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Broadwind Energy: The Turnaround Is Underway
Feb 28 2013, 05:03 | 22 comments | about: BWEN
Disclosure: I am long BWEN. (More...)

Broadwind Energy (BWEN) makes wind towers and provides maintenance for the wind industry, provides gearing systems & maintenance for the oil & gas and mining industries, and offers large-scale welding services. The company's stock has had a spectacular ride both up and down, with a five-year split-adjusted trading range of $290/share to $1.66/share. Hemorrhaging losses, Broadwind brought in a new management team approximately two years ago to get things back on track, and through a combination of cost-cutting/restructuring and diversification that team is now succeeding.

Due to competitors who have gone out of business and newly implemented tariffs on imported towers, Broadwind is essentially "one of the last men standing" in the wind tower business. Thus, as the Production Tax Credit (PTC) for wind energy has now been extended for any project that begins construction in 2013, it should be able to enjoy both increased market share and significant pricing power for at least the next several years. In fact, shortly after this month's announcement of a major new order, the company indicated in its Q4 earnings presentation that it doesn't even expect to realize the brunt of the benefit from the PTC extension until 2014 and 2015, and yet despite this it still raised 2013 revenue guidance to $215-$225 million. Thus, at Broadwind's February 27th closing price of $3.10/share and with 14.1 million shares outstanding, the company's market cap is just 0.2x the midpoint of 2013's revenue guidance and its enterprise value (see the discussion below) is even cheaper.

The wind industry is now lobbying for an additional five-year extension/phase-out of the PTC and I suspect it might get it, as wind subsidies have the support of nearly all Democrats (especially the President) and a number of "windy state" Republicans; if this happens, it should put Broadwind's tower business on solid footing through 2020. Meanwhile, the company anticipates that its gearing and services businesses will continue to grow to the extent that by the end of this year, 50% of Broadwind's revenue will be derived from outside the wind tower business.

Due to artificially high levels of depreciation that won't completely run off until 2015, the best way to evaluate Broadwind's profitability for the next couple of years will be via EBITDA less maintenance capex rather than by GAAP earnings. On its recent earnings call, management projected 2013 EBITDA of $9-$12 million and further indicated that if the remaining upcoming restructuring savings were in place now rather than over the next year or so, the 2013 EBITDA guidance would have been $12.5-$15.5 million; therefore it's the latter figures that I'm using as a "normalized" EBITDA range. Management also indicated that maintenance capex runs around $4 million/year.

As of year-end 2012, the company had lowered its net debt to $10 million and subsequently contracted to sell its vacant South Dakota facility which will generate an additional $8 million of net cash, thereby reducing debt to a level that's negligible at approximately $2 million. Additionally, the company has NOL carryforwards of $154 million (soon to be protected by a "poison pill") to which I attribute a cash value of at least $20 million. Thus, the company's enterprise value is at least $18 million cheaper than its market cap.

What's my 12-month price target? Well, 7.5x $10 million (the $14 million mid-point of "normalized" 2013 EBITDA less $4 million in maintenance capex) plus $20 million for the NOLs would be $6.70/share. Alternatively, if a larger industrial company were to buy Broadwind for just 0.5x revenue (banking on substantial SG&A consolidation/eliminations), using the $220 million midpoint of the 2013 guidance, the price would be $7.80/share. A more typical multiple of 1x revenue would provide twice that price.