2023-03-07 16:51:14 ET
Summary
- TPI Composites reported Q4 earnings highlighted by stabilizing financial trends.
- The company is exiting manufacturing in China as part of a broader restructuring to optimize the global operation.
- An outlook for firming margins and stronger earnings supports a positive long-term outlook within the segment of wind energy.
TPI Composites, Inc. ( TPIC ) is recognized as a leading manufacturer of wind blades, a critical component of wind energy turbines. While the company has a strong growth history over the past decade, the challenge in recent years has been dealing with increasing costs and supply chain disruptions, pressuring earnings. Indeed, TPIC has lost more than 80% of its value from an all-time high at the height of the pandemic, which was a period likely defined by some valuation exuberance.
We last covered the stock back in 2021, following what had already been a deep selloff, with a conclusion at the time that a potential turnaround was missing a "tailwind". Fast forward, our update today covers some more recent developments, moving us into taking a more positive outlook on the stock. In our view, the latest financial trends and management guidance support a more positive outlook.
TPIC Earnings Recap
TPIC reported its fiscal 2022 Q4 earnings on February 22nd with a GAAP EPS loss of -$1.00, which narrowed from a -$2.10 loss in the period last year. More favorably, Q4 adjusted EBITDA turned positive at $41 million, reversing a loss of -$28 million in Q4 2021.
Revenue from continuing operations of $402 million climbed by 15% year-over-year. This momentum reflected an improvement in key performance metrics between a 6% increase in the number of wind blade sets produced, and the overall factory utilization at 87% from 71% in the period last year.
The takeaway here is that the company has made some progress in at least stabilizing financial trends, while management continues to cite ongoing macro challenges.
On this point, TPI Composites announced some restructuring initiatives to further improve profitability. The company has effectively exited its manufacturing operation in China as of December citing the impact of import tariffs targeted at the country by the United States on wind blades.
The result is expected to hit the top line initially, but also reduce a significant expense based on the related costs. The effort to streamline the global operation by optimizing the manufacturing footprint is expected to ultimately support higher margins.
In terms of guidance, management expects full-year 2023 net sales from continuing operations of around $1.65 billion, representing an 8% increase over the 2022 result. The company is also targeting a positive adjusted EBITDA margin in the "low single digits" as a continuation of the Q4 trends.
Longer term, the expectation is that annual wind revenue climbs above $2 billion while the adjusted EBITDA margin runs above "high-single-digits" alongside recurring positive free cash flow.
Finally, we can bring up that the company ended the quarter with a cash position of $133 million against $62 million in total debt. Despite the otherwise solid balance sheet with net cash, the company announced a new $115 million convertible notes offering following the quarter's end. Management simply commented that a portion of the cash would be used to fund "eligible green projects", for general corporate purposes, while further strengthening liquidity.
Is TPIC a Good Stock?
From what has been a series of "messy" financial results with some disappointing growth trends in the last two years, the attraction of TPIC is its significant market opportunity. The company shares data that its global onshore market share of wind blade deployments has climbed to 31% from 24% in 2018, and from 15% in 2016.
This includes close relationships with key customers from the wind turbine OEM producers like Vestas Wind Systems A/S ( VWDRY ), General Electric ( GE ), Nordex SE ( NRDXF ), and privately held "Enercon Wind energy Ltd" which together represent 77% of the global onshore wind market outside China. The idea here is to continue being a trusted supplier while partnering on the next generation of technology.
On the demand side, there are several growth drivers. Beyond utility-scale wind farms, the automotive sector through energy storage and EV charging needs is seen as a tailwind for renewable energy. Several incentives within the U.S. Infrastructure and "Inflation Reduction Act" support wind directly.
According to estimates, total U.S. wind installations would need to climb by 4x from 2020 levels to achieve the stated 2035 "zero-carbon energy goals". Globally, the demand is expected re-accelerate over the next several years including strong activity in Europe.
Putting it all together, we're looking at TPIC as a turnaround opportunity where the company is capable of generating higher margins while underlying demand works as a "tailwind" for stronger growth.
While adjusted EBITDA is expected to be positive for 2023 around $60 million as per the company margin guidance, EPS is expected to remain negative through 2024. By this measure, 2023 will still be somewhat of a transition year as the company deals with restructuring efforts.
In terms of valuation, that EBITDA forecast implies an EV to forward EBITDA multiple of around 15x, which is reasonable in our opinion considering the expectation for stronger earnings next year and beyond.
Final Thoughts
Looking at the stock price chart, we highlight TPIC has been trading in a relatively tight range over the last several months. The setup here where sentiment improves based on the stronger outlook may be enough for the stock to break out higher.
A resilient macro backdrop where interest rates stabilize and inflationary trends ease could be enough to work as a catalyst in this segment. The upside for the stock is that top-line sales outperform which would help pull forward to a path to more sustained profitability. We're bullish.
On the downside, the biggest risk we see would be a deterioration of global growth. Weaker-than-expected sales trends would force a reassessment of the earnings outlook and open the door for a leg lower in the stock. The EBITDA margin and utilization levels will be key monitoring points over the next few quarters.
For further details see:
TPI Composites: Restructuring Plan Supports A Bullish Outlook