August 19, 2008 – American Superconductor Corporation (Nasdaq:AMSC) is currently trading about 47% off its 52-week high. We have been watching the stock for the past few months, looking for an opportunity to begin accumulating on weakness and we believe that the current level, below $25, looks attractive.
AMSC’s solutions are based on proprietary technology, and address the burgeoning demand for clean and renewable sources of electricity, as well for the demand for an upgraded, “smart” power grid infrastructure. The U.S. Energy Information Administration predicts s that electricity growth will cause worldwide generation to double by 2030. The current grid is antiquated and estimates are that 60% of the current electrical equipment will need to be replaced in the next 10 years.
Drivers of Electricity Consumption
· Population growth
· The electrification of everything – more and more devices are becoming mainstays in our daily lives and these all require electricity (lights, motors, air conditioning, computers, cell ******, TVs, refrigeration, and myriads of other appliances). Moreover, the automotive sector is on the verge of introducing fleets of fuel cell battery driven auto******s.
Fast Facts
· In 2007, Lawrence Berkeley National Laboratory reported that electricity used by computer services in the U.S. had doubled between 2000 and 2005. The EPA estimates that power consumption of servers will nearly double by 2011 to more than 100kWh, about $7.4 billion in today’s rates.
· The DOE says air conditioning now accounts for 16% of the average U.S. household’s electricity consumption.
· The Electric Power Institute reports that outages and disturbances cost the U.S. economy about $119 billion annually.
In the past 40 years, there has been little investment in the electric grid infrastructure in the U.S., but traffic has surged. It wasn’t designed to handle the kind of transport, the amount of transport and the distance of transport that it is required to handle today. Consequently, transmission has become increasingly congested. Experts estimate that updating and upgrading the grid is going to require an investment of almost $1 trillion through 3030.
This bodes well for AMSC, whose products enable cleaner, more efficient and reliable generation, delivery and use of electric power. Its high temperature superconductor wires (HTS) carry 150 times the electrical current of comparable sized copper wire. The two primary markets it services are the wind energy market and the power transmission and distribution – or the “power grid” – market. AMSC owns more than 415 patents and patent applications worldwide, and has rights through exclusive and non-exclusive licenses to more than 360 additional patents.
Wind Energy Market
Its Power Systems Offerings are designed to address the burgeoning wind energy market, filling the needs of capacity constrained assets and providing more reliable, secure and efficient transmission. Edison Electric Institute anticipates that investments in the transmission grid will increase to $10.2 billion by 2010. Worldwide, more than $37 billion was invested on wind power equipment in 2007 alone. Global wind power capacity is expected to double by 2011.AMSC addresses the wind energy market by providing electrical systems, grid interconnection, development contracts, licensed designs and consulting services. It is currently designing systems for, or licensing wind energy systems to customers in China, India and other growth areas around the world. In 2007, wind power capacity in China grew at a 132% clip.
Power Grid Infrastructure Market
AMCS’s HTS wire used in superconductor power cables increase the thermal limit of existing or new corridors. Today, power cables are made primarily using copper wires. AMCS’s HTS wire is able to carry 150 times the electrical current of comparably sized copper wire and conduct up to 10 times the current. It also offers other efficiencies. Traditional copper cable systems heat up due to the electrical resistance of copper, causing electrical losses. It is estimated that, on average 8% of electricity produced at generation sites is lost due to resistance in the power grid. HTS materials carry direct current (DC) with 100% efficiency and alternating current (AC) with close to 100% efficiency. So AMCS’s HTS power cables lose less power and have not energy losses due to resistive heating.
The bottom line, in our opinion, is that AMSC is positioned to be a technology leader in providing transmission solutions to two critical areas of our future energy and electricity growth markets – wind energy, and the power grid. As we mentioned above, the stock has been sold off of late, and this is due to widening losses – despite demonstrating solid top line growth. We think that most recent quarter’s results demonstrates that the company is moving in the right direction in terms of margin expansion, which is obviously critical to getting to profitability, while demand for its products is stronger than ever. As of the most recent quarter end, AMCS had a backlog of $634 million.
Recent News
· August 6 – licensed wind turbine design to Turkish Model Enerji Ltd. which will begin mass production of the 1.65MW turbine in late 2009. In addition, AMSC will receive a royalty payment for the first 425 turbines (the stock traded up to $31.31 on the news).
· August 5 – shares sold off (down $4.75 to $31.32) on reports of a wider than expected Q1 loss which included a non-cash charge of $2.4 million ($0.06 per share) for a mark-to-market adjustment on an outstanding warrant. Expectations were for a loss of $0.06 per share, so the company would have lost $0.03 more than expected in any case, backing out the non-cash charge. Also, it increased its FY2008 guidance of a loss to a range of $0.30 to $0.35 per share – despite increasing total sales guidance.
- Recorded Q1 revenue of $39.8 million, up 101% on a Y/Y basis.
- Gross margin increased to 29.2% for the quarter, compared to 18.1% for the Q1 of the prior year
- Forecasting EBITDAS for FY 2008 in the range of $7 to $10 million
- Increase revenue guidance for FY 2008 to a range of $175 million to $185 million
· July 29 – Initiating testing of HTS degaussing system with U.S. Navy. Degaussing systems containing multiple tons of copper wire are utilized in most naval ships to cloak their magnetic signature. AMSC’s system is significantly lighter and less expensive to install than conventional copper-based degaussing coils.
· July 1 – Announced multiple orders for Static VAR Compensator solution: Texas-based natural gas utility; recycler in Western U.S.; and a distributed independent electrical generator.
· June 10 – Won $450 million wind energy contract to supply electrical components for wind turbines in China.
Our Assessment
At $24.26, the stock is trading at a 7.89x P/S (ttm) multiple, which is typically too expensive for us to get excited about. But there is just so much demand and growth, we think, built in to the AMSC story that we can accept a higher multiple like this, at least for another four quarters or so. The company recently raised its FY 2008 top-line revenue guidance to a range of $175 to $185 million. We used $180 million for our analysis, and forecast that, at a 7.5x P/S multiple, the high end of our trading range would be about $31, which is about a 30% increase from current levels.
Keep in mind, that heading into the most recent quarterly report, the stock was trading pretty comfortably in the mid 30s. We think that with a few more contract win announcements like they have made in the past couple months, the Street will recalibrate its expectations for the company and the stock could easily move back into the $30 territory. In the meanwhile, we think the stock looks extremely attractive for accumulation in the current market weakness. There are just so many secular trends that are driving growth in the power grid and wind energy sector that a technology leader like AMSC should benefit. We are adding AMSC to our Clean Tech Index this morning.
Disclosure Note: SCPEditor is LONG AMSC for its Clean Tech Index as of this morning.