Power Play

Last week's historic blackout boosted a number of alternative-energy hopefuls. This time, American Superconductor (Nasdaq: AMSC  ) , a maker of high-temperature superconducting products and materials, was quickest out of the gate. The stock jumped 43% Friday to lead the Nasdaq gainers.

Fuel cell developers Plug Power (Nasdaq: PLUG  ) , FuelCell Energy (Nasdaq: FCEL  ) , and Ballard Power (Nasdaq: BLDP  ) enjoyed jumps of their own, as did microturbine maker Capstone Turbine (Nasdaq: CPST  ) . (For our community's view on the blackout and its ramifications, head over to our busy Energy & Utilities discussion board.)

This reaction is fairly typical in the wake of energy "crises." So, too, are the subsequent reversals, as investors predictably lose interest. What's striking in this case is that, with products either years away or targeting markets not necessarily ready for them, these darlings of the last bull market already boast high price-to-dream ratios.

The companies themselves, meanwhile, are burning through their available cash and credit, in a world where the cost of producing a kilowatt of energy from alternative sources -- for whatever reason -- is simply not competitive. It's also a world in which traditional utilities appear either unwilling or unable to make capital investments in technology that may save them money in the long run.

Still, might not any of these niche players be worth at least an informed speculation? To find out, let's take the temperature of the one whose voltage meter jumped highest last week.

High-wire act
American Superconductor specializes in superconducting materials that, when sufficiently cooled, lose all resistance to direct current (DC) and nearly all to alternating current (AC) electricity, resulting in huge increases in efficiency. The company has mastered the critical, expensive, and difficult process of cooling these superconducting materials, which it then uses in a variety of products aimed at improving all aspects of electric power transmission.

The company has long targeted the national electricity transmission grid. When I wrote One Powerful Stock in February 2001, American Superconductor's long-term goal was to retrofit every mile of electrical transmission wire in the U.S. with its high temperature superconducting (HTS) wire, while also supplying superconducting magnetic energy storage and high-power switching. Its innovations allow power lines to carry more stable voltage at higher thermal limits, with greater reliability and quality.

At the time, CEO Greg Yurek acknowledged that customers -- cash-strapped utilities -- were not budgeting for his company's products. True to form, revenues the following year dropped 30%, which at its then-steady burn rate left American Superconductor with but two quarters of cash and equivalents. Gulp.

Applying the Rule Breaker strategy to this massively risky stock, I concluded that the risks outweighed the potential rewards. Revenues were falling, not rising, and there seemed no way that the stock could deliver explosive returns -- the "10 times your money in five years" (10x/5y) type of reward necessary to compensate for such risk.

Turning the ship
But just when things appeared darkest, a series of Navy and other government contracts sparked an 80% revenue jolt in the fiscal year ending last February. And last fiscal year's $21 million in sales is on track to more than double this year to $45 million to $50 million. Q1's $17.1 million in new orders and contracts alone represents an incredible 81% of lastyear's total revenues.

The star performer? The SuperMachines unit that applies the company's HTS technology to manufacture energy-efficient motors, condensers, and synchronous condensers. The division turned in its first quarterly profit -- a quarter earlier than projected.

Unfortunately, the money situation hasn't improved since 2001. The company finished the quarter with $11.1 million in cash and equivalents (plus another $1 million in long-term investments), with an $8 million burn in Q1 (net cash used in operating activities plus capital expenditures). It will need to issue debt, stock, or both this quarter, but an $87.4 million sales backlog -- four times last year's revenues and 75%-94% higher than this year's estimates -- should bolster the case for buyers.

Help is on its way
In fact, the company has lined up $50 million in financing, in three parts: $10 million in convertible notes; a $10 million credit facility secured by accounts receivables and inventory; and a $30 million five-year loan secured by other assets. Management expects to close the deal by the end of September. But even if financing falls through, the company confirmed in its recent 10-Q filing that it could obtain a conventional mortgage on its manufacturing facility to carry it through the next 12 months. Taking the new cash and granting Yurek his target burn rate would mean three to four years of cash -- and that's assuming no growth in revenues or further cost reductions.

I don't like that the customers are the government (the Navy, Energy Dept., and Tennessee Valley Authority) and utilities like DTE Energy's (NYSE: DTE  ) Detroit Edison -- parties whose expenditures take years to come through and involve all sorts of regulations. Nor do I like that much of the company's growth is tied to prototypes, not actual products. But because history is filled with companies whose technology got its boost from cutting-edge military or other government projects, this is not grounds for dismissal -- especially not when the company's HTS wire and other products address transmission bottlenecks on the electric power grid.

In all, it's still a very risky proposition, but if the financing deal closes and revenues continue growing apace, the company has a fighting chance to become self-financing and prosper. But even then, I have a hard time imagining how this will adequately reward investors from today's prices. After all, such rewards appear at best several years away and maybe farther, raising the opportunity costs of investing today.

I'm keeping an open mind -- especially should we see more funding for, and less talk about, upgrading the national power grid. Keep this one on your watch list and we'll monitor quarterly changes in order backlog. Meanwhile, take part in the sharing on our active American Superconductor discussion board. If revenues keep accelerating and expenses stay down, the stock may be an informed speculation worth making. And if you had the foresight to buy when the stock was in the low single digits, congratulations!

The buzz
I hope you are enjoying the last weeks of summer. Is there anything more wonderful than the next month, when the evening insect chorus rises louder and louder, in a futile fight against the end of its requiem? Just plain magic.

Have a most Foolish week, and thanks for reading.

The Motley Fool is celebrating its 10th anniversary with 10 Ways to Make More Money Now!

Writer and senior analyst Tom Jacobs (TMF Tom9) welcomes your comments at TomJ@Fool.com especially if they come with money. Find Tom's other Fool.com columns in his archive. He owns no shares of companies mentioned here but owns others you can find listed in his profile. The Motley Fool is investors writing for investors.


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