Value Investors Club / BROADWIND ENERGY INC (BWEN)

Description

Thesis:

I project BWEN will be among the best performing stocks of the year, and estimate it will increase at least 400% as investors just look at the stock, and realize the tremendous mistake the stock market has made in under-valuing this entity. There are also many other catalysts that could drive an upward revaluation. There has been the perfect storm of positive events that have occurred for BWEN, yet the stock has barely reacted, and is near multi-year lows. I am going to keep this write-up relatively short so VIC members get it ASAP, because the idea is so compelling and easy to understand, it does not take that much explaining. You could also feel very good about owning BWEN, because it is a socially responsible investment, whose primary business (manufacturing wind towers for the Wind Energy industry) reduces a tremendous amount of CO2, SOX, NOX, and particulates from our atmosphere. I also believe the socially responsible nature of the investment could help drive upward revaluation, as the increasing number of investment funds focusing on companies with positive social characteristics become aware of BWEN stock.

BWEN is a compelling buy, with short-term upside potential of 400%+, and longer-term upside of much more. BWEN represents a very rare opportunity to own a high-growth, under-the-radar stock, at a deep discount valuation, and in a high growth industry. BWEN is TREMENSOULY under-valued on every metric, and has several near-term catalysts that should propel the stock higher. The company operates primarily in the Wind Energy segment of the Alternative Energy Industry, which is at a significant positive growth inflection, driven by the compelling economic and environmental benefits of using Wind Energy, as a source of virtually unlimited power with near-zero hazardous emissions. For the first time in history, Wind Energy has recently achieved parity, or even in many instances superiority in costs vs fossil fuel electric generation, which should lead to unprecedented growth for decades to come.

Valuation:

BWEN is among the most undervalued stocks I have seen in over 25 years of investing. BWEN is trading at a 2020 P/E, EV/EBITDA, and FCF yield of 3.8x, 2.21x and 38%, on my estimates. BWEN is trading at a 2021 P/E, EV/EBITDA and FCF yield of 2.3x, 1.4x and 56%, on my estimates. The company is also valued at a price to tangible book value (P/TBV) of only about 0.57x. My short-term target price for the stock is about $8.50 per share, which equals a FY21, P/E, EV/EBITDA, and FCF yield, of 10x, 5.7x, and 13%, resulting in 400%+ short-term return potential. The multiples I applied to BWEN to achieve an $8.50 target price are at a significant discount to the company's alternative energy peer group. I also add $26 mil [$1.50 per share] into my valuation to reflect the value of the company’s NOL’s. To derive the NOL value, I applied a 90% discount to BWEN’s NOL balance of $258 mil. There is significant upside above my $8.50 target in the mid-to-long-term, as I expect the company to achieve significant long-term revenue and EPS growth. I also expect the market to ultimately apply a higher multiple to BWEN vs my target price, due to the growth characteristics of the company. Although a move of BWEN to $8.50 seems like a big jump for a stock that is currently around $1.70, it is in line with where the stock has traded in past history when the Wind Industry was strong. In 2017 BWEN stock hit $10 when the industry was in less of an up-cycle. The primary difference now, is that the Wind Industry is in the initial stages of a much stronger super-cycle, with significantly better longer-term growth prospects. BWEN is also much better positioned to benefit from this up-cycle because the company has diversified its business with additional customers, and has been stream-lined and optimized over the last 3 years.

Why Does This Opportunity Exist?

The dramatic under-valuation for BWEN exists for several reasons;

1) It is an underfollowed nano-cap which is not well known, and has no direct domestic comps.

2) BWEN management has intentionally down-played the company’s current strength and EPS power, because they recently received a $9.5 mil Payment Protection Program (PPP) loan, and thus need to portray a cautious public stance for political reasons, because they don’t want to risk any political blow-back for receiving these funds. I think BWEN management did the right thing by applying for a PPP loan, because at the time they were not sure if their manufacturing facilities would be closed or seriously impacted by Covid. However, BWEN has barely been impacted by COVID, because the company’s domestic based manufacturing has been categorized as an essential service. BWEN is actually seeing some meaningful benefits from Covid, and lower interest rates, because this has caused increased demand for wind projects due to their attractive financial and return profile. The strong industry and company specific tail-winds, led BWEN to report record 1Q20 financial results on 5/8/20. However, the company struck a cautious tone, and withdrew guidance for 2020, due to “uncertainty” associated with Covid. From any reasonable analysis, it seems obvious that the only reason management struck this tone, is because they didn’t want to pound their chest and raise guidance after receiving a PPP loan. If you actually analyze the latest quarter’s results, and listen to the commentary on the call, BWEN is significantly ahead of their prior guidance and they are near sold-out for the year, and should report FY20 results significantly above consensus.

