Going Global with Wind Power Sector

The most recent post “Tapping New Zealand’s Breezes” featured NZ Windfarms Ltd. (NWF:  NZ).  As appealing as the fast growing New Zealand wind power sector might be, many investors might consider NZ Windfarms as far too small.  In this post we come back to the U.S. for an alternative vehicle to tap opportunity in wind power.

TPI Composites (TPIC:  Nasdaq) designs and manufactures composite wind blades and accompanying assembly systems.  TPI also provides field services to wind farm owners and operators.  As a component supplier TPI can benefit from growth across a mix of markets and geographies.  Indeed, the company counts customers all across the globe.

The company recently reported financial results for the full-year 2020.  Sales totaled $1.7 billion in the year, resulting in a net loss of $19.0 million or $0.54 per share.  The loss is the results of cost pressures.  The gross profit margin of 3.8% in the year 2020, represented a significant slip from the previous year when the company report a gross profit margin of 5.4%. TPI last reported positive earnings three years ago when the gross profit margin was 7.1%.

The loss seems less troubling against strong operating cash generation of $37.6 million, representing a sales-to-cash conversion rate of 2.25%.  Operating cash flow helped cover at least part of the capital budget of $65.7 million in the year.  The company had to raise $88.6 million in new capital to cover the balance.  Cash balances rose to $130.2 million at the end of December 2020.   

TPI management will need to conjure up some efficiencies to get its financial performance back on track.  In the meantime, the company remains a key player in the world wind energy industry.  TPI sold 3,544 sets of three wind blades in the year 2020, which are expected to generate as much as 12,080 megawatts of power after installation.  This compares to 3,189 sets in the previous year with a production capacity of 9,598 megawatts.

It appears TPI management is going to remain a player in the wind energy sector.  Management’s guidance for sales in 2021 is a range of $1.75 billion to $1.85 billion.  The company plans to meet this goal with 50 manufacturing lines compared to 53 in 2020.  Government support in the U.S. and Europe appear to favor the renewable energy industry.  Management also mentioned expectations to operate all of its manufacturing plants at normal capacities despite the continued presence of the coronavirus.  Based on forecasted wind set sales in 2020, the worldwide business interruption due to the COVID-19 pandemic negatively impacted 2020 sales by $6 million and net income by $2 million.  Utilization of manufacturing capacity is expected in a range of 80% to 85% for the full year 2021.  Given that utilization was 92% in the last three months of 2020, we believe management has sound reason to expect efficiency improvement in the year.

Analysts following TPIC appear to have swallowed management’s kool-aid.  The consensus estimate for the year 2021 is $0.79 in cash earnings per share on $1.8 billion in total sales.  Coming out of a period of net losses, it is understandable that the shares are trading at a high forward-earnings multiple.  It might be more instructive to look at the company’s long-term projected growth rate against its valuation multiple.  The price-earnings to growth ratio is well under the 1.00 threshold, suggesting that from the standpoint of long-term growth, TPIC is worth a look.      

 

 

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.