Down 75% in 2011, power technology manufacturer American Superconductor Corp. (Nasdaq: AMSC) is stumbling to recover from a barrage of bad news and pricing free fall, including a 42%, single-day drop on April 6. So why do at least two leading analysts still rate the beleaguered Devens, Mass.-based company a strong buy -- and several others advise holding it?
But what really piqued my interest was a statement from Wunderlich Securities Inc. analyst Theodore O'Neill, who told IU, "Some good things are happening at this company, which could lead to a much more attractive valuation."
It's been a while since "good things" and "attractive" were used to describe American Superconductor. Chinese wind turbine maker Sinovel Wind Group, its largest customer, reneged on a contracted-buying agreement and refused shipment of (and denied payment for) its orders.
This prompted investors to discount future revenues from Sinovel and take a more cautious look at AMSC's strategy. Following this mess, the CEO retired and AMSC delayed the previously contracted acquisition of The Switch, a Finnish company specializing in power conversion electronics, because of lack of financing.
No doubt what Sinovel did was crooked, but AMSC accepted the risk of having a single large customer in a foreign country, where it had limited legal recourse. The move to acquire The Switch doesn't necessarily detract from that risk, as 70% of the company's $430 million in revenue comes from China (Goldwind). However, GE (NYSE: GE) is also a customer, as well as the wind industry leader in the US.
Once I started examining the weak points, I started to sway toward a Buy opinion. Why? Because the impacts are measurable, the events are standalone, and investors have already beaten the stock like a rented mule. I can empathize with furious investors who bought last year, but after the spanking, it's worth a second look.
AMSC's second line of business isn't affected by this pessimism. AMSC has developed a large-scale manufacturing ability to produce a superconducting wire called "Amperium," which is a key component of the smart grid movement.
And here is something else: Some analysts expect Sinovel to return to AMSC as a customer in the not-too-distant future. O'Neill attributes it to simple supply and demand. He thinks Sinovel will have to reorder from AMSC before the end of September because of falling inventories. The result: possible restoration of lost income for AMSC.
A look by the numbers reveals AMSC's price-to-book ratio is 0.63, including cash of $4.79/share, with no long-term debt. We see operating and profit margins of 16.2% and 10% respectively, even beating out much larger comparables like Babcock & Wilcox Co. (NYSE: BWC) and Franklin Electric Co. (Nasdaq: FELE) by a material margin.
Conducting my own bottom-up valuation, I used a discounted cashflow model to project a 10% to 30% growth rate on future (reduced) revenues and a free cash flow margin from -6.0% to 7.5%. Add in the cash, and we're looking at a baseline-to-optimistic price range of $9.72 to $12.01.
From a more technical standpoint, short interest is falling, down 19% from highs in April, but is still 25% off the float. This has potential for a short squeeze if we see another rally like we did late last week. Stronger-than-normal volume could help solidify this $6 point as a floor.
Here, I believe we're looking at a humbled but hungry lean company that will move forward in a better direction, with some costly experience in the rear-view mirror.