Fire Sale - Hopefully not burned beyond recognition

Yesterday (April 5), American Superconductor [AMSC] revised their projected Q4 revenue to $42m from $115m because one of their major customers, Sinovel Wind, rejected shipments of wind turbine generator components. Trading was halted at 25 following the news, and resumed after hours at around 14/share for a drop of more than 40%. The price recovered slightly to 14.75 by the end of the day today (April 6).  The P/E ratio before the announcement was 29, and dropped to 17 once trading resumed. The company also announced they were deciding whether revenue recognized in three previous quarters would need to be restated because it was included in shipments that were rejected.

Sinovel is one of a few very large AMSC customers, about 30% of their revenue. This is a very scary event that will certainly impact their business. Actual quarterly results are due to be announced in May.

The high-growth "story" stock got an unexpected tragedy written into the story. And this has several of the things that the market hates: bad news without warning, and uncertainty of how bad the news is (they may restate five quarters of results).  The market, predictably, has overreacted by shedding 40% of the company's value.

This follows the recent acquisition of the Finnish company, The Switch, which licenses wind turbine designs and produces power handling components. The components compliment AMSC's current offerings, and will give them a much broader base to sell their own components into. The acquisistion was said to be immediately accretive to revenue and earnings. In addition, there have been seven recent insider buys. These guys have a tailwind and they know it.

Since the market likes certainty, you can bet that there will be an improvement in the shares short-term as the company announces more and the market finds out how bad the bad news is. And in the medium term, they will work their way through the setback, and continue on with the tailwind from the acquisition. This might slow down their growth but everything is in place to accelerate once this is resolved and forgotten.

American Superconductor could be forced to cut production

Something similar happened recently to another "story" stock, STEC, that manufactures high-performance Solid State Drives for high-end servers and workstations. Their primary customer announced in August, 2009 that they would "delay" contracted shipments from one quarter to the following one. Nothing was cancelled.  STEC was trading near $40 on the news, then dropped to 12.25 following. Since then it dropped as low as 10 in after-hours trading following the quarterly earnings announcement which included the first impact of the delay and a weak estimate of the impact on the following quarter. Earnings are now back on track and the stock has been rising into the 20-25 range.

AMSC may follow a similar pattern of recovery, seeing that it in a similar position. There are some mitigating factors, as well. STEC's sales slip was their one primary customer who is responsible for 80% of sales. AMSC's customer is a much smaller fraction - 30%. Its products are well-accepted and sell into a high-growth market. Server SSDs, however, are only just being adopted by customers.

The risk, however, is that nearly 50% of AMSC's sales are to three large Chinese customers. The Chinese are often quite aggressive about taking over production and technology from foreign suppliers, partners and competitors and moving it home to China. This could be part of a larger plan on the part of Sinovel to build parts in-house that they are currently buying from AMSC overseas. In that case, AMSC's business could be permanently impaired, even with the tailwind created by acquisition of The Switch.

As of the previous quarter (ending Dec 31), they had 243M in cash and short-term investments, much of it fresh from a secondary stock offering. That is supported by zero debt and opportunities to drive revenue from new customers acquired with The Switch.