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American Superconductor: Difficult Hold?



April 15, 2011 – Comments (0) | RELATED TICKERS: AMSC

Board: American Superconductor

Author: DCWD40

In the first 90 minutes of trading today, AMSC is up 5.5% on 1.4 million shares. Since the average volume of the last 3 months is 1.9 million shares, there is a lot of buying going on...

What isn't pretty is the only story I see on Yahoo! today about AMSC. It answers a lot of questions but sums up the situation like this: "Their next conference call is in early May and that should shed more light on the situation and perhaps goose it out of its vegetative state. However, at its current valuation, I consider American Superconductor unattractive, if not radioactive because it seems to have lost its way."

While I agree that the May conference call will be a big event, I expect that the company will clean house and get things in order before that day. With all the legal firms circling the company, the board certainly had to be concerned about their performance. If they let another month pass before making significant changes, they might find themselves defending themselves in court.

I'll use a few snips from the above link to help think through what I see happening.

Citigroup states that their previous estimates for American Superconductor's 2011 revenues were $464 million and have now reduced that number to $253 million. With 52 million shares outstanding, that gives us a sales/share of $4.9 and a price/sales of 2.8. In addition to this, they may have to issue new shares to complete The Switch deal, which would dilute sales/share even further and increase the price/sales ratio.

The Switch may hold the answer to many of AMSC's problems. The CEO has led this company through a merger of three green companies to form this exciting and profitable business. I expect the AMSC board to be looking at their CEO to be CEO or President of AMSC. Here is a snip of this bio from The Switch's Web site:

Jukka-Pekka Mäkinen, better known as simply “J-P”, admits that his personal strengths are the drive for achievement and enabling those around him to embrace a sense of urgency. At the helm of The Switch, he strives for world-class customer service, both customer care and technical support.

AMSC needs to separate the duties of CEO, Chairman, and President. J-P's electrical engineering degree certainly is the right education for AMSC. He knows the power industry, is already a recognized name, and is (because of the upcoming merger) going to be running the most important division (based on sales) within AMSC along with the most promising industry technology -- permanent magnet generators (PMG). The board is lucky that they have an industry veteran already set to join AMSC. If AMSC shareholders are not so sure they would like the guy, look at his shareholder's message and CEO Q&A from their latest annual report:

The Switch CEO looks very promising. And, don't rule out AMSC's CEO getting fired in order to tame the legal wolfs at the door. The Switch CEO could step in to save the day. At the least, by offering him an executive role at AMSC (and maybe moving another Switch executive or two to an AMSC senior position or two), the acquisition of The Switch may be saved (and it has not been lost yet) and the market may be appeased that a seasoned industry veteran (or two or three) will be guiding the company going forward. This looks like a big win-win that could quickly change the market's perception of AMSC's future.

While AMSC had the #2 wind turbine company in the world (Sinovel), The Switch has two others (Dongfang and Goldwind) that are part of the Top 5. They also have offshore specialist ScanWind, a PMG customer that was acquired in September 2009 by GE Energy (#2 in the world).

Do the math. The Switch already has three of the Top 5 manufacturers on its customer list. If Sinovel decides to use The Switch product, is AMSC really hurt as bad as anyone expects? Yes, Sinovel needs to reduce inventory but it is still a big force in the industry and AMSC merged with The Switch could claim four of the Top 5 manufacturers as customers. [I know. Dream on. But, it could happen...]

Every broker report I read which includes Citigroup Global Markets, Morgan/Stanley and ValueLine believes that American Superconductor will operate in the red for at least another year if not longer.

Yes, that is true but The Switch is not included in those numbers. The Switch is profitable, growing quickly, and maybe of such a size that it could keep AMSC from being deeply in the red. The Switch also has the PMG technology that is growing rapidly. Until the status of this acquisition is known, earnings forecasts are not able to be done with any certainty.

They also recently closed orders with Doosan Heavy Industries and Hyundai Heavy Industries in Korea, and, Inox Wind in India.

This is the part that has been missing from the AMSC analysis -- especially the negative research note posted last week that questioned if their were disclosure issues at AMSC. AMSC was starting to pick up customers. There is something there more than Sinovel -- although having the #2 is worth significantly more than the combined contribution of the three mentioned above.

This, though, is the bad news:

Sinovel accounts for over 70% of American Superconductor's revenues. According to a ValueLine update: "Negotiations are now under way as to whether the company will will be accepting future shipments and when it will pay for receivables due."

The status of Sinovel is unknown. It is encouraging, though, that Sinovel's stock is still trading little changed from when the AMSC news was reported. It appears that the company still has lots of cash on its books.

I contend that American Superconductor is still a viable company because they remain a leader in a viable industry - renewable energy.

That is the good news -- maybe. Is AMSC still a leader? Who knows?

It is not known if today's upside move in the stock is short covering or something else. Since the company appears to have gone silent it is difficult to know what is happening with its overall business. The past press release frenzy that marked AMSC may stop now that lawyers are lined up at the front door. You can play number games like the one below but, for now, AMSC is trading on speculation and nothing more...

If we do the math here, the remaining 30% of the business now accounts for 100% of future revenues, 66% from the power grid division with growth growing like gangbusters. That means that 33% of revenues will now constitute all other clients in the wind turbine division. American Superconductor will focus their marketing efforts in the Asia-Pacific region, specifically China. They "expect increased revenue contribution from Chinese customers such as XJ Group ... Shenyang Blower Works ... Dongfeng Turbine Company (DNFGF.PK) ... Beijing JINGCHENG New Energy," as stated in the earlier mentioned conference call.

Then there is The Switch...

It's all games right now. The hard facts of what is the future are not known. The stock, for me, is a difficult hold.


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