Stock Analsys: Broadwind Energy (BWEN)
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Yesterday Broadwind Energy announced their third quarter 2014 results. I can't mince words here. To call the quarter disappointing would be foolish. It was a downright disaster and the stock price was obliterated for it. Earnings came in at $-0.12 - yes, that's a negative - on revenues of $60.3M. That's a miss from guidance of 40%! That wasn't enough bad news, though. To finish us off with the upper cut, they also downgraded 2014 guidance on revenues and earnings. So we've gone from expectations of the company making a profit in 2014 (albeit only a few cents per share) to a loss of around 30 cents. As such, the stock was swiftly delivered a 20% hair cut on it's already declined prices and has suffered another trim of over 1.5% today. There wasn't even a chance to sell. Management also announced a $10M share buyback that has been approved by the board, but please don't consider this to be any sign of strength. I don't expect it to all get spent and its purpose is only to buy back shares it's been distributing via incentive programs and things of that nature - something that's done to keep the size of the float level, as opposed to a meaningful buy back.
So what does all of this mean? Why/how did this happen and is there anything worth salvaging? First, this happened because of poor management - in both execution and understanding of their employee's capabilities. They had a plant with a high number of inexperienced workers who were asked not only to ramp up production, but to also fit in a new design - which means a number of changes to the processes and floor plans. This one factor has accounted for the entire miss via lower than expected productions, extra pay from overtime needed, and other miscellaneous expenses related to the efforts - like sending people from a productive plant to help turn this around. This is what you call the perfect example of poor execution. That being said, the management team has recognized the mistake and started making changes immediately to correct them and, at least, appear driven to correct this quickly. They're going to have to show us they can do it though. One final thing to note is that the change in guidance isn't all at the fault of Management. There is a 11 cent per earnings factor into the fourth quarter to settle old SEC concerns from prior management that has finally come into play. Management has always planned on this being settled this year, but never had a clue of the impact. They couldn't predict this, so it wasn't in the numbers. That impact on them missing a profitable year, I'm willing to give them a pass on and cuts how much they miss profits by about one third.
Is there anything worth salvaging? I need to be honest. I don't know. Again, some of this has more to do with us actually seeing swift improvements and corrections. The management team is stressing their confidence that the patterns are in their favor, however, when looking at the gearing division, they had huge growth from the oil and gas industry. Now that Oil has dropped as much as it has, what happens to demand? Management says they're watching oil prices, however, are they talking to their customers? Do they have a feel for demand shifts? I feel like they're waiting to react instead of understanding the industries they serve. We're still waiting on the PTC, but we can't gauge the likelihood of it getting passed. Their only guidance is a single lobbyist who thinks things will pass. That's not a strong endorsement because lobbyists generally think they'll get their way. Finally, the share price has been cut in half since it's highs earlier this year and we haven't seen these prices since December of 2013, when significant insider buying by both the CEO and CFO forced stock prices to shoot up from about $5 all the way up to a little under $10 in a couple short weeks. I can honestly see the stock dipping into the $5 range again, however, there is a small buyback on a small stock that could provide a false floor. What I'd really like to see is more insider buying to reinforce their beliefs that the company is on the right path. I believe that would put a floor in this stock and make it move up into the $8 range at least. Anything else takes time to see results, I'd expect. At this point, I'm willing to bide just a little bit of time to see what happens. I feel there are better odds of at least some upside from here than to sell at these levels. That being said, this stock is downgraded to a 3 until I have anything that can build confidence. Too much has changed here to make me feel like there are strong growth opportunities at this time. I expect earnings for 2014 to be a loss of 30 cents and revenues to be about 248 million. EBITA - something we need to watch with a capital intensive company such as this will be about $11M. The company has 2015 backlogs for the Towers industry, but with this performance and the risks that hover over the other sectors, there's no way I can predict 2015 as I should be. Right now, My price target is $6.75. Since this company has no earnings, I have little to base that price off of. However, this is about equal to 1 times 2014 EBITA growth from 2013.
So what does all of this mean? Why/how did this happen and is there anything worth salvaging? First, this happened because of poor management - in both execution and understanding of their employee's capabilities. They had a plant with a high number of inexperienced workers who were asked not only to ramp up production, but to also fit in a new design - which means a number of changes to the processes and floor plans. This one factor has accounted for the entire miss via lower than expected productions, extra pay from overtime needed, and other miscellaneous expenses related to the efforts - like sending people from a productive plant to help turn this around. This is what you call the perfect example of poor execution. That being said, the management team has recognized the mistake and started making changes immediately to correct them and, at least, appear driven to correct this quickly. They're going to have to show us they can do it though. One final thing to note is that the change in guidance isn't all at the fault of Management. There is a 11 cent per earnings factor into the fourth quarter to settle old SEC concerns from prior management that has finally come into play. Management has always planned on this being settled this year, but never had a clue of the impact. They couldn't predict this, so it wasn't in the numbers. That impact on them missing a profitable year, I'm willing to give them a pass on and cuts how much they miss profits by about one third.
Is there anything worth salvaging? I need to be honest. I don't know. Again, some of this has more to do with us actually seeing swift improvements and corrections. The management team is stressing their confidence that the patterns are in their favor, however, when looking at the gearing division, they had huge growth from the oil and gas industry. Now that Oil has dropped as much as it has, what happens to demand? Management says they're watching oil prices, however, are they talking to their customers? Do they have a feel for demand shifts? I feel like they're waiting to react instead of understanding the industries they serve. We're still waiting on the PTC, but we can't gauge the likelihood of it getting passed. Their only guidance is a single lobbyist who thinks things will pass. That's not a strong endorsement because lobbyists generally think they'll get their way. Finally, the share price has been cut in half since it's highs earlier this year and we haven't seen these prices since December of 2013, when significant insider buying by both the CEO and CFO forced stock prices to shoot up from about $5 all the way up to a little under $10 in a couple short weeks. I can honestly see the stock dipping into the $5 range again, however, there is a small buyback on a small stock that could provide a false floor. What I'd really like to see is more insider buying to reinforce their beliefs that the company is on the right path. I believe that would put a floor in this stock and make it move up into the $8 range at least. Anything else takes time to see results, I'd expect. At this point, I'm willing to bide just a little bit of time to see what happens. I feel there are better odds of at least some upside from here than to sell at these levels. That being said, this stock is downgraded to a 3 until I have anything that can build confidence. Too much has changed here to make me feel like there are strong growth opportunities at this time. I expect earnings for 2014 to be a loss of 30 cents and revenues to be about 248 million. EBITA - something we need to watch with a capital intensive company such as this will be about $11M. The company has 2015 backlogs for the Towers industry, but with this performance and the risks that hover over the other sectors, there's no way I can predict 2015 as I should be. Right now, My price target is $6.75. Since this company has no earnings, I have little to base that price off of. However, this is about equal to 1 times 2014 EBITA growth from 2013.
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