Broadwind: Major Order, But Still Looking For The Right Size

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by Debra Fiakas CFA

Last month wind tower manufacturer Broadwind Energy (BWEN:  Nasdaq) announced a major new tower order from a major U.S. wind turbine manufacturer. The customer was not named, but the likely suspects are not hard to round up.  General Electric (GE:  NYSE) is the largest U.S.-based wind turbine producer with about 9.1% of the total world market according to BTM Navigant, an industry research firm.  While substantially smaller in size, Northern Power Systems, PacWind and Xzeres are also important competitors in the wind energy industry.   Clearly General Electric as a customer has the greatest financial strength and therefore more credibility  –  two traits that have been in short supply at Broadwind of late.

The company’s current chief executive officer, Stephanie Kushner was recently promoted to the post from the position of chief financial officer, a position held since 2009.  No new CFO has been named.  Broadwind also recently announced the resignation of the controller and intentions to “consolidate corporate financial functions.”  The C-suite at Broadwind is not well populated these days, leading some shareholders to question leadership and direction.  The big new order helps calm critics.

Valued at a total of $137 million, the recent wind tower order calls for deliveries over a three-year period ending in 2019.  That means roughly $45 million in additional revenue per year  –  a major win for the company.  In the twelve months ending March 2016, Broadwind reported a total of $196.7 million in total sales.  Thus the new order represents a 23% increase in incremental annual sales.

Broadwind reported a net loss of $10.1 million in the twelve months ending March 2016.  However, EBITDA (earnings before interest, depreciation and amortization) was near breakeven at $111,000 and operations generated $13.1 million in cash flow.  Barring poorly negotiated margins on the new contract, Broadwind should be able to at least post positive EBITDA if not a net profit as the company works through the new contract.  There is only a single analyst with a published estimate for Broadwind.  Surprisingly, that analyst reacted to the new contract announcement with even deeper quarter losses than before in 2016, as well as a deeper loss in the year 2017.

The forecast reduction was not encouraging for shareholders, but most appear to have shrugged off the opinion of a single analyst.  The stock had already been on an up-trend since February 2016, riding the wave of renewed interest in U.S. equities.  The stock gapped higher on the new contract announcement in early June 2016, but has since given up the entire gain.   

As encouraging as new business appears, the fact that Broadwind has not found an operating configuration that produces profits is of far greater concern.  The company recently decided to divest of its services division, retaining the towers and weldments businesses.  Eliminating the unprofitable services division will be beneficial, but it will not fix the problems in the remaining business that is also unprofitable.  Five years ago the company initiated a restructuring plan to right-size its manufacturing base and reduce fixed costs.  Two production facilities were idled and 10% of the workforce was laid off.  The efforts have led to positive cash flows in continuing operations, but net profitability remains elusive.  Indeed, the gross profit margin shrank to 9.2% in the year 2015.  

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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