Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
After throwing investors for a loop with its November earnings report four months ago, windmill blade maker TPI Composites (TPIC 0.46%) sounded another warning note last week in its Q4 (and end-of-year) report. Despite growing both sales and billings, TPI sank into unprofitability for the fourth quarter, sparking a two-day selling spree that sent the stock down 9%.
But then, a miracle happened. JPMorgan upgraded shares of TPI.
Check out the latest earnings call transcript for TPI Composites.
Image source: Getty Images.
Why JPMorgan just upgraded TPI Composites
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On Thursday, TPI reported a quarter of strong sales and billings growth (up 26% and 14%, respectively), but paired that with a $8.8 million loss. My Fool.com colleague Neha Chamaria said the lack of profits stemmed from "nearly $20.5 million" spent to upgrade windmill blade designs and start up new production lines, but also noted that this investment sets the stage for TPI "to double its wind-blade sales by 2021" as new production comes on line.
A second, perhaps more disturbing revelation from TPI's earnings call was that the company is experiencing difficulties on two continents. Workers are striking at its plant in Matamoros, Mexico, demanding higher pay. At the same time, TPI is also encountering issues with a customer in China, which faces "financial challenges" and may be unable to pay its bills.
Taken together, these revelations raise the prospect that TPI will pay higher costs (for labor in Mexico) at the same time as it takes in less revenue (from a potentially insolvent customer in China).
Now, that's a double whammy of bad financial news that will do TPI's income statement no favors if either or both risks come to pass. But in today's note, investment banker JPMorgan argues that the 9% pullback in TPI's stock since earnings came out has priced in the risks the company faces. Accordingly, the analyst is upgrading TPI shares to overweight and assigning a $34 price target.
Risk...
In last week's earnings report, TPI missed analyst estimates on both sales (it was expected to report $301.5 million, but actually sold only $290.1 million) and earnings (TPI's $0.26-per-share loss exceeded the per-share loss of $0.04 that Wall Street had projected). And yet, as JPMorgan explains it, TPI stock sold off Friday and Monday more because investors are worried about rising costs (in Mexico) and a potential revenue hit (in China) than because of a single quarter of missed earnings.
What's more, at least one of these worries appears to have been put to bed. In a filing with the SEC yesterday, TPI confirmed that after reporting earnings, it "reached an agreement with the labor union representing certain employees that work at the Company's Matamoros, Mexico manufacturing facility to end its labor strike. The Company reopened its Matamoros, Mexico manufacturing facility on March 3, 2019 and is in the process of starting up its manufacturing operations."
...and reward
So, problem solved -- or at least one problem solved. I must admit that I'm still a little leery of the fact that, after its steep decline in profitability in Q4, TPI now has trailing-12-month earnings of only $5.3 million -- and negative free cash flow -- neither of which compares very favorably to its $949 million market capitalization.
That being said, analysts polled by S&P Global Market Intelligence predict that TPI's profits will rebound mightily this year, rising from $0.15 per share in 2018 to $1.35 per share in 2019 (a ninefold increase). Profits could rise a further 66% in 2020, and on average, analysts who follow the stock project a 35% annualized earnings growth rate for TPI over the next five years -- which actually isn't all that unreasonable if wind-blade sales do in fact "double ... by 2021."
On top of all that, TPI has the tailwind (if you'll forgive the pun) of the Green New Deal being pushed by freshman Congresswoman Alexandria Ocasio-Cortez in the House of Representatives. While critics scoff at the cost of revamping the entire U.S. economy to eliminate the production of greenhouse gases, and the Green New Deal is unlikely to pass in the form it's been presented, politics is the art of compromise -- and even a drastically scaled-down version of the Green New Deal holds the potential to drive the fortunes of windmill blade makers like TPI Composites higher.
In sum, I agree with JPMorgan on this one: After a 9% rout in the shares, a lot of risk has now been priced into TPI Composites stock -- but a lot of opportunity remains.
