TPI Composites Q3 Earnings: Key Takeaways for Investors

Shares of TPI Composites (TPIC -6.48%) plunged nearly 17% on Nov. 9, the day after the company reported its third-quarter earnings. What was it that spooked investors so much? In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Brian Withers and Jason Hall discuss the highlights of the company's report. 

Brian Withers: [laughs] These guys have an interesting logo. On the bottom, it says de-carbonize and electrify. Does that have something to do with what they do on a day-to-day basis?

Jason Hall: No. They are a McDonald's franchiser.

Withers: [laughs].

Hall: I'm sorry, Brian, I couldn't resist. Yes. The TPI Composites is a really interesting company. It's actually a company that I really like a lot. There's some concerns we'll get into in a second, but their primary business is manufacturing. They're a contract manufacturer of wind turbine blades. For most of the largest wind turbine manufacturers in the world. Except for some of the big players in China that don't use TPI. Here's the crux of where their business is valuable. These wind turbines, if you've ever actually seen one in person, it's like the Grand Canyon -- unless you actually see it in person, it's hard to fathom how big these things really are. The blades can be longer than a football field.

The logistics of getting them where you need to are very expensive and very challenging so you need manufacturing as proximate to where they're going to be deployed as possible. It doesn't make sense to manufacture in every market for every wind turbine manufacturer. There's just not enough volume, right? TPI has carved out a niche of being a contract manufacturer for just about everybody. The good thing is that they've got a really good position in the market. The bad thing is it's a very cyclical industry. Utility, upgrade cycle, the expansion cycle.

The capital deployment cycle is driven by a lot of things and can be up and down very much from year to year. It's really important to manage the balance sheet, to manage your capital deployments over time, and be conservative with the company. Here's the thing. I'm going to share the slide and I'm going to jump the gun here. I'm actually not going to share the slide, Brian. I'm going to share something else first. Can you see that with the highlighted text?

Withers: It first and then the text got a lot smaller. If you could blow it up just a tad, there we go. As of Sept. 30, there you go.

Hall: As of Sept. 30.

Withers: We were not in compliance.

Hall: Yeah, we were not in compliance with our total net leverage ratio financial covenants. Whenever a company says we were not in compliance with our covenants.

Withers: They spent too much on their credit card? Is that what it sounds like?

Hall: That's a way to put it or either we spend too much on the credit card or something went backwards with the business and now we are out of compliance. The short version is that they were in a position where they could've had their lender call in their loan. As a result of that, I don't know if you can see this. It's really big here.

Withers: 11%. 

Hall: Eleven percent per year, right? What is 11% per year? Can you see the TPI slide now or I need to reshare it?

Withers: I can share. No.

Hall: Let me reshare it. I'm going to jump back over to that now just to tell the whole story. Oaktree Capital is a company a lot of longtime Fools have heard about, right? It's been a recommendation in multiple services. It's been a winner. Sometimes you see the name Oaktree Capital and is like, oh cool, they're working with Oaktree Capital. Guys, it's not good when a company you own stock in is working with Oaktree Capital. Oaktree Capital is the lender of last resort.

They're really good at keeping cash for when companies have to get cash fast, like super-fast. That was the position TPI Composites got in. They needed a bunch of money to pay off their revolver quickly. The bottom line is it Oaktree was able to set the terms, that 11% interest. We were just talking about DOC at 2.625%. On one end, raising about the same amount of money and now we're talking 11%.

It's really concerning. Here's the thing I keep going back and forth about buying the stock even with this going on. Here's what's going on. I want to hit this from the beginning.

Revenue was up a little bit, missed earnings pretty bad, lowered their outlook to the bottom end of their full-year guidance because of what's going on with the cycle. They were able to realize a higher price per blade, but they sold 20% fewer sets year-over-year. A lot of that was expected. The bottom lines is the company had a pretty good quarter in the second quarter that beat expectations.

But expectations were really low. They missed expectations, they lowered guidance, they emphasized the thing that they told us earlier this year, and that's the 2022 is not going to be a good year. It's going to be a down year in the cycle. I think for patient investors, it's really worth thinking about TPI Composites right now, here's the caveat. Management's got to do better.

They run a very cyclical business that requires a lot of leverage. They are investing in the business because it is a long-term growth business. They've got to know better about investing in the right time. They had some problems with transitioning one of their lines, they lost. There were some deals that got pushed that affected them. They ended up way over their skis, the water went out and they were swimming naked, however you want to put it all those terms.

I think it's a great business I'm really concerned about management letting this happen. With this business, you have to have really good management that runs the capital well. That's the thing that has me thinking they need a little bit of time to earn any more of my capital, but you have to be patient. Toby just shared this comment and here's the funny thing Toby.

Withers: Yeah, that's what I was saying.

Hall: Toby said, Oaktree Capital is the company version of a payday lender. I said the exact same thing in a Slack message with Nick Rossolillo, not two hours ago. [laughs] Exactly the same thing, literally the same word. There's reasons to be worried right now about management's ability to execute.