Tuesday, March 23, 2010

American Superconductor (NASDAQ:AMSC): Upgraded to Buy at Jefferies, Wunderlish highlights Sinovel orders

Jefferies is upgrading American Superconductor (NASDAQ:AMSC) to Buy from Hold with a $35 price target (unch) saying they view the current level of AMSC's stock price as a buying opportunity. The stock has been pressured since late CY'09 from a variety of issues including mgt maintaining FY'10 guidance against lofty expectations and concerns about a potential shake-out of the wind industry in China. They continue to like the story's operational momentum and leverage to Chinese wind growth. On a risk-return basis the firm believes the stock is trading lower than fair value.

Bear case unlikely, in Jefferies' view. Recent press reports have raised fears that gov't efforts to force a shake-out in turbine manufacturing will slow Chinese wind installations. Yet, China appears committed to rapid growth in wind having raised its target to 150 GW of installations by 2020 (from 25 GW today). In fact, efforts to restrict capital deployment in the sector appear targeted towards a glut of under-capitalized new entrants with limited technological expertise, not the industry leaders AMSC has signed development contracts and orders with. While AMSC does face a rev concentration risk (Sinovel makes up the majority of revs), it is also gaining traction with new customers, some from outside China, such as Hyundai
Heavy Industries, which plans to export turbines for the US mkt.

Guidance upside as a catalyst? The company gave first time FY'10 guidance in Nov. '09 ("more than $400M" and non-GAAP EPS exceeding $1.15). Since then the company has announced several new contracts and orders that could raise the outlook (see the text of this note for more details). While Street ests are currently ahead of these figures (revs/EPS of $420M and $1.18), with the stock down, the firm believes there is potential performance upside from a raise. Moreover, they note that recent announcements from AMSC on next gen turbine development suggest that subsequent years' growth may continue to be very strong.

- Also note that little known Wunderlich Securities is out also positive on AMSC saying the co shares announced yesterday that its largest customer had placed an initial order for electrical components for its 5-megawatt (MW) wind turbine. Separately, the company announced it had received one of many needed regulatory approvals for a electrical interconnection system that would use superconducting wire. Firm believes the
shares represent the best opportunity in a U.S.-based wind energy company. AMSC is experiencing more than two times the industry average growth rate, which, in the U.S., clocked in at a blistering 39% in 2009.

Largest customer, Sinovel, launches new product line with AMSC inside. AMSC is now selling electronic components for all three of Sinovel's wind turbine products. Although AMSC has made it clear for some time that it was developing Sinovel's 5MW wind turbine, this is the first formal announcement giving production time-frame and placing an order. Some investors were expecting Sinovel to move to Brand X electrical components and this announcement would seem to push that out to the distant future if ever.

5MW wind turbine order is the tip of the iceberg. This initial order is small but that is the way these orders start. Three years after introducing its first turbine, Sinovel ordered over a thousand electrical components. Wunderlich notes they would argue that the time between initial order and production is shrinking as both the market develops and as Sinovel's reputation grows. It is now the fifth-largest wind turbine maker in the world according to some sources. Reits Buy and $50 tgt for AMSC.

Notablecalls: When you have 'potential guidance raise' & 'Sinovel orders' in one note (ok, two notes), you're looking at AMSC up 6-8%, with $28+ level in play.

It's become a hated stock, mostly thanks to Citron Research touting the short thesis on the name, it looks good for a buy. A trade, if you will. There's a 26% short interest.

btw, I think the Street missed the Sinovel news yesterday.

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