2023-08-04 01:33:56 ET
Summary
- American Superconductor stock soared 60% after the hype around a potentially revolutionary compound called LK-99.
- AMSC specializes in superconductors and provides advanced power electronics and superconductor systems for the power grid and military.
- The company has reported negative earnings for the past 5 quarters but is expected to see substantial revenue growth in the future.
As the Fourth Industrial Revolution, which I have previously written about while discussing Powell Industries ( POWL ) here as well as Flex ( FLEX ) in this recent Flex: Time To Join The 4th Industrial Revolution continues to develop, and the world begins to recognize the impacts on our daily lives, how can we make better investment decisions based on these trends? In a recent research publication highlighting development of a potentially radical new superconductor compound called LK-99, Wedbush analyst Dan Ives calls the hype around it proof that we are in the midst of the 4th Industrial Revolution. That news sent the stock of one company that specializes in superconductors, American Superconductor ( AMSC ) soaring on Tuesday, with the market price closing about 60% higher than the previous day's close.
Not only did AMSC stock pop 60% on Tuesday, presumably due to that recent news, but it has also risen over 50% in the past month. However, all the recent gains have been given up in the past 2 days with the stock back down to below $10, which is where it was trading July 31 before the big jump on August 1. The next earnings report is due on August 9 after the market close, and I rate the stock a Hold pending the quarterly results.
What Does AMSC Do?
You may have heard the term superconductor, and you may have some idea what it means, but I was unclear before starting my research what products AMSC sells to its customers. To get a better understanding, I went to the company website and found this paragraph that summarizes the company and its product offerings.
The world's energy demand is akin to a symphony. Its peaks and valleys are like notes in a song. The instruments of this great orchestra are the many parts of the power grid - transmission lines, substations and generators, all moving energy to the beat of life. Have you ever wondered who the conductor is? AMSC is a grid-wide provider of advanced power electronics and superconductor systems that keep this rhythm in harmony. Our anthem also proudly extends to the U.S. Navy, powering , protecting and propelling the next generation of fleets. Whatever key life hits, energy is there for us in tune. We help it to Never Stop Moving - so you don't either.
The product offerings are further divided into Gridtec, Windtec, and Marinetec products.
The Gridtec solutions include components and system solutions at a utility-scale for power generation through transmission and distribution. They provide solutions for utilities, electric reliability and resiliency, industrial applications, and renewable energy. The D-Var compensation solution is one of the company's primary product offerings for the Grid.
AMSC
Windtec products include solutions for both onshore and offshore wind turbine designs, and advanced hardware and software solutions, as well as interconnectivity solutions for renewable energy.
Marinetec includes ship power, protection, and propulsion systems. For example, their HTS degaussing systems are used by the Navy to cloak the ship's magnetic signature. In April, AMSC was awarded a Navy contract for a deployable mine countermeasure system. Although the contract award was only about $8M, it represents a positive step forward in the Naval market for future product sales as explained by CEO Daniel McGahn on the Q422 earnings American Superconductor Corporation Q4 2022 Earnings Call Transcript:
Let me explain the importance of our MCM system, and what it means for the company. This nearly $8 million, multi-year contract builds on prior work on the deployable MCM solution, allowing us to leverage our proprietary technology to develop the capabilities needed for possible future ship systems. We believe that this program is positioned to grow Navy-related revenue for us in the near future. The MCM contract as it is structured, already contemplates the Navy buying commercial systems. If and when this happens, our Navy business could turn from being an investment to being a source of operating cash flow.
AMSC was founded in 1987 and has its company headquarters in Boston, MA. It is a small cap growth company with a current market cap just under $500 million. The stock has a small following with just 3 Wall Street analysts covering with 2 Strong Buy and 1 Buy rating in the past 90 days.
The most recent coverage of the stock of SA was published back in November 2022 when that author also assigned a Hold rating given the company's lack of profitability despite growing revenues, although the stock is up more than 135% since that article was published. Revenues declined slightly YOY from 2022 to 2023 but are expected to increase substantially by 2025.
Conversely, the company has reported negative earnings and has missed earnings estimates for the past 5 straight quarters, even though estimates for future quarters have improved.
Given the encouraging trend of increasing revenues and the prospect of profitability on the horizon, the Q123 (fiscal year ends March 31) report should have meaningful data for potential investors to consume, indicating whether that goal of profitability is getting nearer. The following slide from the May investor presentation shows the company's improving financial performance in terms of revenue growth since FY2017.
