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No. of Recommendations: 9
I was quite suprised to see AMSC dip SO low on the news.

This is probably the reason:

In conjunction with today's announcement, AMSC is updating its guidance for fiscal year 2010 (ending March 31, 2011). The company expects that its revenues will be toward the lower end of its $430 million to $440 million forecast range. Due primarily to anticipated one-time costs related to the acquisition, AMSC is reducing its net income guidance from a range of $48.0 million to $50.0 million, or $0.99 to $1.04 per diluted share, to a range of $44.0 million to $46.0 million, or $0.91 to $0.95 per diluted share.

Saying the acquisition is accretive to earnings and then guide down is double-speak that, although it can be logically explained, is not what the common man might understand.

TMF had this to say about the event:

So what: The fall stems from American Superconductor buying a smaller rival known as The Switch Engineering. Though the deal is expected to add to the bottom line immediately, investors are clearly not jazzed about this deal.

Now what: Of course, the company lowered its 2011 guidance to account for acquisition costs. I still don't see how it could be a bad move to get into Switch's core market of wind-powered generators, with financial windfalls starting almost right away.


This is my Take: The Switch has permanent magnet generators (PMG). Everything I read says that PMG's are the near-term future for wind farms needing a direct-drive configuration. They are highly efficient and low maintenance. Until the superconducting side of SeaTitan can be perfected and the cost lowered, PMG is the next generation of technology.

Here is a snip from TheSwitch.com

We at The Switch are following the development with interest. Not only are we among the few companies in the world mastering permanent magnet technology, but we are also among the very few able to supply direct-drive generators above 5 MW based on proven technology.

Denmark has first-mover advantage and as Vikings intends to fight to maintain its global market leadership, focusing on large offshore turbines.


This does raise one nasty question. Most of the largest offshore wind farms being built use PGM's. I wonder if AMSC isn't covering its bases in case its SeaTitan turns out to be a SeaLillipution?

The Switch started operations in November 2006. That's a young company for such rapid sales growth -- and profitability. The 2009 annual report is a very interesting read because it sets an aggressive 2012 sales growth target, notes special products like its in-place-replacement PMG system, and sets an industry objective of being #1 by 2012:

http://www.theswitch.com/files/2010/05/News_AR-2009_final-2....

The solar part of the business could be a sleeper but the fuel cell effort doesn't fit AMSC's existing profile. The Switch looks like a very successful rapid-development company that takes university ideas and turns them quickly into products. Their culture of rapid development sounds very good. I just hope there isn't a clash with AMSC's culture.

This purchase puts AMSC solidly inside all three of the largest wind turbine manufacturers in China. This allows AMSC to cross-sell its other products and allows superconductor applications to be sold when AMSC has them.

AMSC is paying 17.6-times earnings for The Switch (a company with an ROI of 6.5% in its fourth year of operation). That seems like a reasonable price for a complimentary technology that makes Windtec product catalog that much more robust. AMSC has the $186 million on its balance sheet for the cash portion of the purchase. If AMSC wants to borrow some of this, that's OK with me. Rates are low and The Switch is generating enough net income to help pay for the borrowing.

I like the purchase. The market may start to like it after the June 3rd analysts conference. The deal is scheduled to close 8/31/2011.

W.D.
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