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Published: April 2, 2010
There has been an increasing amount of
distrust among investors about the clean energy sector in recent
months, pushing share prices down across the board. This
cynicism stems from an expectation that governments in Europe
and the United States will reduce their clean energy subsidies
in the face of rising budget deficits. If these concerns prove
to be correct, logic would dictate that you'd want to stick with
clean energy companies more closely tied to Asia, where funding
is robust and growing.
American Superconductor (Nasdaq: AMSC), which derives the bulk
of its revenue in China, is growing quickly on the back of wind
deployments spreading throughout the interior of China. The
stock has sold off in sympathy with the entire sector, suddenly
making it more appealing.
American Superconductor has long vexed investors with its
promising highly-conductive electricity wire (known as
superconducting wire). To assuage investors, management decided
to enter the wind turbine space and now designs turbines and
build the electronic systems that are the heart of every wind
farm. The move paid off handsomely -- the wind business is now
the key business driver.
Much of the company's success in wind stems from a relationship
with Sinovel, the largest wind player in China. Sinovel has used
American Superconductor's equipment as it builds out massive
wind farms. As a result, the company's backlog remains safely
above the $500 million mark.
To reduce its dependence on Sinovel -- a key investor concern --
American Superconductor is now pursuing deals in India, Korea
and elsewhere in Asia. Based on the pace of those dialogues,
management has been consistently boosting sales forecasts in
recent quarterly conference calls. The company bagged $52
million in sales in fiscal 2006, and that figure jumped to $183
million in fiscal 2008. Management expects sales to top $300
million in the fiscal 2009 year ending this week and exceed $400
million in fiscal 2010.
For investors, the question is whether China's wind development
is just getting started. China still derives less than 5% of its
power from wind farms, and has expressed goals to see that
figure rise to 20% in the coming decade. Much of that business
should go to Sinovel, and every time Sinovel inks another deal
with American Superconductor, investors should grow less
concerned that Sinovel will abandon this longstanding
relationship.
As an added twist, American Superconductor's long-struggling
superconducting wire business, which accounts for less than 10%
of sales, could finally be ready to ramp up. Korea Electric
Power (NYSE: KEP) has turned to American Superconductor and its
partner LS Cable to construct a 10-kilometer superconductor
power cable. The project, which would consume 1.6 million meters
of the company's cabling, would be quite expensive, and
investors are taking a wait-and-see approach as to whether the
project gets the green light.
Here in the United States, American Superconductor may supply
cable for the proposed Tres Amigas super-substation that would
link three major power grids. Best-case scenario, the project
would not move forward until at least 2012, and would not be
operational before 2014, but the deal could net the company tens
of millions of dollars in sales if approved.
In the meantime, investors are more focused on American
Superconductor's ability to ramp up profits after years of
annual losses. Fiscal 2009 will mark the first year of
profitability for the company, but investors were annoyed to
learn that near-term results will be hit by a decision to take
up spending in anticipation of further growth. Even with higher
expenses, per share profits are expected to rise more than +60%
in fiscal 2010. Shares are not cheap, trading at around 24 times
projected 2010 profits, but that forward multiple is actually
well below the 30 to 40 times projected profits that shares
traded for at various times during the last few years. If the
multiple rises back to 30 -- or around $34 a share, then
investors are looking at a +25% gain.
-- David Sterman
Contributor
StreetAuthority |
