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A Small-Cap Investment In Green Energy

|Includes: TPI Composites (TPIC)
Summary

Fundamentally-strong companies involved in green energy production that are selling at reasonable prices are difficult to find.

Global wind capacity is set to rise 56% through 2022, so this segment may offer hidden opportunities.

TPI Composites (NASD: TPIC) is fundamentally sound and offers long-term potential gains that should outpace the market.

Many investors are interested in investing in companies that are involved in the production of energy through renewable (non-fossil fuels-based) means. Unfortunately, publicly-traded companies in this area that meet GARP criteria are difficult to find.

Some companies involved in alternative power generation, especially solar, are growing well but carry sky-high P/E ratios that make them expensive for our tastes. Import tariffs have the potential to wreak havoc on Chinese manufacturers, and other Chinese companies come with their own problems of analysis and concerns about transparency.

On the pink sheets can be found many companies that are attempting to cash in on a trend, but these generally don’t have the fundamentals to support ownership.

And many large multi-national companies like General Electric and Siemens have energy businesses that aren’t significant segments of their total operations.

In Forbes in mid-April, it was reported that predictions from the Global Wind Energy Council indicate that wind capacity by 2022 could grow 56% from the end of 2017 -- winds of change indeed.

That’s why I was excited to find a company involved in renewable energy for our SmallCap Informer newsletter. The company hopes to take advantage of trends in wind energy production worldwide, and may be one of the best non-speculative investments in green energy available to investors today.

Our featured company closed at $22.86 May 1, 2018, the day after the SmallCap Informer issue was published. By the end of May, it had reached $26.29 for a very nice one-month gain of 15.0%. But there's plenty more growth potential left for TPI Composites, Inc. (TPIC).

Alternative energy production remains a growing industry both in the U.S. and worldwide. The solution to reducing dependence on fossil fuels will likely include many sources: wind, solar, geothermal, and hydropower. One potential investment candidate in the wind power segment is TPI Composites, Inc.

TPI Composites is the largest U.S.-based independent manufacturer of composite wind blades. The company manufactures and sells these and related molding and assembly systems to original equipment manufacturers (OEMs) in the wind turbine industry (including Vestas, Siemens/Gamesa, and GE), enabling these companies to outsource the manufacturing of some of their blades. TPI Composites operates in the United States, Asia, Mexico, Europe, the Middle East, and Africa, with facilities strategically located to serve large and growing wind markets in a cost-effective manner.

The company also provides composite solutions for the transportation industry, including bodies for electric vehicles and airplanes. The company was formerly known as LCSI Holding, Inc. and changed its name to TPI Composites in 2008. The company went public in 2016 and is headquartered in Scottsdale, Arizona.

Growth Analysis

Consultant firm Bloomberg New Energy Finance estimates that $10 trillion will be invested in new power generation capacity through 2040 and of this, 72% will be renewables and $3.3 trillion will be wind. TPI claims 13% of the global market share of wind blade production.

TPI Composites’ global presence may help the company as wind generation is growing faster in emerging markets around the world than in mature markets. There are huge barriers to entering the wind blade production market for other companies, as blades are typically 60-70 meters long, larger than the wing span of a 787, with tolerances measured in millimeters. TPI owns patents and technology that is difficult to replicate.

Since 2013, TPI has grown revenues at an annualized rate of 46%. EPS since 2015 have grown at an annualized 107%. For fiscal 2017, ended December 31, 2017, the company reported sales of $930.3 million and EPS of $1.25.

The company has long-term supply agreements that the company sees providing up to $5.5B in visible revenue through 2023. After four years of 45% annual revenue growth, TPI is labeling 2018 as an investment year. In its fourth-quarter financial reporting, Steven Lockard, President and Chief Executive Officer, explained, “While 2018 will be a year of significant investment as we transition 14 existing manufacturing lines to larger blade models and start up 12 new lines, we estimate top line growth of approximately 10%. We believe our planned investments this year will position us for revenue growth in 2019 of approximately 35% and enable us to meet our three year revenue CAGR of between 20% and 25%.”

We are tempering management’s view and are projecting 18% annualized growth of revenues and earnings through 2022.

Quality Analysis

TPI’s profit margins have been growing, reaching a high of 6% in 2017. The company has projected that its gross margins will expand from 4.6% in 2015 to 12.0% in 2019.

The company has reduced its debt, with debt-to-equity at 55.2% at the end of fiscal 2017. Management claims a high return on invested capital for the expansions of manufacturing capacity that it has undertaken in the past and plan for the future.

Valuation Analysis

An EPS growth rate of 18% will support a high P/E ratio of 25, which in turn implies a high price of $79.50 can be reached within five years.

On the downside, a low P/E of 15 times trailing twelve months EPS of $1.25 results in a projected low price of $20.90.

From the current price of $26.76, the potential upside is 9 times the downside, with a 24.3% annualized rate of return possible if our target high price is reached by May 2022.

We remind investors that the company’s performance in the year-ahead is likely to show downturns or much slower growth than in the past as part of the management’s long-term strategic plan.

TPI Composites, Inc. trades on the NASDAQ with the symbol TPIC and pays no dividends.

For More Information

Investor Relations
TPI Composites, Inc.
8501 North Scottsdale Road
Gainey Center II, Suite 100
Scottsdale, AZ 85253

Phone: 480-315-8742
Email: investors@tpicomposites.com
Website: www.tpicomposites.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.