3) BWEN stock has irrationally traded down with other energy stocks, as energy prices have declined, although this action makes no rational sense since the company’s EBITDA is not impacted by swings in commodity prices. In fact, demand for Wind Energy projects have increased with the decline of energy prices, due to wind projects stable return profiles.

The Company:

BWEN was formed in 2008 through a series of transactions, and is currently the largest domestic manufacturer of wind towers, which comprises about 75% of the company’s revenues. BWEN derives the remainder of their revenues from selling a variety of other heavy fabrication, gearing, and industrial manufactured products to industries such as wind, mining, material handling, and oil and gas. BWEN manufactures and sells virtually all of its products in the US, which advantages them in terms of supply chain and incentives. BWEN sells its products to many of the world’s largest wind turbine company’s, and a variety of products to other leading companies across markets they serve. BWEN’s primary problem over past years has been over-capacity in the industry, dumping of towers into the US market by foreign companyies which compressed margins, and down cycles in the Wind industry. All of these issues have currently resolved, and BWEN is finally in a position to realize its massive potential and the positive financial leverage from its operations. What has changed, is that tariffs have recently been implemented to stop the foreign dumping, which has increased BWEN’s margins and demand, coupled with a massive general up-cycle within the Wind industry. BWEN’s financial leverage is evidenced from its record 1Q20 EPS results of $0.06. Just annualizing these results would result in EPS of $0.24 and a P/E of 7x. However, there are many reasons why these results should improve significantly in the coming quarters.

The Industry:

I have been studying the Wind Industry for over 25 years, and I project the domestic Wind market is in the initial stages of a dramatic growth cycle that could last decades. This cycle is being driven by a convergence of factors including the following; 1) Technological innovations and increased volume, has dramatically decreased the cost profile of wind power. For the first time in history wind power is now comparable or superior to fossil fuel power in many instances making it a no-brainer choice for future electric generation; 2) Wind has been accepted as among the only viable solutions to achieve our carbon and pollution reduction goals; 3) Political support for Wind has increased dramatically, resulting in favorable tax and other incentives, significantly decreasing Wind Energy costs below most other sources of power; 4) Lower interest rates have made the returns on Wind projects (low double digits locked in for 20-30 years) look much more attractive, increasing demand for these projects; and 5) A series of large offshore wind projects will begin to be manufactured in the US in 2023, which could ultimately increase the size of the Wind market by 50% in the coming years. The US has untapped offshore Wind potential which could economically generate 30% of our electricity, which is just starting to be tapped. Wind is now the no-brainer energy choice for today and the future.

Balance Sheet and Cash Flow:

BWEN has the potential to become a cash cow, and I estimate it will generate an adjusted FY20 and FY21 FCF of $11 and $15 mil, which equals a free Cash Flow (FCF) yield of 38% and 54%. BWEN requires very little CAPX going forward of only about $2.4 mil per year, because the company is comfortable with their current manufacturing capacity. BWEN also has a very strong balance sheet with net debt of currently only about $7 mil, and significant liquidity. To note, when you look at liquidity you should add into BWEN’s cash, the portion of the PPP loan they recently received and which that they will not have to pay back [$6.5 mil]. This loan is not reflected on BWEN’s 1Q B/S because the loan occurred after the quarter. BWEN also has about $259 mil NOLs, so the company will not pay meaningful taxes for the foreseeable future. This $259 offers tremendous option value for the company, because it is attractive to a potential aquirer. The NOL also would enable BWEN to make very accreative aquisitions in the future, because they could shield virtually all of the income from an aquisition from taxes indefinetly. Argualbly, this $259 mil NOL has an option value greater than BWEN's current market cap, and investors are getting the rest of the company for free, or a negative value.

Income Statement:

I estimate BWEN will generate 2020 revs, EBIDTA and EPS of $210 mil, $16, and $0.44. One of the keys to the BWEN investment thesis, is that their numbers will be extremely strong, despite the fact that management pulled guidance for 2020. I believe the primary reason management pulled 2020 guidance, is because they would have had to raise their guidance significantly due to 1Q20 results and strong order-flow, but they did not want to do this for political reasons, due to their recent receipt of a sizable PPP loan. However, BWEN stock is still vastly undervalued even if numbers are much less than I forecast. My thesis of stronger than expected numbers seems to be obviously true by simply looking at 1Q20 results, and listening to the hard information BWEN gave on their EPS call, the prior FY19 EPS release, and other recent press announcements. During BWEN’s 4Q19 financial results (released on 2/27/20), management gave guidance for 2020 revenues in the range of $200-$210 mil, and adjusted EBITDA of $12-$14 mil. Management also stated on the call that they had already booked 80% of their wind tower orders for FY20. Since that time BWEN announced a $19 mil order on 4/28/20, when the company’s CEO (Eric Blashford) stated that:

