Shares of wind blade manufacturer TPI Composites (TPIC -3.24%) got walloped over the past week because Wall Street didn't like its 2021 guidance. The earnings report, paired with a broad market pullback, put a lot of pressure on TPI's stock price, which is now down around 30% in just one week.
While TPI's 2020 results were actually quite good, there's concern that its growth rate is slowing. It's something no investor wants to hear, especially when the company isn't consistently turning a profit. However, TPI expects to return to profitability in 2021, and could be in the beginning stages of years of earnings growth. Here's why, TPI is my top renewable energy stock to buy in March.
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TPI's niche
TPI Composites is an independent manufacturer of composite wind turbine blades. Its blades contribute roughly 20% of electricity generated by onshore wind. TPI's clients are large original equipment manufacturers (OEMs) like Vestas and GE. When these companies land big contracts, they often rely on TPI to supply some of the blades. Wind energy is capital-intensive and logistically challenging. With various OEMs, operators, parts contractors, engineering, procurement, and construction (EPC) firms, and more, there tend to be several companies working together to successfully complete a project. TPI has significantly expanded its global reach over the past few years in an effort to make it the most affordable and convenient partner for the OEMs.
In addition to building facilities, TPI incentivizes its customers to spend more money under long-term supply agreements (LTSAs). These contracts allow customers to lock in set supplies of TPI's blades and save money the more they spend. The contracts are good for the OEMs, because they can better forecast costs and gauge which projects to pursue. They are also great for TPI, giving it predictable revenue so that it can manage its business. In addition to landing contracts for its new facility in India, TPI was able to extend contracts with GE, Vestas, and Nordex in 2020.
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Lower spending
The main reason TPI hasn't reported an annual profit since 2018 has to do with the company's spending. Gaining market share and increasing global manufacturing capacity isn't free. But management thinks these are the right moves for the company long-term.
To put spending levels into context, consider that between 2015 and 2019, annual capital expenditures rose 280% to a record-high $74.4 million as TPI invested in new facilities in Denmark, Germany, and India. The trend shifted in 2020, and capital expenditures decreased to $65.7 million. TPI is guiding for just $55 million to $65 million in 2021 spending.
Overall spending numbers are helpful, but a more useful figure is start-up costs. Digging into the numbers, the company plans on spending far less on start-up costs this year. For example, it spent $13.1 million in the fourth quarter of 2020 as it built out its India facility to accommodate contracts with Vestas and Nordex, as well as transition to bigger blades in Turkey and Mexico. Conversely, TPI is only guiding for $8 million to $11 million in start-up costs for all of 2021. It's also a drop in the bucket compared to the $44.6 million it spent in 2020 or the $68 million it spent in 2019. Simply put, TPI is transitioning into a period of higher profitability, potentially higher free cash flow (FCF), and steadily increasing revenue.
Looking ahead
Like other industries, wind energy has had its fair share of challenges during the COVID-19 pandemic. TPI's massive expansion overlapped with this difficult time, so the company has yet to see how its new business could perform in a good market. Despite these short-term challenges, the long-term future of renewable energy has never looked brighter. Solar and wind are now competitive with fossil fuels. Countries around the world are embracing cleaner energy as an excellent pairing to nonrenewable sources. Favorable governmental policy and positive public sentiment should continue to support renewables as well.
Small pure-play wind energy stocks can be hard to find, and TPI remains one of the best, despite the sell-off.
