Since 2021, TPI Composites’ (NASDAQ:TPIC) net losses increased, sales decreased, and manufacturing utilization plummeted. While their recent business and stock performance could make even the most steadfast investors feel uneasy, I believe TPI Composites might be ripe for a turnaround.
2021 was a rough year for TPI Composites. Management blamed halted production, reduced demand for wind blades, and global supply chain issues as the primary reason for their earnings doldrum. To reduce the impact of rising logistics costs, management stated they will prioritize localizing and regionalizing TPI’s supply chain. Fortunately for investors, this may be a reality. They recently reduced spend exposure to China, which is experiencing continued lockdowns, from 20% in 2019 to just 6% in Q2 2022. While this is a step in the right direction, I am critical of TPI Composites’ ability to further localize and de-risk their logistics network given the complicated nature of their raw material supply chain, which encompasses over 550 suppliers from more than 30 countries.
In regards to TPI Composites’ earnings, a decrease in the total number of wind blades produced and a utilization of only 65% made their numbers look atrocious. They missed on both earnings and revenue, reporting a quarterly gross profit loss of -122.4%, from $7.27 Million to a negative $1.627 Million, and a 4.9% decrease in revenue from $404.68 Million to $384.87 Million. To make matters worse, adjusted EBITDA for the quarter was more than cut in half from $13.1 Million to $6.1 Million.
Meanwhile, TPI Composites recently sourced $600 Million in capital from Oaktree, a renowned and experienced investor within the power and energy sector. $350 Million of which consists of series A preferred stock entitled to an 11% dividend. Servicing that 11% dividend will certainly weigh on TPI Composites’ bottom line. However, the upside of this capital sourcing is that, in the short term, TPI Composites’ balance sheet has been shored up. For example, QoQ debt is trending in the right direction, down from $74.65 Million to $51.71 Million. While this liquidity came at a cost, I believe their deal with Oaktree sends a clear message of endorsement for TPI Composites’ strategy and growth prospects moving forward.
In the recent earnings call, management maintained their 2022 guidance of increasing margins, utilization, and blade production as well as rapid growth in their clean transportation and highly profitable services segment. With TPI Composites’ shares hitting a low of $9.29 earlier this year, down 88.6% from their previous all-time high of $81.48, Wall Street may have already priced in the past earnings negativity. In fact, TPI Composite shares have outperformed the S&P 500 year to date and have surged over 40% from their February 2022 low.
In a risk off market environment where many companies are reducing or withholding guidance, management has confidently reiterated theirs, expecting a 2022 utilization rate of 80-85%, way higher than the current 65%. To reach this ambitious goal, they expect an 80% utilization for Q2 and about 90% for Q3 and Q4. On the earnings call, CEO William Siwek asserted these improvements in utilization will drive margin growth of 40-50% this year. These margin improvements are bolstered by impressive pricing power. TPI Composites raised the average selling cost per blade by 26%.
On another positive note, TPI Composites is leveraging their industry leading wind blade know-how to grow their high margin services segment by approximately 40% to 50% this year. Afterall, who better to provide global field service maintenance and repairs to the wind turbine industry than high-quality technicians from the company that builds them? I believe this is a highly profitable razors and blades model whereby each wind blade sold creates an opportunity for a high margin servicing revenue stream.
In addition, I am pleased to see TPI capitalizing on the electric vehicle and transportation trend which is expected to grow at a 19% compound annual growth rate over the next two decades. TPI Composites is utilizing their manufacturing and engineering expertise to produce lightweight, durable, and cutting edge components for leaders of the clean commercial transportation industry such as Proterra (PTRA), Navistar, and General Motors (GM). Their collaboration with Navistar, to create an all composite class 8 truck, is making serious progress and is creating buzz in the business and academic community alike.
Overall, their transportation business segment grew 70% this year, to about $30 Million, an increase from the 40% to 50% expected last quarter. This is still just a tiny piece of their overall revenue pie. But, as it continues to grow, I believe it will add financial ballast during volatile wind blade demand cycles, such as those experienced in 2021.
While management’s outlook does seem rather rosy, I believe their earnings growth guidance is possible. Plus, the increase in sales could be supported by a rapidly growing wind market. For example, since 2000, wind power generation capacity has grown at a compound annual rate of 21%. That is a 66x increase over the past 22 years. At the same time, wind generated utility-scale electricity has become as cheap as any other energy source. In fact, from an unsubsidized dollar per megawatt hour perspective, wind is less expensive than coal, nuclear, and gas while being roughly in line with utility scale solar power.
Europe’s clean energy transition is bolstering demand for TPI Composites’ products and services. In Q1 2022, 37% of their blades went to Europe, up from just 30% the year before. The European Union increased their wind energy investments by 41 Billion Euros last year. They plan to invest much more in the coming decade. In fact, on May 18th, Germany, the Netherlands, Denmark, and Belgium pledged to increase their offshore wind capacity by 10 fold to help wean the European Union off Russian fossil fuels. I expect demand for TPI Composites’ products will ramp up as the European Union transitions to a cleaner economy and works to reduce its dependence on Russian fossil fuels.
Now, let’s talk about valuation. Even after a 40% rally over the past few weeks, TPI Composites’ market cap still sits around $500 Million. Considering their quarterly revenue of $395 Million, they have an eye-poppingly low price to full year 2022 sales ratio (P/S) of less than 0.3. If management can achieve their ambitious guidance, today's valuation might be a good entry point for patient, long term investors.
After TPI Composites’ very poor performance in 2021 and the first half of 2022, Management is definitely in a show not tell position with investors. Their negative earnings and revenue growth have made investors very uneasy. The stock has certainly taken one of the worst beatings out of any publicly traded company. On the flip side, however, if earnings turn positive and revenue begins to grow again, their market cap of a mere $509.69 Million will look cheap in the future. With TPI Composites trading at a price to sales of under 0.3, management guiding for improved margins, and energy transition tailwinds supporting future revenue growth, I would consider creating a small tracking position of TPI at these levels. However, before I make this anywhere near a 2-5% core position of my portfolio, I would like to see two or three consecutive quarters of revenue growth, margin improvements, and positive earnings.
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Disclosure: I/we have a beneficial long position in the shares of TPIC either through stock ownership, options, or other derivatives. 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.
Additional disclosure: This article cannot and does not contain financial advice. The financial information is provided for general informational and educational purposes only and is not a substitute for professional advice. Accordingly, before taking any actions based upon such information, I encourage you to consult with the appropriate professionals. The use or reliance of any information contained in this article is solely at your own risk.