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The Verdict On AMSC: Avoid At All Costs

 April 07, 2011 10:17 AM

As I noted earlier, shares of American Superconductor (Nasdaq: AMSC) were taken out back to the woodshed by investors today. The maker of wind turbine designs and electrical control systems is off more than 40%.

What prompted the selloff? After the bell yesterday, management announced its biggest customer, Chinese wind power company Sinovel, is now refusing shipments of wind turbine components.

That's decidedly bad news in the short term. And even if you believe in the long-term prospects for alternative energy, I wouldn't buy the stock. Even if you put up the capital.

[Related -Futures Down As Market Awaits Economic Data; Research In Motion Ltd. (BBRY) Plunges]

Here's why…

The High Costs of Customer Concentration Risk

Sinovel accounted for 75% of American Superconductor's sales. (How's that for customer concentration?) Accordingly, American Superconductor needed to slash its sales guidance to account for the lost business.

The company now expects to post fourth-quarter revenue below $42 million. That's a 56% decrease from analysts' previous consensus estimate of $96.1 million.

Management also said full-year earnings will be "well below" its previous forecast.

Translation: After booking its first ever profit in 2009, American Superconductor's bottom line is likely to glow red again.

[Related -American Superconductor (AMSC) Amends Agreement With Institutional Investor; Shares Off]

Making matters worse, the lost business and plummeting stock price also jeopardizes the company's deal to acquire Finnish power technologies company, "The Switch."

Terms of the $265 million deal called for $186 million in cash and the rest in stock. But now the stock's worth considerably less. So if American Superconductor wants to complete the acquisition as planned by August 31, 2011, it's got two choices:

  • Tap the equity markets to raise more cash – a move that's likely to be met with little investor demand.
  • Or offer up considerably more shares, which would dilute existing shareholders further.

Since neither choice is particularly attractive, I wouldn't be surprised if the company backs away from the deal. Especially since a quick review of the SEC Filings suggests there would be no breakup fee (i.e. – a penalty).

Manning Up When Most Analysts Wimp Out

Most Wall Street analysts concur the latest developments don't bode well for American Superconductor's stock price. Amazingly, though, not a single one had the guts to issue a "Sell" rating…

Ben Schuman of Pacific Crest cut his rating to "Sector Perform"… John Hardy of Gleacher & Co. reiterated his "Hold" rating… And Jesse Pichel of Jefferies & Co. cut his rating to "Underperform."

At least James Ricchiuti of Needham & Co. was smart enough to buy time and change his rating to "Under Review." There's still a chance for him to man-up.

I don't need any extra time to review the circumstances, though.

This is not a short-term hiccup for American Superconductor. As Citigroup analyst Timothy Arcuri estimates, the company is now sitting on about six months of inventory. And there are no guarantees how much inventory, if any, Sinovel is going to purchase in the future from American Superconductor.

As I predicted two years ago, "green euphoria will ultimately be replaced with despair and massive losses." American Superconductor serves as recent proof.

And while some analysts expect shares to rebound to $16 or $17 per share, I think a valuation below $10 is more likely.

So unless you like rampant speculation, I'd avoid buying the stock at all costs.

Ahead of the tape,

Louis Basenese



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