Can TPI Composites Bounce Back in 2022?

Shares of TPI Composites (TPIC -1.50%) have plunged nearly 70% over the past six months following some questionable decisions from management and a tough business environment during the pandemic. Can the company regain investor confidence in 2022? In this segment of Backstage Pass, recorded on Dec. 17, 2021, Fool contributors Jason Hall and Toby Bordelon discuss. 

Jason Hall: Toby, to answer your question, what's another company that just can't -- management just can't wait to put this year behind them. I'm going to say TPI Composites, ticker, TPIC. This is a company I've talked a lot about. I've actually been really high on the company for quite some time.

But if you go back to the beginning of the year, like the expectations were super-duper high. I'm going to do a screen share here in just a second and show you the stock price. TPI Composites, what do they do?

They make wind turbines. They're a contract manufacturer, they make wind turbine blades for the world's biggest wind turbine manufacturers, with the exception of a couple of the big Chinese manufacturers, the companies like the large pure-plays and then like GE and some of the consolidated companies, the conglomerates, this is the company that makes their wind turbine blades and a lot of their markets. The reason why they do that is because wind turbine blades are huge.

You can only sell so many wind turbines and it's the kind of manufacturing that you really have to be at scale to do it, to make good margins. That means everybody can't manufacture in every market that they service, because these things are so expensive to manufacture. You can't ship them everywhere in the world because they are so big and expensive to ship.

TPI Composites carved out a really, really good business like being like the manufacturer of choice for everybody in the markets where they're not doing their own core manufacturing.

Expectations coming into the year, were super-duper high. Let me share this real quick. Here's the stock price at the beginning of the year. Stock price was way up. It surged. Company said early in the year or actually they said in the fourth quarter, so late in 2020, low expectations for 2021.

It's going to be just a part of the cycle. It's not going to be great. Then they beat their own guidance, pretty handily when they reported earnings. Then they said guidance was low, it's like guys, keep your expectations low. Then the stock took a bit of a beating.

Then hasn't been a great year as they pretty much told us. It just wasn't going to be a very good year and this stock was down 30%, 35%. Then what do they do? They spend way too much money.

They whip out the corporate credit card, they put way too much money on the corporate credit card.

They get outside of their covenants on their debt. What does that mean? When you're outside the covenants of your debt Toby, what does that mean? That means that who can do what?

Toby Bordelon: That means your lenders can, in some cases call the debt, they can send you into bankruptcy.

Hall: They can call you in.

Bordelon: They can take the company over in some cases. Sometimes this triggers like a turnover in the board. This is a bad situation to be in, you don't want to be there.

Hall: If you think about it, you're in a capital-intensive business, you use leverage and it's a cyclical industry. The one thing as a manager you have to do is manage your balance sheet very well and be careful about how you allocate capital.

These guys screwed it up. That's just the best way to put it. They had to call the lender of last choice here. You never want to call Oaktree Capital Management because you know what Oaktree Capital Management can say, you need $400 million?

Sure, we can get it to you in 24 hours. We're going to charge you 11% interest. Oh, it's the lowest interest rate environment essentially in history? So, you said you need $400 million? It's going to be 11% interest.

That's basically what's happened. Now the stock is down 70% since the beginning of the year. If you look at it from the high, it's down 80% from the peak in February. It's been a brutal year.

These guys just want this year to be over to get through the holidays, get into next year because the expectations are super-low. The expectations or the cycle for wind turbine demand is still going to be relatively low.

Not a ton of allocation planned, no big tax credit things happening anywhere in the world that creates manufacturer incentive to get deals done. It's just going to be a regular year on the down part of the cycle.

That sets them up to at least do OK. If it's just whatever year then they are going to be fine. Their expectations are so low. But if the year is even a little bit good, these guys are going to look like heroes. That's assuming that the people in charge are still the same people, next year.

Bordelon: Maybe not be. We'll see.

Hall: I hope they learned their lesson because I'm still bullish on the business. I really am. I've got management on a short leash. l really do.