Investing in clean energy takes a very strong stomach. Share
prices in this sector continually soar and plunge depending on
whether investors are feeling optimistic or pessimistic. Although
the industry may never live up to the grandest hopes that some had
expected, it is clearly emerging as a viable business with real
profits and likely moderate long-term sales growth rates.
Poring over the dozens of publicly-traded companies in this sector,
I took a fresh look at three names that had been considered future
industry leaders, but now see their shares trade quite far from
their 52-week highs. Here's a deeper look:
American Superconductor (Nasdaq: AMSC)
This company was founded more than 20 years ago to develop cables
that could carry high volumes of electricity. But those cables were
quite expensive and few utilities were willing to make heavy
investments in the technology. So management shifted gears early
last decade and moved into the wind business, acquiring a small
developer of wind turbines and related electronics. That move
proved quite prescient. Annual sales, which had been stuck in the
$40-$50 million range in the middle of the past decade now exceed
$300 million. And after years of losses, American Superconductor
finally turned a profit last year.
Much of the company's growth is coming from a massive supply
agreement with China's Sinovel, one of the world's largest builders
of wind farms. Concerns often arise that Sinovel's demand will
peter out, but the company continues to renew its contract with
American Superconductor (Sinovel signed on for another $445 million
long-term deal with American Superconductor in mid-May). It's
important to remember that China's plans for clean energy are only
getting started, and spending should remain robust for quite some
time as the country's electricity needs to continue to soar.
Yet a curious disconnect has emerged. Even as American
Superconductor tops estimates every quarter and analysts steadily
boost their forecasts, the company's stock steadily drifts lower.
After moving past $40 early this year, shares now trade below $27.
Despite that downward move, investors should know that this is
still very much a growth story. Sales and profits should rise at
least +30% this year and another +20% in fiscal (March) 2012.
Shares now trade for a very reasonable 17 times projected 2012
A-Power Energy (Nasdaq: APWR)
This company has vexed even its most bullish supporters. The
China-based supplier of wind turbines and energy distribution
systems always manages to boost annual sales at an impressive clip,
but quarterly results are far more erratic. In some quarters, sales
greatly exceed forecasts while profits lag, while in other quarters
the opposite is true. In recent quarters, profits have lagged, and
analysts have been lowering their earnings forecasts. Many
investors have simply given up, as the erratic quarterly
performances lend the impression that management doesn't have a
handle on the business.
Of additional concern, the company consumes huge wads of money on
its capital-intensive projects, which is hampering
free cash flow
. But as those investments are completed, free cash flow should
increase nicely. In the near-term, investors should stick with
earnings as a measure of the company's value. And those above-cited
concerns, legitimate as they are, overshadow a compellingly
valued stock. Shares have sharply fallen in each of the past four
trading sessions and now trade for about five times next year's
SunPower (Nasdaq: SPWRA)
This company, along with
First Solar (Nasdaq: FSLR)
had perennially been considered to be one of the strongest solar
power companies, thanks to a strong technology base, a deep set of
customers and ample manufacturing capacity.
Sunpower's primary focus is on large installations, such as on the
stores. And based on its technology roadmap, the company's
competitive position should only get stronger in this market.
That's because Sunpower's solar power panels will soon convert 23%
of the sun's energy into electricity, which is roughly 20% to 30%
better than past energy conversion ratios. That means customers
will reap an even greater payback on their investment and reduce
the break-even time on what is a costly investment.
But shares are off sharply this year as it has become increasingly
evident that the company's
is not yet helping to generate cash. SunPower has generated
negative free cash flow in every year of its history (even though
the company is profitable on a GAAP basis). Making matters worse,
in the March and June quarters was fairly weak and should be again
in the current quarter before an expected massive profit spike in
the fourth quarter as the company is finally able to recognize
revenue from some large projects.
Yet you can make a case that shares have found a floor as they
trade right at tangible
. And even if free cash flow is wanting, operating
is fairly healthy -- and shares trade for just six times projected
2010 operating cash flow.
is fairly high, which should lead to strong sales and profit growth
SunPower is clearly a "show-me" stock. Investors need to see more
impressive bottom-line results and a path toward rising free cash
flow. Management insists these trends will start to be in evidence
later this year. If so, shares should move up nicely from their
lows, especially since the stock is very heavily shorted, and
short-covering would boost buying pressure on the stock.
Action to Take -->
American Superconductor remains one of the strongest operators in
the field, and it's unclear why its shares have fallen out of
favor. As investors renew their affection for growth stocks, this
high-growth name should move back into favor.
As for A-Power, investors should simply expect erratic short-term
quarterly results and focus on the long-term. The company is
emerging as a leading provider of clean energy technologies in
China and elsewhere. The Chinese government is throwing big bucks
in support of clean energy and favors domestic suppliers. A-Power
still looks like a great way to play that market, and shares are
SunPower has had major growing pains, but still looks poised for a
string of sales growth, and eventually rising cash flow.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.