material shortage due to a significant increase in demand from the wind power industry, and that would put a cap on production capacity.
Owing to all these happenings, management restated its outlook for FY19, lowering four metrics. Based on range midpoints, net sales and bookings were lowered from $1.55 billion to $1.48 billion; Adj. EBITDA decreased from $125 million to $82.5 million; GAAP EPS was dropped from $1.41 to a loss of $0.06; and total contract value through 2023 was lowered from $6.8 billion to $6.3 billion because of Senvion. The reduced total contract value metric still reflects a $1.7 billion increase over the beginning of 2018.
Two other notes: management maintained guidance for 2020 with net sales and bookings growing to $1.8 billion and Adj. EBITDA more than doubling to $180 million (based on range midpoints). Also, during 1Q19, TPI inked a joint development agreement with GE to cooperatively develop blade technology for future wind turbines. Although details were scant, it clearly emphasizes GE's plan to continue its partnership with TPI.
Source: Investor Presentation
Predictably, shares of TPIC were punished on the news, dropping 16% to $25.74 on approximately ten times the normal volume. In the subsequent month, the stock continued to languish, hitting under $20 in late May before starting to recover in June.
Balance Sheet & Analyst Commentary
As of March 31st, 2019, TPI's balance sheet showed cash of $78.3 million and debt of $159.4 million. The company has an additional $73 million in borrowing capacity from various credit facilities. The company does not pay a dividend and has no share buyback program in place.
Despite the ugly quarter, Street analysts are very sanguine on the TPI's prospects, with six buys and two outperform ratings dotting the recommendation landscape. Price targets proffered range from $32 to $45 a share.
Based on their recent purchases, insiders are using the bad quarter as an opportunity to add to their positions. Since mid-May, the CEO, the recently-promoted president, and two board members have made modest purchases totaling just over 15,000 shares, all under $23.
Although TPI is going to have a disappointing 2019 from a bottom-line standpoint, its global footprint has it well-positioned to take advantage of the emergent wind markets, which are expected to grow at a 25% CAGR through 2027.
Also, even though no particulars were mentioned regarding its new GE deal, the company should increase its market share (or at least offset it) from LM non-GE customer attrition. Based on management guidance, TPI's EV/2020E Adj. EBITDA multiple is ~5. With large and very visible future revenues - courtesy of its large total contract value - and situated to grow in a growth industry well beyond 2019, this multiple represents a good entry point for investment. Given the recent volatility of the shares, this is a good one to accumulate over time.
The superior man understands what is right; the inferior man understands what will sell." ― Confucius
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Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum and Insiders Forum.
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Disclosure: I am/we are long TPIC. 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.