American Superconductor (AMSC) is in the process of reengineering its business. Once a money losing electrical equipment firm, the company made a strategic investment in 2007 which transformed the company’s focus and lead to a profitable business in providing components to the alternative energy market.
The process has been turbulent for investors who saw their investment grow by more than 300% in less than two years, only to give the entire gain back as the market reacted to the global financial crisis. But continued successful execution by management was quickly reflected in the stock as buyers stepped in to gain exposure to the wind turbine market. AMSC is one of the only publicly traded companies which offers a near pure play on wind energy as many other players such as General Electric (GE) have so much exposure to other markets that the wind business is simply drowned out.
American Superconductor operates with a fiscal year end of March 31. So they are currently in the second quarter of fiscal 2010. The most recent quarterly results drove the stock up sharply as investors were impressed with the positive statements given by management. During the quarter the company earned $0.04 per share on revenues of $73 million (this was an 83% increase over the same quarter last year). AMSC’s largest customer, Sinovel, essentially asked the company to speed up an existing contract in order to get more units in the field quickly. This means that a contract which was expected to last until December of 2011 will now be crammed into a time period ending April of 2011. So not only did the total value of the contract expand, but AMSC will be able to recognize the revenue and earnings much more quickly.
At the same time, management stated that additional customers who have small contracts with the firm will begin to roll out larger products which should lead to an uptick in revenue and earnings over the next 12 to 18 months.
A solid mix of wind power and power grid business fueled another record quarter at American Superconductor… With Sinovel continuing to gain market share, many of our other wind turbine manufacturers set to commence production over the next 12 months, and power grid demand on the rise worldwide, AMSC’s outlook is stronger than ever. ~Gregory J. Yurek, Chairman & CEO
The future certainly looks bright for the company which is sitting on no debt and has a cash and marketable securities balance north of $95 million. It’s no wonder investors are bidding the shares significantly higher and seem willing to pay nearly any price to get exposure to this growth company.
Unfortunately, even strong growth companies like AMSC can see their stock values plummet – especially when investors begin to trade with too much confidence. Currently the stock price is hovering around $33 compared to earnings this year which are estimated at $0.46 per share. This means that investors are willing to pay more than $71 for every dollar the company earns this year.
The bullish analysts will tell you that the numbers look much better when compared to future earnings. But even considering the consensus numbers for 2011 of $0.94, the stock is still trading at a multiple of 35 – and a lot can happen between now and March of 2011. Not only will the company have to compete with a growing number of businesses flocking to the profitable sector, but the demand side could also see a significant contraction if a double dip recession begins to add pressure to our slowly recovering economy. In short, the risk at this price is simply to high to justify owning this stock. It is hard to imagine what additional good news could be offered at this point to push the stock significantly higher.
If a client walked in my door today with a concentrated position in AMSC, I would urge him to slowly work his way down to a smaller position or possibly exit it entirely. We might start out by selling calls so that he could gain some premium and hold some protection against a possible decline. Often momentum can carry a stock significantly beyond what appears fundamentally possible.
But if the stock broke and closed below $30 I would become much more aggressive. At this point holding the stock is no longer an option, and I would even consider initiating a short position. We could quickly see the stock trade down to a multiple of 15 times next year’s earnings and even that could be cut if analysts became skeptical on the future profits. Bottom line – the danger in AMSC is not worth the risk. There may be a more attractive spot to own this company but for today I would steer clear.
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