Citron updates American Superconductor (NASDAQ:AMSC)

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What is a Power Module Company Really Worth?

For the past two months, Citron has maintained its opinion that the business of selling power modules to the wind industry does not classify a company as a “wind play”, but more accurately an industrial commodity.  Meanwhile, sell side analysts have ignored all warnings, as well as large insider selling and questionable SEC confidentiality requests cloaking the company’s single largest piece of projected business.  Citron will now put forth the one piece of evidence that shareholders cannot afford to ignore.  As for the analysts, ignoring things is standard practice.

 

On August 5, American Superconductor revealed its most recent quarter’s earnings to Wall St., and its results were chilling.  With yet another losing money quarter and declining gross margins, it seems to be business as usual for AMSC.  Yet, here are a few interesting tidbits which everyone has seemed to ignore.

We Would Tell You … But Then We Would Have To Kill You.

In a unique request made two weeks ago, American Superconductor asked the SEC’s permission to withhold key information regarding their huge deal with Chinese wind turbine manufacturer Sinovel as “confidential”.  This is a trick they learned when doing business with the Navy… but Sinovel is not the Navy.  Noting that this one customer is 2/3rds of their entire revenue stream, and the order implies wind farms of a magnitude never before seen on earth, Citron suggests that AMSC’s motive for seeking confidentiality is unlikely to be in the best interests of its shareholders.
http://www.sec.gov/Archives/edgar/data/880807/999999999708034116/filename1.pdf
Confidential treatment of Sinovel deal 8-K filed June 11, 2008  ( until June 5, 2013 )
Exhibit 10.1
Filed 7/30/08
http://www.sec.gov/Archives/edgar/data/880807/000119312508132049/dex101.htm

So what is AMSC really worth?  Don’t ask us …. ask the industry

Until recently, there was uncertainty about how to value the manufacturer of makers of power modules to the alt-energy sector.  Are they commodities as suggested by Citron (worth 1.5 to 2x sales), or do they deserve the nosebleed “alt-energy” multiples (5x to 7x sales) that we see AMSC enjoy in the marketplace?  The industry has now spoken:

In the industry, Xantrex (XTX:Toronto) is a well known direct competitor to AMSC, and as such has been identified for years in AMSC filings.  As a matter of fact, look who Hoovers lists as their #1 competitor:

http://www.hoovers.com/xantrex/–ID__118450–/free-co-factsheet.xhtml

In a piece of news that every sell side analyst seemed to ignore, Citron notes the sale of Xantrex to multi-billion, multi-national Schneider Electric, for appx $500 million:

http://www.reuters.com/article/innovationNews/idUSL854952120080728

  American Superconductor Xantrex
Revenues (ttm thru June 2008) 132.3m 281.4m
Revenues Projected 180 m 312 m
Gross Margin (mrq) 29.1% 33.1%
Customer base Sinovel is 2/3rds of revenues Diversified
Product base Power controllers and components for wind turbines Power controllers and components for wind and solar and other applicatons
Profitable No, consistently Yes, consistently
Market multiple of revenues 7.0 x revenues –
(with stock price at $30/share )
1.6 x  revenues –     on recent sale to Schneider Electric

Based on AMSC’s revenue guidance for the year at $175-180 million, a 1.5 to 2.0 multiple yields a valuation for AMSC of around $10 per share

There are a few obvious differences between Xantrex and American Superconductor.

  1. Xantrex is profitable
  2. Xantrex makes power modules for both wind and solar (its largest market segment). http://www.xantrex.com/products.asp
  3. Xantrex has a more diversified product base and a diversified customer base.

(AMSC’s superconductor revenue fell 28% to about $3.9 million revenue for the quarter.  At less than 10% of its revenue, there is no realistic way to assign a significant valuation to that side of the business.)

Citron suggests this very timely and highly comparable valuation point explains the excessive insider selling we have seen this year from AMSC.  Furthermore, it finally gives the bulls and the bears a fair comparable.

Add to this the company’s disclosure, that AMSC’s right to sell electrical components to wind turbine licensees is only a “right of first refusal”, meaning that pricing will continue to be subject to competitive pressures at the time of sale.  Citron also notes that no less than four large Chinese industrial manufacturers of power modules appear to be on track for commercial production by 2010.

There is not much more Citron can say about the future valuation of AMSC … but the market has spoken.