Two Green Energy Companies Moving In Different Directions

By Stephen D. Simpson, CFA | November 04, 2010 AAA

Consider the curious cases of American Superconductor Corp (Nasdaq:AMSC) and Headwaters (NYSE:HW). Although not in competition with each other, the stocks of these two greener energy players have done an interesting dance over the past 14 years, as their fortunes and futures have shifted. Where American Superconductor was once the speculative pie-in-the-sky play, it now has a growing wind power business, while Headwaters continues to struggle with its transition into a manufacturer of green building products.

The Quarters In Hand
This recently-completed quarter provides a good example of the different fortunes of these two companies. Headwaters reported only 4% revenue growth, as good growth in the now-small energy tech business could not substantially offset sluggish performance in the construction/building product segments. Adjusted EBITDA was up 11%, while reported earnings were hurt by impairments related to the company's coal cleaning operations.

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On the flip side, AMSC reported revenue growth of 36%, as the company's wind power business nearly reached $100 million in quarterly revenue. Gross margin improved almost 200 basis points, and the company reported a small increase in backlog. The company's order book now has about $956 million in revenue - more than two years at the current run-rate.

The Road Ahead
For now, it looks like AMSC has a long and wide runway. The company's high-temperature superconductor wire/cable business still has not achieved commercial viability, but the company recently booked a commercial order in Korea. Moreover, it is not really hurting the company to continue to develop this potential home-run call option on better energy transmission.

More practically, the company's decision to diversify into wind power has proved to be transformative. The company provides wind turbine parts, wires, motors and other components and has been leading the way towards larger and larger offshore turbines. The company is beholden to Sinovel (a Chinese wind power company) for roughly three-quarters of its revenue, but Sinovel continues to grow rapidly in China, and the company is working with other potential customers like Hyundai. (For more, see Looking Offshore For Wind Power.)

Focusing on the guts of wind power has been a good move, and the company has done well against rivals like General Electric (NYSE:GE) and lesser-known Chinese companies like Xinjiang GoldWind, Baoding Tianwei Baobian, and China High Speed Transmission. Likewise, the company recently announced a new product in solar power (SolarTie) for grid connection that is low risk (it is basically a modified version of some wind power products they sell) and yet holds some potential.

Where AMSC seemed like a long shot in 2005, Headwaters was riding high as a clean coal company with a call option in intriguing chemical catalysts. At that point, though, the company decided to dive into the building/construction products markets (in the midst of an unprecedented building bubble, no less) and took on debt to do it. To say that move was ill-timed is a grand understatement.

Now it is unclear where Headwaters goes next. There are ample rumors that Headwaters is looking to sell the energy technology and/or catalyst businesses, and some concern that the EPA could change the rules on the use of fly ash in building products (Headwaters uses fly ash as a substitute for Portland cement). On top of that, the construction market is still flat on its back and other construction materials rivals like Eagle Materials (NYSE:EXP) and Vulcan Materials (NYSE:VMC) are expanding their recycled and green building material product lines.

The Bottom Line
American Superconductor now has what Headwaters once has - a very healthy valuation, big expectations, and the attention of analysts from large brokerages. The question is if they can live up to it. Wind power is not the panacea that many believe and the company needs its superconducting businesses to eventually work out to offset the inevitable rise in competition in the turbine business.

For Headwaters, the outlook is much more mixed. A rebound in construction activity would certainly salve a lot of wounds, but it's an open question if it can compete effectively against major suppliers like Cemex (NYSE:CX) and establish differentiated green building products. In the meantime, clarity on the company's vision for its energy and catalyst businesses would be welcome.

AMSC is definitely a stock for the "growth today" crowd, while Headwaters could hold some interest for risk-tolerant investors who can patiently wait for a turnaround. (For more, see The Characteristics Of A Successful Company.)

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