Shares of wind blade manufacturer TPI Composites (TPIC 2.03%) fell by 20.4% in February, according to data from S&P Global Market Intelligence. That steep decline occurred following the release of a disappointing earnings report near the end of the month.
The market's issue with the results comes down to the company's 2021 earnings guidance. For the year, management forecast adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) in the $110 million to $135 million range, on sales of $1.75 billion to $1.85 billion. The EBITDA guidance range was lower than many had expected, and implies weaker margins than investors might have hoped for.
The issue comes down to the removal of five production lines in China. Furthermore, during the earnings call CFO Bryan Schumaker said that he expected "the other 10 lines to be operating at a lower utilization during the back half of the year." Also, Schumaker expects "lower utilization in Q4 for several of our lines in other regions. "
The latter condition is a result of "a short-term overcapacity issue with a few of our customers" while the former is due to "certain of our customers shifting production away from China to mitigate geopolitical risk and increasing costs associated with doing business in China."
The market for wind power is still strong and its long-term growth looks assured. However, the disappointing guidance serves as a reminder that all growth markets go through periods of volatility and flux. That speaks to the overcapacity issue referred to by Schumaker. The situation is being further complicated by customers wanting to shift activity out of China, which compelled TPI to close production lines there and prepare for lower utilization in the fourth quarter.
These are both issues to be taken seriously, but on the other hand, it's possible that some of the production capacity taken away from China could be relocated to other TPI locations, such as India.
As ever with TPI, the key is to generate long-term supply agreements (LTSA) and also take advantage of the shift among wind turbine manufacturers toward larger blades -- something that benefits TPI. The company sells to all the major wind turbine manufacturers, and investors should keep an eye out for extensions to existing agreements and/or new LTSA wins in 2021.
If such deals occur and the issues forecast for 2021 prove temporary, the future could still be bright for this company.