2023-07-19 18:37:12 ET
Summary
- Broadwind, Inc. has shown exceptional performance in recent results that should give confidence to investors about the company's future.
- The company's future looks promising due to the rising demand in the wind sector, with installed capacity of onshore wind power projects predicted to rise substantially.
- Its valuation is looking better now, though it is still not a bargain.
Introduction
There's something about patience that can feel truly rewarding. It bestows you with a certain clarity you may have previously lacked, paving the way for conviction-fueled and confident investments. This has the case with Broadwind, Inc. ( BWEN ).
Yes, it was pretty apparent that the company was on the cusp of a significant earnings surge this year, as I discussed a few months ago. But now, its recent results have unveiled its true potential to yield an exceptional performance and boost earnings considerably. What's even more encouraging is the reassurance this brings for investors. Broadwind Energy's future is looking bright, and we now have a clearer understanding of how this could unfold—with the company bolstering both its revenues and earnings.
Quarterly Results and Future Projections
As one of the largest independent wind tower manufacturers, Broadwind Energy extends its operations beyond power, providing equipment for other industrial customers across sectors such as oil & gas, mining, and construction.
Previously, I highlighted how Broadwind's financial performance stood to gain significantly from a new order valued at $175 million for wind towers, placed by a leading wind turbine manufacturer. The magnitude of this deal, equaling the company's total revenue from the previous year, is projected to keep Broadwind's two manufacturing facilities bustling with activity for the ensuing two years. Additionally, I underscored how the Biden administration's implementation of the Inflation Reduction Act (IRA) in 2022 would be a significant windfall for the company. The Act, set to funnel $500 billion into new spending and tax credits, holds considerable incentives specifically targeted at entities engaged in clean energy technology, such as Broadwind Energy.
The influence of these developments is clearly reflected in Broadwind Energy's latest quarterly results, which should infuse investors with confidence regarding the company's future performance. This significant new order has not only fueled revenue growth but also increased plant utilization rates, thereby positively affecting cost management.
Broadwind Energy reported a year-over-year revenue increase of 17%, reaching $48.9 million in the first quarter. Concurrently, its gross profit surged from $2 million the previous year to nearly $7 million, and it pivoted from a loss of $0.12 to a profit of $0.04 per share. Excluding one-time items, the company's adjusted EBITDA shifted from a loss of approximately $800,000 to a profit of $4.09 million.
The growth in earnings was propelled by robust performance across all three segments. Notably, the primary Heavy Fabrications segment, which reflects the favorable impact of the major new tower order, saw a six-fold increase in earnings (adjusted EBITDA) to $3.85 million. This earnings growth was also augmented by benefits linked to AMP (advanced manufacturing production) tax credits associated with the production of wind towers. These credits, as noted earlier, were instituted through the IRA.
As a reminder, Broadwind Energy previously projected it would generate revenues of between $205 million and $220 million and adjusted EBITDA of between $16 million and $18 million in 2023. Recently, the company further indicated its intention to maintain profitability (on a GAAP basis) throughout 2023. Despite its previous struggles to consistently generate profits, which led some to view the company's guidance with a hint of skepticism, the release of stellar quarterly results underscores the effect of the large new tower order on which work will continue throughout the current and following year. I believe this, coupled with the improving macro environment inclusive of favorable legislation and rising demand, paints a brighter picture for Broadwind Energy's future.
In my view, a key highlight was Broadwind Energy securing another order in the first quarter, which sets a positive trajectory for the remainder of the year. As I've suggested before, the large tower order should enhance Broadwind Energy's visibility and aid in garnering more orders from the wind and other industries. This was exemplified in April when the company secured an $8 million order for its proprietary Mobile Pressure Reducing Systems ((PRS)).
Market Dynamics
Despite the most recent order's connection to the natural gas sector, I believe Broadwind Energy's larger victory could come from securing additional tower orders. Given the market's vitality and imminent expansion, this seems a plausible outcome. The Inflation Reduction Act (IRA) has injected new confidence into wind energy project developers, which should stoke demand. According to Wood Mackenzie's projections , onshore wind power projects will experience significant growth starting next year. The installed capacity of onshore wind power projects is predicted to escalate from 9.3GW in 2023 to 12.0GW the following year. This trend is expected to drive demand for wind energy equipment upward in the subsequent years, favoring Broadwind Energy.
BWEN Investor Presentation
Image: BWEN Investor Presentation (link provided earlier)
I anticipate that Broadwind Energy will secure additional orders in the near future, riding the wave of the wind power industry's substantial growth that may persist over a decade. This should spur the company's revenue and earnings growth, with the effect on earnings becoming even more notable when factoring in the positive impact of AMP credits.
However, I think there is a concern tied to the oil and gas industry. Even though the wind market is expanding, the oil and gas sector, specifically the oilfield services space, is experiencing a deceleration. As I've discussed in previous articles , oil and gas producers have been reducing rigs this year and drilling activity has been ebbing as producers prioritize shareholder returns over production growth. This has adversely affected industries providing services and equipment to these producers, and it appears Broadwind Energy may be among those impacted.
In the first quarter, Broadwind Energy's Gearing segment experienced a 12% decline in orders, dropping to $12.39 million. A decrease in the Heavy Fabrications segment's orders would have been understandable due to the high-base effect, but the downturn in Gearing orders came as a surprise. The company disclosed that this reduction was attributed to a weakening Oil & Gas segment.
Broadwind Energy predominantly services the wind sector, which accounted for nearly half of its orders last year. However, oil & gas is the second-largest sector, contributing 19% of last year's revenues. The oil & gas sector's weakness is a concern, and I believe this trend may persist in light of the broader frailty in the oilfield equipment and services industry. This will be a crucial development to watch in the future. On the brighter side, the vigor of the considerably larger wind sector should compensate for the oil & gas sector's downturn, enabling the company to maintain robust revenue and earnings figures.
Valuation
Another plus for Broadwind Energy is the considerable improvement in its valuation in recent months. The stock saw a significant surge following the announcement of the large order, but a corrective phase has seen shares decline by 14% since my last article. Concurrently, analysts have made upward revisions to the company's EPS forecast, enhancing its valuation. The stock is now trading at 19x forward earnings estimates, compared to 30x in late April when my previous article was published. While it's not quite a steal yet—with the sector median lower at 17.7x—it's inching closer.
Takeaway
Broadwind Energy appears set to augment revenues and earnings in upcoming quarters as it fulfills the tower order and potentially secures new orders due to healthy demand in the wind sector. Its latest quarterly results provide a roadmap for this growth trajectory and potential earnings expansion. While its valuation may not appear attractive at first glance, it is undoubtedly a stock worth tracking.
It is, however, crucial to bear in mind certain risks. Chief among them is Broadwind Energy's historical performance. As noted earlier, the company does not have a solid record of consistently generating profits. While the new tower order and favorable macro environment might shift this trend, it remains a risk worth considering.
For further details see:
Riding The Winds Of Change: Getting Clarity On Broadwind's Future