Two Paths to Greener Pastures for this Stock

David Sterman's picture

Wednesday, March 31, 2010 - 11:43am

by David Sterman

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 does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.