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You may have noticed that A-Power Energy Generation Systems (Nasdaq: APWR ) has been on an absolute tear lately, with shares up 70% over the past month. Last week's Dubai dip was no match for this momentum. I've been remiss in covering developments at this company, and it's high time I got up to speed on the story. Let's see what all the fuss is about.
Reasons to be optimistic ... and skeptical
A-Power got off on the right foot early in 2009, forming a gearbox assembly joint venture with General Electric (NYSE: GE ) . The firm also opened China's largest wind turbine manufacturing facility around that time. Coming up light on revenue, A-Power's first-quarter results were far from a-mazing, but the company did raise its full-year earnings guidance by 10%, to $32 million. Seasonally slow first-quarter earnings coming in at just over $1.5 million pointed to some huge quarters to come.
I missed that latter point at the time. Then again, with a track record of overpromising results, I may not have given this guidance a lot of credence. To see what I mean, compare last year's earnings guidance of $35 to $45 million to actual results of $28.5 million.
Grow an overnight conglomerate? Just add sunlight (and natural gas)
In August, A-Power announced second-quarter earnings of $6.3 million, on par with the previous year. So far, no bottom-line explosion. The company also signed some interesting memoranda of understanding.
One said that the company would buy Japanese thin-film solar panel equipment manufacturer EVATECH, broadening A-Power's green reach. Another MOU had majority-owned Shenyang Power Group agreeing to construct an offshore liquefied natural gas facility. That's well outside the distributed energy generation realm, within which SPG was specifically formed to operate.
I can't help but be concerned that this company is overreaching. It's like A-Power wants to become the Chinese Siemens (NYSE: SI ) or ABB (NYSE: ABB ) overnight. You'd think they might try to cement their position in the capital-intensive wind turbine business before tackling new verticals. Getting into the solar or LNG business is no casual affair.
I guess with the government heavily subsidizing your expansion, you're more apt to build an empire. A-Power put up just 55% of the funds for the EVATECH purchase, with local governments covering the rest.
A Texas-sized turbine order
If anyone shared my concerns about the new company's new adventures in alternative energy, these were certainly overshadowed by the late October announcement that A-Power will supply up to 240 turbines to a proposed $1.5 billion, 600-megawatt West Texas wind farm in which SPG is a joint venture partner.
This news was enough to make steam come out of certain Washington lawmakers' ears. (Hey, maybe that's the solution to our renewable energy needs!) As a project that could potentially qualify for hundreds of millions of stimulus dollars, this wind farm put A-Power in the crosshairs of Senator Schumer from New York, who argued that the U.S. should source its own high-value turbines.
There were conflicting comments by various JV members as to whether the project would actually seek Federal grants. Austin's Cielo Wind Power (whose largest wind farm developed to date was 279 megawatts) said, quite definitively: "This project will not take place without the planned benefits of the American Recovery and Reinvestment Act." A-Power, however, claimed that U.S. stimulus funds would not be involved, and that Chinese banks would carry the load.
Perhaps just to be safe, A-Power and private equity partner U.S. Renewable Energy Group soon announced that the parties (or more accurately, SPG and US-REG) are going to build a wind turbine manufacturing plant in the U.S., with a capacity of 1,100 megawatts. That's the same as A-Power's giant plant in Shenyang!
A-Power has thus taken a page from Suntech Power (NYSE: STP ) and Yingli Green Energy (NYSE: YGE ) , as it looks to nip U.S. protectionism in the bud. The company actually goes far beyond the modest U.S. presence that these solar firms have planned.
A Foolish final thought
I frankly don't know what to think about this company. As of the August conference call, A-Power had constructed all of two wind turbines. I don't have any insight into the quality or cost competitiveness of these capital goods. The Texas deal is a huge win, suggesting that financial players consider A-Power to be "bankable," but the question still nags at me: Can the company execute on this scale, right out of the gate?
If you're buying shares of A-Power today, you're making that bet. Maybe you understand the company's technical capabilities better than I do, and know that we're looking at the First Solar (Nasdaq: FSLR ) of wind turbines. Without that conviction, I'm resigned to sit and watch this one play out from the cheap seats.