The Long-Term Upside Case for American Superconductor

American Superconductor Corp. (NASDAQ: AMSC) is a company recently featured by 24/7 Wall St. as one of seven alternative energy stocks with significant long-term upside. There is more than one side to this story, and the company’s past and volatile results might scare away many traditional investors. Still, there is a significant opportunity over the long term if this company can find its sweet spot.

American Superconductor is different from many alternative and renewable energy companies. It is effectively two companies in one. It represents a wind-related opportunity (Windtec) and a grid technology one (Gridtec). Note that American Superconductor is one of the more complicated companies in alternatives and renewables.

What we would first say is that the Gridtec and Windtec operations do not generally have the same business trends with each other at any point in time. Does this leave an opportunity for the company to eventually split itself up? Possibly, although we would not look for such a special situation to develop in any base case scenario.

Speculative alternative energy companies generally are small cap stocks with a history of losses, so we have to mention that they would not be suitable for anyone but very speculative investors. There are not likely to be any dividends to act as a cushion at any point in the near future, and AMSC has total accumulated losses of more than $856 million over its life as of March 31.

Investors may recall that American Superconductor fell from grace after significant issues arose in China. In 2011, this stock fell from $30 to less than $5, and it has struggled ever since. At this point, we are looking beyond the past for its dual opportunity in wind and in grid ahead.

One potential wild card here is that there is an ongoing possibility that its woes from China will become good again. The base case does not assume that Sinovel issues will suddenly be rectified, but anything — even out of China — is possible in the future. AMSC has also restructured its U.S. operations. The company has a presence in Asia, Australia and Europe.

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What potentially makes AMSC less risky in the short-term than its past may indicate is that it has nearly $50 million in cash as a cushion. Its market cap was about $125 million on Friday, only about 15% above its tangible book value. AMSC also has tried to slow its cash burn rate to acceptable levels, and as such it still has ample access to the capital markets for raising cash if needed.

AMSC recently received a $40 million follow-on order from Inox Wind (India), and we are awaiting a defense order as well. Its Gridtec may be losing money and suffer from lower sales currently, but if you have evaluated the aging U.S. power grid and the need for new and advanced remote power base stations then this represents a significant opportunity in the years ahead.

The company’s Windtec Solutions is a host of electronic controls and systems, as well as wind turbine designs and engineering services. The turbine maximization is already in use in thousands of wind turbines around the planet. AMSC’s Gridtec portfolio focuses on interconnection, helping to maximize the transmission of energy into the grid and to help act as surge protection for systems. It also has high-temperature superconductor wiring rather than traditional wiring, which aims for up to 10 times more power than conventional cables.

The short interest as of May 30 was still elevated at 5.84 million shares. Still, that short interest was down handily from the prior short interest reading of almost 7 million shares.

Revenues have been sporadic in both units, but large opportunities are coming from military and defense, and the longer-term opportunities remain in China. India and Europe are ongoing, and the company has a huge opportunity to capitalize on the failing infrastructure inside the United States as well.

With total 2013 revenue down more than $3 million to $84.1 million, the company has already forecast that revenue is likely to be slightly lower again for all of 2014. Still, the reality is that both wind and grid can act as significant opportunities in the years ahead, both of which have the potential for exponential revenue growth in the coming years.

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The most recent quote with earnings was from President and CEO Daniel P. McGahn:

In fiscal year 2013, we were able to reduce our operating expenses as well as decrease our cash burn. These efforts, combined with our financing activities, resulted in a year-over-year decrease of under $1 million in our cash balance, including restricted cash. We believe our current liquidity position provides us the flexibility to focus on positioning the Company for future growth. In fiscal 2014, we are focused on putting into place the pieces that will help us drive towards our vision of sustained revenue growth in 2015 and beyond…

AMSC is based in Devens, Mass., and has been consolidating its U.S. operation from its Middleton, Wis., facility. It has also been moving its Suzhou, China, facility to a new manufacturing operation in Timisoara, Romania.

AMSC is far from a sure thing, but the recent recovery from $1.25 may indicate that investors are considering the book value issue as a potential cushion or a floor. This company has almost no real analyst coverage, and its 52-week trading range is $1.25 to $3.06. Shares were trading at $1.54 late on Friday.

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