The bad news just keeps coming for alternative energy company American Superconductor (Nasdaq:AMSC). Although the company thought it had made a major step forward when it diversified into wind turbine components, that plan has run off the rails recently. It remains to be seen whether the company can repair its relationship with a major customer and/or find a new and more stable business plan to grow the company.

TUTORIAL: Investing 101

The Latest Setbacks
American Superconductor reported a double-whammy related to ongoing issues with its biggest customer Sinovel. The company announced that not only will revenue be "materially less" than $355 million for the quarter (which itself was a big step down from prior hopes), but the company would need an extension to file its 10-K due to the probable need to reverse already recognized revenue.

Sinovel is the second-largest wind turbine maker in the world (and the largest in China) and has been a huge customer for AMSC's turbine components business, making up close to three-quarters of sales. Unfortunately, the company decided a few months ago to stop accepting any deliveries of components for 1.5MW and 3MW turbines and hasn't fully paid for prior accepted shipments. (For related reading, see What Does It Mean To Be Green?)

A Power-Play?
It is certainly fair for American Superconductor shareholders to wonder what the heck is going on with Sinovel and the relationship between the two companies.

True, the wind turbine business as a whole has seen some setbacks. Companies like Sinovel, Vestas (Nasdaq:VWDRY), Gamesa (Nasdaq:GCTAY), and Zoltek (Nasdaq:ZOLT) - whose carbon fiber is used in turbine blades - have all been under pressure as turbine orders have lagged in the face of lower government subsidies and ongoing improvements in solar panel efficiency.

Still, there are more than hints that there is something more going on here. Sinovel may well be having a hard time collecting from its own customers, but reading between the lines suggests a possible power-play between the two companies. Sinovel wants and arguably needs a better internal cost structure so that it can compete more effectively on price. It is logical from their perspective, then, to squeeze American Superconductor hard on price - threatening to end the relationship without concessions. Along those lines, it would hardly be a surprise if Sinovel itself was the source of the many and varied rumors that the company is designing AMSC's components out of future (and current) turbine designs. (For related reading, see Top 10 Green Industries.)

What Does AMSC Do Now?
If Sinovel is playing a game of chicken with AMSC - figuring that AMSC's survival is dependent upon ongoing business with them - AMSC may not have a lot of good options in the short term. The company is cutting headcount immediately to conserve cash, but the need to scramble for resources to finish the acquisition of The Switch Engineering Oy clearly indicates that AMSC has little strength in its bargaining position. What's more, the market's disappointment with these developments has crushed the stock, hurting the company's chances of raising capital on good terms and bringing out the ambulance-chasers in force.

Longer-term, there is no question that AMSC needs to broaden its customer base. Maybe there is a place for AMSC components in turbines made by Vestas, GE (NYSE:GE) -number three in the world - or Siemens (NYSE:SI). American Superconductor shareholders had certainly better hope so, as it is clear that Sinovel is no longer a customer with whom anybody should feel comfortable as a long-term partner in mutual success. (For more, see Can Business Evolve In A Green World?)

The Bottom Line
Maybe Sinovel really is an honest partner going through some hard times. Unfortunately, investors who operate with rose-colored glasses usually end up taking capital loss deductions on their taxes and wondering what went wrong. American Superconductor looks like a bargain in some respects, but investors should realize that those valuation ratios will get much worse as if or when the Sinovel business rolls off and nothing replaces it. What's more, the superconducting wire business is still not close to making a meaningful contribution to earnings.

For the sake of the business, management is probably better off swallowing hard and giving in to Sinovel - if it turns out that Sinovel is squeezing the company for concessions, that is. In the end, 20% of something is better than 100% of nothing and it is probable that there is some level of compromise that would keep AMSC profitable long enough to find some new business alternatives.

For investors, this looks like a situation of maximum pessimism - a good time to commit for those truly brave (and/or a little crazy) and capable of absorbing the losses of being wrong. In no way, though, is this a sure thing or anything like an investment - this is speculation and a very risky situation. (For more, see Five Companies Leading The Green Charge.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center