Best stock to invest in – Broadwind: Major Order, But Still Looking For The Right Size

Best stock to invest in

by Debra Fiakas CFA

Last month wind tower manufacturer Broadwind
Nasdaq) announced a major new tower order from a major U.S. wind
turbine manufacturer. The customer was not named, but the likely
suspects are not hard to round up.  General
(GE:  NYSE) is the largest U.S.-based wind
turbine producer with about 9.1% of the total world market according
to BTM Navigant, an industry research firm.  While
substantially smaller in size, Northern Power Systems, PacWind and Xzeres are also important
competitors in the wind energy industry.   Clearly General
Electric as a customer has the greatest financial strength and
therefore more credibility  –  two traits that have been
in short supply at Broadwind of late.

The company’s current chief executive officer, Stephanie Kushner was
recently promoted to the post from the position of chief financial
officer, a position held since 2009.  No new CFO has been
named.  Broadwind also recently announced the resignation of
the controller and intentions to “consolidate corporate financial
functions.”  The C-suite at Broadwind is not well populated
these days, leading some shareholders to question leadership and
direction.  The big new order helps calm critics.

Valued at a total of $137 million, the recent wind tower order calls
for deliveries over a three-year period ending in 2019.  That
means roughly $45 million in additional revenue per year 
–  a major win for the company.  In the twelve months
ending March 2016, Broadwind reported a total of $196.7 million in
total sales.  Thus the new order represents a 23% increase in
incremental annual sales.

Broadwind reported a net loss of $10.1 million in the twelve months
ending March 2016.  However, EBITDA (earnings before interest,
depreciation and amortization) was near breakeven at $111,000 and
operations generated $13.1 million in cash flow.  Barring
poorly negotiated margins on the new contract, Broadwind should be
able to at least post positive EBITDA if not a net profit as the
company works through the new contract.  There is only a single
analyst with a published estimate for Broadwind.  Surprisingly,
that analyst reacted to the new contract announcement with even
deeper quarter losses than before in 2016, as well as a deeper loss
in the year 2017.

The forecast reduction was not encouraging for shareholders, but
most appear to have shrugged off the opinion of a single
analyst.  The stock had already been on an up-trend since
February 2016, riding the wave of renewed interest in U.S.
equities.  The stock gapped higher on the new contract
announcement in early June 2016, but has since given up the entire

As encouraging as new business appears, the fact that Broadwind has
not found an operating configuration that produces profits is of far
greater concern.  The company recently decided to divest of its
services division, retaining the towers and weldments
businesses.  Eliminating the unprofitable services division
will be beneficial, but it will not fix the problems in the
remaining business that is also unprofitable.  Five years ago
the company initiated a restructuring plan to right-size its
manufacturing base and reduce fixed costs.  Two production
facilities were idled and 10% of the workforce was laid off. 
The efforts have led to positive cash flows in continuing
operations, but net profitability remains elusive.  Indeed, the
gross profit margin shrank to 9.2% in the year 2015.  

Debra Fiakas is the Managing
Director of
Crystal Equity
, an alternative
research resource on small capitalization companies in selected

Neither the author of the Small Cap
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

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