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Sorry, but this is a long post!

http://biz.yahoo.com/bw/061218/20061218005444.html?.v=1

Revenue Guidance for Fiscal 2007 Reaffirmed

Net Loss Expected to Increase Due to Timing, Government Funding Issues and Higher Than Planned Expenses on Navy Motor Development Program

Revenue Forecast for Power Electronic Systems Business Increased


I am trying to decide if this is a buying opportunity. Here is what I think after reading the press release:

The good news:

It is possible that these delays could carry through most or all of the fourth fiscal quarter if the new Congress does not quickly resolve appropriations for 2007.

This sounds like bad news but the new Democratic Congress will have the opportunity to prove if they really are focused on reducing CO2 and funding alternative energy -- and I would classify superconducting energy efficiency as being an alternative way to deliver the same amount of power using less fuel.

Revenues on the DOE-LIPA cable project are reported under the company's AMSC Wires business unit, which is on or ahead of schedule in all other aspects of its business, including wire manufacturing scale up, wire shipments, and technology development.

Regardless of these funding delays, AMSC is moving forward
with this important project. The superconductor cable and ancillary equipment are currently in the final stages of manufacturing, the site preparation work is nearly complete, and the cable is expected to be commissioned in the summer of 2007 on Long Island.


I was talking to friends in Portland Oregon last night and they were without power for two days (and their daughter was still without power). While they do not have the power issues many cities have they are learning just how hard it is to function without power. As more people live through the experience (like those in LA who lived with rolling power outages), the more grid reliability becomes hot politically.

Long-lines are too hard to replace so it will be projects like this in Long Island where new technology can provide a clear fix. It is a political winner for the Democrats as they focus on fixing what the Republicans didn't have the political will to get done (and expect that kind of language all the way into the presidential election because it will be how they want to present themselves on domestic issues).

The Long Island project is the "proof in the pudding" that also puts pressure on utilities to step up and make the upgrades needed. When the CEO meets with the local Senator, it is no longer going to be acceptable for the utility to say they wish there was a clear way to fix big city electricity problems. The Senator is going to say, "We made the investment and have a real-life implementation. It is time for you to put away your hankie. Get out your wallet and fix the problem with U.S. technology."

Long Island is the cable project AMSC has to get done to generate a waterfall of orders.

The bad news:

The flip-side of the funding issue is that "going ahead" may require additional financing. Will it lead to the sale of new stock? Let's hope not because stock sales to fund development have really killed some stocks lately. [See MKTY today for an example of that.] Let's hope they can borrow $25 million or more to help them through the spending they will need to do for 2007. Selling stock is what they ought to consider if Wall Street discovers the company and sends the shares soaring. Borrowing is what they need to do now because they are so close to important products getting to market.

The net effect will be lower revenue recognition and cash collections in the company's third fiscal quarter. It is possible that these delays could carry through most or all of the fourth fiscal quarter if the new Congress does not quickly resolve appropriations for 2007.

It is good the company left the door open for this problem to drag on. That will stop the need for future negative press releases if this in fact happens. But, until revenue really starts to flow, the company will still be seen as a "story stock" and not a "ready for prime time player."

Acceptance of the 36.5-megawatt (MW) superconductor motor by the U.S. Navy in Philadelphia, which had been expected to occur near year end 2006, is now expected to take place in March 2007 based on the need to repair a crack in a non-superconductor component of the motor.

Besides costing $3 million, the delay to fix this will take months. Since this is a non-superconductor repair, it makes me wonder how long it would take to fix any problem once these motors are in operation. I am sure the Navy would not want a ship motor down for months. The damage here may be in the perception of the serviceability of these motors. Motors have been an area that excited me. Now I am questioning if it is years before this business really takes off because time-to-service issues will drive two or three more prototypes (or stop any more Navy prototypes because the Navy doesn't want to go through more prototypes).

Shipment of the first commercial SuperVAR synchronous condenser by SuperMachines to Tennessee Valley Authority (TVA) is expected to occur by the end of January 2007, about one month later than previously expected due to an issue with a portion of the product's electrical insulation, which has now been resolved.

While delays are to be expected with radical new technology, time is still money. The dark cloud over this stock, because of these delays, is going to be funding. A big bank loan -- over $75 million -- would remove the year-to-year funding concerns. The question is if someone is willing to write such a loan (without it being convertible into stock).

Revenue for both SuperVAR systems, which totals approximately $1.9 million, is now expected to be recognized in the first quarter of fiscal 2008 due to a delay by TVA in receiving third-party materials and components necessary to prepare the site for installation of the SuperVAR systems.

Since FY 2008 starts April 2007, this sounds worse than it is. Still, TVA is not looking at the SuperVAR as being the critical path component. If it was, site preparation would never be allowed to delay this project. This is one more sign that AMSC has "interesting technology" but no person is in a rush to get it installed. With the change coming in Congress, maybe priorities will change (although the same slow-go U.S. President is in place).

Revenues for the third quarter are expected to be approximately $9 million. The company's net loss for the third fiscal quarter is expected to be approximately $9 million to $11 million, or $0.28 to $0.33 per share.

Wall Street expected revenue of $12.39 million and a loss of $.20 a share (4 analysts). So, the company numbers are a big percentage miss (although on a very small revenue base).

The best for last...

...sales at its profitable Power Electronic Systems business continue to grow rapidly. The company today increased its revenue forecast for the Power Electronic Systems business unit from approximately $22.5 million for fiscal 2007 to approximately $25 million, which represents 67% growth year over year. None of this increase in revenues is associated with the acquisition of Windtec, which the company expects to close in January 2007. AMSC reaffirmed that it expects revenues for its Power Electronic Systems business, with the inclusion of Windtec, to double to approximately $50 million in fiscal 2008 with approximately 10% operating profits.

I purchased this stock because I expected it to be building up to a very exciting 2008. It is a good thing I took a 10% stake (not the full stake I planned). It looks like the news for the balance of this fiscal year will be dismal and that 2008 may ramp up slower than even I expect (excluding the big positive that Windtec will be).

The stock is now broken technically. Just above $9.00 looks like support. The next step down is the July low that is south of $7 a share. Since the company has the big breakthrough in temperature to work on, the $9 level is where I will make my next purchase. I still think I am too early (usually am) but this is a stock that will have any excellent chance to start catching good news in calendar year 2007. One such news item could be a cable manufacturer willing to build the wires for an up-front royalty fee of $10 million or more. That would be a great way to get money into the bank without selling stock or bringing in the bankers.

Just one person's opinion...

W.D.
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