American Superconductor: Time to Catch a Falling Knife?
What is AMSC stock worth?
American Superconductor Corporation (AMSC) investors panicked yet again on June 1st when the company said it would delay filing its annual report, needing additional time to review its recognition of revenue from Sinovel Wind Group (601558.SS) in the last three quarters of their fiscal 2010 (July 2010 thru March 2011.)
The stock promptly dropped another 20+% and is trading for around $8 as I write, down over 70% since the start of the year.
The Story So Far
The delayed annual report should not have caught investors by surprise. When AMSC first announced that Sinovel had not paid for previously delivered product and was refusing to accept deliveries in early April, it was fairly clear that some revenue recognition would have to be restated. That, after all, was the main grounds for the several class action lawsuits which promptly sprang up. So investors are selling simply because of the increased uncertainty of not having new financial statements, not because of new negative news.
The other piece of recent news was the announcement on May 24 that Daniel McGahn, AMSC's former President and COO, would be taking AMSC founder Gregory Yurek's place as CEO. Although the board attempted to pass this off "as part of the CEO succession plan that has been discussed with the Board of Directors since late 2010", I'd be willing to bet that the succession plan in question was significantly accelerated due to recent events. In any case, Yurek will stay on as board chairman, and McGahn is a company insider, so while this may represent a change in emphasis for the company, it's no revolution.
When I first looked at AMSC after the Sinovel announcement, I thought the company was a speculative buy below $12, but quickly changed my mind when I found out that Sinovel had been working to establish a China-based competitor to AMSC. With the recent sell-off I'm looking at the stock again, but with the immediate risk of dilution as the company attempts to raise funds in order to complete their acquisition of The Switch Engineering Oy ("The Switch"), it's difficult to point to any price as a bottom, even if the company's fundamental value is much higher.
Back of the Envelope Calculations
One reader suggested that AMSC's Dec 31 cash on hand of $4.79 might serve as a useful floor for the stock price. However, that amount represents only $243M, and any amount not needed to maintain operations will almost certainly be used as part of "The Switch" acquisition. The rest will either be raised in the form of debt, or additional share offerings. At the current share price, I expect that management will attempt to fund the rest of the acquisition with debt, if they can find a bank or banks willing to make the loan.
The company's book value per share was $9.86 on Dec 31, a number which represents the cost paid to acquire the company's assets, minus any depreciation. Book value is a notoriously inaccurate guide to the current replacement cost of assets, and to the extent that these assets are dedicated to servicing the needs of Sinovel, they may in fact be worth much less than the company paid for them. Hence, it is also difficult to place a floor under the possible stock price based on book value.
Finally, we should consider future potential earnings as an indicator of the company's value. In the June 1st press release, AMSC said it "currently expects to reverse the recognition of a material amount of revenue that it had included when estimating revenues of "less than $355 million." With shipments to Sinovel having not yet resumed two months into fiscal 2011, I think it is reasonable to expect much lower revenues this year.
My current guess is that Sinovel will again accept shipments from AMSC this year, but they will never return to former levels, and could easily decline over time. I'm far from confident in this guess, but given that Sinovel previously accounted for 70% of AMSC revenues, I think a reasonable guess for revenue in FY 2011 would be on the order of $150M (not including revenues attributable to "The Switch.") Those revenues will come from any resumption of sales to Sinovel, revenues to other customers (Sinovel was only 70%, after all) and growth, especially from AMSC's eponymous superconducting wire business.
If AMSC maintains their previous gross margin of 29%, $150M revenues will translate into an operating profit of $43M, or an EBITDA of $28M. If overhead were not reduced from last year, net loss would be about $7M. But the company is working to reduce overhead, and said that they had already reduced headcount by 10% in the June 1st press release. Therefore, we can reasonably expect overhead to fall, leaving the company near break-even or at a tiny profit.
If AMSC does not achieve a significant profit in 2011 as I'm guessing, a reasonable way to value the company would be based on sales. Here are the price/sales ratios of other publicly traded wind industry players:
|Broadwind Energy (BWEN.OB)||1.15
|Kaydon Corp (KDN)||2.55
|Vestas Wind Systems (VWDRY.PK)||0.58
Given the uncertainly currently surrounding American Superconductor, Broadwind and Zoltek are probably the better comparables than the established companies Kaydon, Gamesa, and Vestas, so I will use a prospective Price/Sales ratio of 1.0 to 1.3. Using my $150M revenue estimate, we get a market capitalization of between $150M and $200M.
The Switch acquisition was valued at € 190-million, or about $273M at current exchange rates, and was supposed to be immediately accretive to AMSC's sales. It seems reasonable that, to the extent that the acquisition can be funded without outside funds, it should increase AMSC's market cap. Given AMSC's cash on hand at the end of the year of $243 million, I'm comfortable attributing another $200M market cap to The Switch, for a total market capitalization of between $350M and $400M. This translates to a stock price of between $6.90 and $7.90.
Given the uncertainty in all my guesstimates and calculations, it may already be time to pull the trigger on AMSC, given that the company seems relatively fairly valued even if we assume (as I did in my back-of-the-envelope calculation above) that most revenue from Sinovel is gone for good. The recent response to their delayed annual report has the feel of panic selling.
Yet panicking sellers do not pay much attention to valuations, back-of-the-envelope or otherwise. Are you brave enough to try and catch a falling knife?
DISCLOSURE: Long Gamesa. Considering a near-term purchase of AMSC.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.