Investing legend and Motley Fool co-founder David Gardner often says, to paraphrase, we should invest in the future we want to see. As a parent, I want to see a world that's safer, cleaner, and with more economic opportunity for all. These basic ideas underpin much of my own investing philosophy, and a key reason why I look for companies that can do well, while also doing good.
TPI Composites (TPIC 5.50%) certainly fits that bill, providing a key component that drives a massive share of global renewable energy. Keep reading to learn why this under-the-radar company you've probably never heard of could be the most important in the wind industry, and why it might be perfect for your portfolio.
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A hidden leader in the wind industry
The wind turbine industry is dominated by General Electric (GE 2.23%), Siemens Gamesa, and Vestas Wind Systems (VWDRY +1.52%), and privately held Goldwind. Of these, Vestas has the largest global market share, with 15% of wind turbine sales in 2019.
Yet all of these companies (with the exception of Goldwind) along with many smaller wind turbine companies, rely heavily on TPI Composites to make their turbines spin. TPI is the largest manufacturer of wind turbine blades in the world, with some 18% of the global market share for onshore wind turbine blades.
According to a recent presentation, TPI Composite customers have 52% of the global market share in onshore turbines, and 99% of market share in the U.S. This puts the company in a wonderful position.
Why TPI is so important to wind turbine manufacturers
Why do these companies use TPI Composites as a manufacturing partner? Two reasons. First, despite the big growth in renewable energy, demand for wind turbines is notoriously cyclical, and can rise and fall sharply from one year to the next based on demand for utility-scale project development. This makes it more challenging for companies to both meet peak demand, and keep costs low during cyclical downturns. Working with TPI helps wind turbine makers do both.
Second, turbine blades are absolutely enormous, and can be longer than the wingspan of the largest commercial airlines. It's not cost-effective to ship over large distances, and even the companies with the most market share may not have enough volume in certain geographies to justify blade manufacturing operations.
TPIC Revenue (TTM) data by YCharts
This is where TPI comes in. Since it partners with many wind turbine companies, it can build a blade manufacturing plant that serves multiple customers. This is a huge strategic advantage that will continue to add value around the world, as pockets of opportunity develop for the wind industry.
TPI's future is more than just wind
Renewable energy is about more than just the power grid, and TPI is positioned to be a leader in another industry that's historically relied heavily on contract manufacturers: transportation. The company has agreements with some of the biggest names in clean transportation, including bus and commercial vehicle leaders Proterra and Workhorse, heavy truck giant Navistar, and global automaker General Motors.
As a leader in manufacturing the lighter, stronger materials it takes to continue pushing the limits on wind turbines, vehicle manufacturers are turning to TPI to develop and manufacture composite frames, bodies, and components for their zero-emission vehicles.
Why TPI is worth buying now
On one hand, with its share price near the all-time high, investors might be a bit skittish about buying TPI Composites right now. I get it, particularly with its financial results deteriorating this year. TPI has reported a $72 million loss over the prior 12 months. It takes more than just being a business that makes the world a little better to be a worthy investment. Investors want to make money, too.
Looking at the longer-term trend, I expect TPI will return to profitability relatively soon; it's the only independent turbine blade manufacturer with a global footprint, and turbine makers are relying more heavily on contract manufacturers now than ever. Between TPI's technical capabilities and geographical scale that creates very high barriers to competitive entry, the company has a number of durable competitive advantages.
Moreover, cash flows are stronger than you might expect. TPI generated $32 million in operating cash over the past year, and its $47 million in negative free cash was the product of a record level of capital investments over the past year. TPI is spending on growing its capacity and capabilities, and that should result in a bigger, more profitable business in the future.
Trading for about 0.7 times sales, TPI is actually still a little bit cheaper than its average since going public. Once those new assets it's been spending to build start generating more cash flows, today's price could end up looking cheap in a few years.
