The market dropped precipitously this morning after the Institute for Supply Management – Chicago announced an unexpected drop in its business barometer. The Chicago Purchasing Managers’ Index fell to 46.1 in September, down from a reading of 50.0 in August (readings below 50 signal contraction). The reading was far below economists’ expectations, the lowest of which was a reading of 49.5, and shows the still dire straights of the economy – especially that of manufacturing which has relied on government stimulus to keep factories humming. With government programs, like Cash-for-clunkers, coming to a close, the weak underlying economic conditions are once again exposed.
The US reading comes in sharp contrast to the re-emerging growth of the developing world. The HSBC China Manufacturing Purchasing Index, also released this morning, fell slightly in September to 55.0 (from 55.1 in August), but still represented the sixth consecutive month of manufacturing expansion in the country. The Chinese economy is on solid footing, and continues to benefit from investments in infrastructure as well as programs designed to help initiate more internal consumption (rather than a reliance on exports to the US and other developed economies). As we’ve repeated at nauseam, beyond a few exceptions, growth companies will need an expanding footprint in the developing part of world in order to exhibit real growth.
Our portfolios are chock full of such recommendations and today we profile one company that is benefiting from China’s growth: Fast Track’s American Superconductor (AMSC).
American Superconductor is benefiting not only from continued Chinese manufacturing investment, but also from the country’s focus on renewable energy sources, namely wind. Strong Chinese demand for the company’s wind-power systems has recent driven the company into profitability for the first time in its 18 year history. The company saw sales in its fiscal first quarter grow over 80 percent versus the year-earlier period to $73 million, causing management to raise its full-year guidance to $260 million to $270 million (an improvement of almost 50 percent versus 2008). The first quarter marked the company’s second profitable quarter in a row, and has put the company on track for its first profitable year.
The company’s success is largely owed to contracts stemming from Sinovel, China’s largest wind-turbine maker. Sinovel has placed numerous orders with American Superconductor, and in July accelerated a $417 million supply agreement. This morning, AMSC shares were boosted more than 10 percent by another contract with Sinovel – this one a $100 million contract to supply the electrical components for Sinovel’s 3-megawatt turbines from March through year-end 2011. The contract, and potentially others like it could help the company outshine its recently raised guidance.
Even with today’s move, American Superconductor shares are still attractive. While trading at a higher price-earnings multiple (40 times next fiscal year’s estimated earnings), continued Chinese investment in alternative energy appears to be a sure bet. The result will be further orders for American Superconductor’s products, and earnings growth that could easily outpace expectations. We continue to recommend AMSC as a high risk/high reward play on alternative energy.
