Gears that Make Wind Go

The series of wind sector opportunities continues with a look at the gears that make wind go.  The gearbox used in a wind turbine increases the rotational speed from a low-speed to high-speed shaft connecting with an electrical generator.  It is a vital piece of equipment impacting efficiency and thus operator profits.  Not just any old gear box is acceptable.  Gears for a wind turbine are subjected to severe stress by variable winds.  Called ‘cyclic loading’ it can lead to degradation of engineering components and ultimately to system failure.  Only the most durable gear systems will do for a reliable wind power system.

Broadwind, Inc. (BWEN:  Nasdaq) aims to be the wind system supplier of choice, manufacturing and selling steel wind towers and gearing for use in the on-shore and off-shore wind energy sector.  The company has a history of losses and has diversified its product line and target markets as a vehicle to profitability, expanding into the paper industry, oil, gas and mining operations.  The company has been focused on operating efficiency and plant utilization through a more diverse sales mix.

Financial results in the fourth quarter and full year ending December 2020, revealed the company has made some progress.  In the full year 2020, Broadwind reported an operating profit for the first time in years as operating income increased to $422,000 on $198.5 million in total sales.  The company generated $5.2 million in operating cash flow, which was sufficient to cover capital expenditures of $1.5 million.

The company may be using diversification as a pathway to profitability, but the wind energy market still figures prominently in the company’s growth plans.  During the conference call to discuss financial results for the year ending 2020, management returned to its plans to capitalize on favorable growth trends in the U.S. wind energy market.  Management cited expectations for the addition of 80 gigawatts of wind energy capacity in the U.S. market that should mean more orders for both wind towers and gear boxes.  Broadwind already has relationships with three of the four largest wind turbine manufacturers in the U.S.  Indeed, orders for wind towers increase by $22 million in the last three months of 2020 compared to the same period in the previous year.

BWEN has traded off in the last two months, falling back down through a line of strong price support/resistance at the $9.00 price level.  The shares are now hovering just above oversold territory.  That might make the stock seem tempting to some traders who like buying a stock in a weakened state.  Unfortunately, BWEN is still trading at a pricey multiple of 33 times forecasted cash earnings for the year 2021.  It seems like a company that has been habitually unprofitable for years should be required to prove its management team has finally got the right formula for success.  Gears may make wind turbines go, but profits make stocks go!      

  

 

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.