“We continue to experience improved demand for wind tower sections, given increased global investment in the development of clean, sustainable energy sources. In 2020, we anticipate the United States will add nearly 15 GW of onshore wind capacity, an increase of more than 40% compared to the prior year. As a leading precision manufacturer of heavy fabrications, Broadwind is uniquely positioned to support growing investment in wind and other clean technologies...”

Furthermore, in BWEN’s 1Q20 EPS release, where they pulled guidance, the CEO noted that,

“Our first quarter results reflect significant year-over-year growth in both revenue and margin capture, resulting in a return to profitability in the period. Due to our ongoing customer diversification efforts, our order book improved materially across each of our reporting segments during the first quarter, while total backlog increased by more than 50% on a year-over-year basis, given increased demand for our wind tower, gearing and industrial fabrication product lines… In recent weeks, we announced more than $24 million in new tower contracts, contributing to improved visibility in second half 2020 production.”

“We sold more than 300 wind tower sections in the first quarter, an increase of more than 65% compared to the prior-year period… Improved plant utilization contributed to a significant expansion in segment operating margin during the first quarter, when compared to the year-ago period. During March, we entered into a new supply relationship with a large global wind turbine manufacturer. With the addition of this customer, Broadwind expects to supply tower sections to three of the top four global wind tower OEMs in 2020 serving the U.S. market, positioning us as a key participant in the development of clean energy-producing infrastructure. Looking ahead, offshore wind remains an emerging growth opportunity for us, one where our precision manufacturing expertise and deep industry knowledge position us to capitalize on increased global investment in sustainable energy sources.”

When I add up the new orders BWEN received with the pre-existing order book, it demonstrates that the company is near fully booked for its wind towers, which were assumed in the guidance the company gave on its 4Q19 earnings release. Additionally, BWEN is generating higher margins vs its 4Q19 guidance due to strong supply/demand characteristrics in the industry and the implimentaion of new tariffs to stop foreign dumping. In my conclusion, which is obvious to anyone who looks closely at BWEN, the company should generate FY20 revenues and EPS of around $210 mil and $0.44, vs consensus (consisting of one analyst who does not seem to focus on the company) of $207.5 and $0.17. The company should grow EPS and revenues significantly above that base in FY21 and beyond. However, my numbers don’t need to be correct for BWEN stock to appreciate tremendously. Even if I were to only annualize 1Q20 results, assuming no additional margin and revenue expansion, (which seems already locked-in), BWEN would report FY20 revenues, EBITDA and EPS of $198 mil, $15 and $0.24, and the stock would currently be valued at a FY20 P/E, and EV/EDITDA of only 7x and 2.5x

Catalysts:

There are several catalysts for BWEN including the following; 1) Continued strong EPS performance above expectations and the eventual reissuance of financial guidance significantly above consensus or even at consensus; 2) The potential that investors begin to better understand the company, and revalue it as a high growth alternative energy stock; 3) Announcements of large tower contracts due to strong wind demand, firming up the BWEN's order book well into FY21; 4) the potential for announcement of additional government incentives for wind energy, or infra-structure programs; 5) If the market begins to discount the potential of a Democratic candidate winning the presidential election, which would likely propel incentives and the growth of the domestic Wind industy much higher; 6) The potential for BWEN to be acquired, or for activist investors to emerge.

Risks:

The primary risks for the company include the following: 1) The unstable nature of the legislative and regulatory bodies which govern the wind incentives programs, could lead to a reduction or increase in the benefits BWEN derives from these programs. The mechanisms and laws that govern incentives

programs are inherently unstable due to the political nature of these programs. However, I believe there is probably more upside than downside risk to these programs, due to increasing bipartisan concern over hazardous emissions and greenhouse gases. 2) Supply chain or other disruptions associated with Covid, although most of the impacts form this virus have seemed to be positive for the company thus far. 3) If my thesis proves to be incorrect about the growth trajectory of the Wind industry.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

See above.

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			2020	2021
Price:	1.68	EPS	0.44	0.71
Shares Out. (in M):	17	P/E	3.9	2.4
Market Cap (in $M):	28	P/FCF	2.5	1.8
Net Debt (in $M):	7	EBIT	10	15
TEV (in $M):	35	TEV/EBIT	3.5	2.3