2023-04-29 07:17:18 ET
Summary
- Broadwind Inc. experiences a significant ~16% jump in revenues and a swing to profitability in Q1 2023, as per the latest guidance.
- The company benefits from a massive $175 million order and the Inflation Reduction Act's tax credits on clean energy initiatives.
- Broadwind improves its 2023 revenue and EBITDA guidance, indicating positive demand trends and growth potential.
Introduction
For years, Broadwind, Inc. (BWEN) has struggled to post sustainable growth in revenues and earnings. However, the company is on the road to recovery and appears to be looking at a brighter future, which has already begun. Recently, Broadwind released its guidance for the first quarter, showing a 16% jump in revenues and a swing to profitability. I expect things to get even better in the coming months.
Key Growth Factors
Broadwind specializes in manufacturing structures, equipment, and components for clean tech and other applications, particularly in the U.S. wind energy industry. The company has tower manufacturing facilities in Manitowoc, WI, and Abilene, TX, capable of producing up to 325 towers annually. Broadwind also manufactures precision gearings and gearboxes and provides heat treat services to a diverse range of industrial clients.
Earlier this month, Broadwind announced that it expects to earn an adjusted EBITDA of $3 million - $4 million from revenues of $48 million - $49 million in the first quarter of 2023. That would mark a significant improvement from last year's first quarter when it reported an adjusted EBITDA loss of $8 million from revenues of $41.8 million.
Two factors have put Broadwind in a great position to grow revenues and earnings.
Firstly, Broadwind announced a massive $175 million order for new towers from a leading wind turbine maker earlier this year. This two-year order will have the company manufacturing tower sections at its Abilene and Manitowoc plants and supplying them to the customer throughout 2023 and 2024. To put things in perspective, the total value of this order is almost equivalent to the company's total revenues last year. Moreover, this single order alone will account for 50% of the utilization of the company's facilities. This has been discussed extensively by Seeking Alpha contributors.
The second factor, which I believe doesn't get discussed enough, even though its impact on the bottom line might be even bigger, is the signing of the Inflation Reduction Act (IRA) into law in 2022. The Biden administration has been taking measures to strengthen domestic industries, and the IRA involves $500 billion in new spending and tax credits on various initiatives, particularly those related to clean energy technology, manufacturing, and innovation. Broadwind, with most of its revenues coming from supplying towers to the wind energy industry, will receive substantial credits, positively impacting its earnings. The large year-over-year increase in earnings implied by the company's guidance for the first quarter could be partly due to this factor.
Future Potential and Unlocking More Benefits
However, the great thing is that the impact of the IRA will likely get even bigger as we move forward towards the second half of 2023. There has been some uncertainty regarding the realization of credits under the IRA, and last month, the management said that they would get more clarity on this as the year progressed. Therefore, I believe the major part of the positive impact on earnings from the IRA will likely happen in the latter part of the year, not in the first quarter.
If Broadwind operates its tower plants at full capacity, it could receive a gross profit benefit of $30 million, as outlined by the company in a recent presentation. At 50% utilization (a likely scenario under the new contract win), it might get a benefit of $15 million linked solely to the tower business, which is substantial for a company that reported a gross profit of $10.7 million from all of its business operations in 2022. This is probably why analysts are also expecting big jumps in earnings on a sequential basis through Q4.
Another positive aspect of the recent update is that Broadwind has also improved its revenues and earnings guidance for 2023. The mid-point of the revenue guidance has been raised from $210 million to $212.5 million, while the midpoint of the adjusted EBITDA guidance has been increased from $15 million to $17 million.
Broadwind's management has been saying that they are experiencing an improvement in demand in various end markets from industrial customers, and I think the increase in guidance could be an indication of this positive trend. Also note that earlier this month, Broadwind announced a new $8 million order for its Mobile Pressure Reducing Systems ((PRS)). This should give more confidence to investors about the company's claims and its ability to not only grow revenues and earnings but also capture new orders.
What I am more interested in seeing is any impact of the uptick in demand from the wind industry, especially in the aftermath of the IRA, which could spur the development of offshore wind projects. We will likely hear more about this when the company releases its first quarter results before the market opens on Thursday, May 11. If Broadwind secures more orders from the wind industry, then it could improve plant utilization rates, which will reduce costs and help improve margins. Plus, new orders will not only help grow revenues and earnings, they could also unlock even more benefits under the IRA, further lifting its earnings.
Investment Considerations and Key Risks
Wall Street is excited about the company's prospects, and its shares have rallied this year, rising by more than 160% so far. I am bullish on this stock and expect shares to move higher on the back of revenues and earnings growth, as well as potentially new order wins which will further strengthen its backlog. However, with shares trading almost 30x forward earnings estimates, above the sector median of 18.14x as per data from Seeking Alpha, I wouldn't call this a bargain. I suggest investors wait for a dip before buying this company's shares.
However, investors must also consider some of the risks involved with Broadwind before jumping on board. The company doesn't have a strong track record of consistently growing revenues and earnings, which might raise concerns about its ability to generate sustainable returns for shareholders. If it fails to secure new major orders for wind towers, then it might find it difficult to grow revenues and earnings at a decent pace after the $175 million order concludes in 2024.
Additionally, it's worth noting that WM Argyle Fund, which owns 1% of Broadwind, is seeking changes on the company's Board to improve its performance. The company, on the other hand, is pushing back. This boardroom battle could also negatively impact the company's shares.
For further details see:
Broadwind: A Clean Energy Stock Worth Watching