The Q422 (quarter ending March 31, 2023) earnings report was disappointing with non-GAAP EPS of -$0.28 missing estimates by -$0.08, although revenues increased YOY by 12%. From the press release:
AMSC reported a net loss for fiscal 2022 of $35.0 million, or $1.26 per diluted share, compared to a net loss of $19.2 million, or $0.71 per diluted share in fiscal 2021. The Company's non-GAAP net loss for fiscal 2022 was $28.8 million, or $1.03 per share, compared with a non-GAAP net loss of $17.1 million, or $0.63 per share, for fiscal 2021.
Although the loss from operations was higher than FY21, part of the explanation for those higher losses is due to acquisitions that occurred recently (including Neeltran in May 2021) and expansion/diversification of their product lines to take advantage of growth opportunities in mining/materials, renewables, semiconductors, and military markets as further explained by Daniel McGahn, Chairman, President, and CEO of AMSC:
"Our fiscal 2022 performance reflects our strategic effort to diversify our Company by markets, geography and products as well as our efforts to capture integration synergies and reduce our cost structure. We believe this diversification well positions us to capitalize on future investments in renewables, mining of metals and materials-especially those for the electrification of vehicles, semiconductors and in the defense business. Our Company has successfully transitioned from almost a pure play in the wind market, to a company primarily focused on the power grid and military resiliency markets as further evidenced by our recently introduced U.S. Navy solution-mine countermeasure system. We believe our growing and consistent Grid demand may allow us to seize opportunities in new markets, introduce new offerings and expand our customer reach. I am grateful for our team's commitment and delivery on fiscal 2022 and look forward to a bright fiscal 2023."
The outlook for Q123 includes an expected net loss not to exceed $6.5M or -$0.23 per share. The company cash flow is operating at a burn rate of approximately $1M to $3M per quarter and expects to have about $22M in cash as of June 30, 2023. As long as the company can turn in a profit in the next year or so, they should be in good financial shape based on current projections. The company also stated that they expect to realize approximately $5M in annual cost savings starting in Q123 in part due to operational synergies.
In July, AMSC announced new orders for energy power systems estimated at $43M, with about half of the revenues to be realized in FY23, further boosting the growth prospects.
Peer Comparison
While AMSC was starting to catch up with their peers in terms of price performance over the past year, the recent earnings report from POWL boosted that stock by nearly 40% after reporting an earnings beat on August 1. That could bode well for AMSC when they report next week, although they mostly operate in different market segments with some overlap in the large-scale industrial electrification market.
Risks to Consider and Growth Outlook
With any small-cap growth company there can be volatile trading action, and that was evident this week with the stock price of AMSC whipsawing higher to around $16 on Tuesday and then dropping back down to the $10 level by Thursday. The recent news of a potential new superconducting compound may have been the catalyst for the jump, but really has little bearing on the future potential for AMSC profitability.
While FY22 was a transition year for AMSC, the prospects for continued growth in FY23 are encouraging and there is lots of room for growth in the markets that AMSC is targeting as illustrated in this slide from the May investor presentation.
However, profitability remains a concern as the quarterly losses eat through the cash on hand. On the other hand, the company remains committed to reigning in overhead costs and adjusting prices where possible to improve the bottom line. On the Q422 earnings call, CEO McGahn discussed the company transition that is underway:
Fiscal year 2022 is one of continued business diversification and strong global orders growth. We announced $150 million of new energy power systems orders during the year. This is an increase of more than 75% over the prior year levels. In fiscal 2022, we saw robust order bookings for the entire company, of over $165 million.
About one-fourth of our sales were for renewable projects. Industrials represented about a fourth as well. Semiconductor projects accounted for about 15%. Metal, mining and materials were nearly 10% and the Navy was just above 10%. The diversity of orders and sales allowed us to transition from almost a pure play in wind to a company now focus on the power grid and military resiliency markets.
While the positive impacts on growth opportunities from the 4th Industrial Revolution are clearly benefitting AMSC in areas like renewable energy, semiconductors, and metals/mining, there is still a cloud hanging over the company with multiple quarters of negative cash flows. If the company leadership can continue to improve profit margins, trim overhead costs, and keep growing the backlog, the stock may become attractive to growth investors. Until they reach profitability, I will remain on the sidelines and watch how things progress.
For further details see:
American Superconductor: A Smallcap Growth Company For The 4th Industrial Revolution