American Superconductor Still Faces Big Challenges

On Friday, American Superconductor (AMSC 6.33%) will release its latest quarterly results. After the loss of its largest customer two years ago, the company has had to make a massive readjustment in its business model, and investors still aren't sure whether it can bounce back from that major setback.

Now, American Superconductor is looking at the solar-inverter market, which has gone through its own tough times but which has the potential to produce long-term profits. But as a small player, the company faces plenty of competition from a wide range of much larger rivals. Let's take an early look at what's been happening with American Superconductor over the past quarter and what we're likely to see in its quarterly report.

Stats on American Superconductor

Source: Yahoo! Finance, S&P Capital IQ.

Will American Superconductor ever power up its earnings?
Analysts remain pessimistic about American Superconductor's earnings prospects. Although they've narrowed their March-quarter loss estimates by a penny per share in the past few months, they've widened their expectations for a fiscal-year loss next year by $0.04 per share. The stock has been similarly gloomy in its movements, falling more than 8% since early March.

American Superconductor's challenges involve a sad story of deceit that highlights the difficulty in protecting intellectual property. In 2011, Sinovel, a Chinese wind energy company that was American Superconductor's main customer, refused to take delivery of a shipment of products and withheld payment for previous shipments. Allegations came out that a former employee of American Superconductor had sold company trade secrets to Sinovel, which allowed the Chinese company to develop its own alternatives to American Superconductor's technology and thereby made the relationship unnecessary. In lawsuits the company filed, American Superconductor is seeking enforcement of the contracts, which are worth about $700 million, as well as $450 million in damages in its trade-secret suit. But the journey through the Chinese legal system has been arduous, and with courts still hashing out jurisdictional issues, it could be years before the substance of American Superconductor's allegations goes before a court.

American Superconductor hasn't given up on wind, despite intense competition there. But neither its wind-turbine-related products nor its power-grid-technology segment has managed to produce the growth the company needs in order to survive. Despite a rise in revenue in the grid category over the past year, American Superconductor still needs more time to complete its shift away from the weak wind turbine business, and the company said in April that it doesn't expect to reach positive cash flow for another couple of years. Meanwhile, 3M (MMM 1.14%) has developed a grid-conductor technology that utilities can install on existing transmission lines rather than fully replacing them with American Superconductor's Amperium superconductor wire.

Moreover, other potential growth opportunities face similar competitive pressures. In the inverter market, Power-One (NASDAQ: PWER) represented a formidable opponent even before energy giant ABB (ABB 2.52%) agreed to pay $1 billion to acquire the solar-inverter company. For now, it appears that American Superconductor needs to focus on its grid segment in order to produce the growth it needs to rebound from its Sinovel setback.

In American Superconductor's quarterly report, watch for a litigation update as well as news about potential customers, especially in its grid business. Without substantial progress, the company's limited cash balance and continuing losses bode ill for shareholders in the near term.

Click here to add American Superconductor to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.