Earlier this month, I reassessed my cautious stance on A-Power Energy Generation Systems
Today, we learned that those Wall Street estimates -- and there are just a handful of them -- were extremely wide of the mark. A-Power's guidance came in at roughly $380 million in revenue and $45 million in net income. That represents pretty modest growth over 2009, while analysts were looking for a really big change. One individual, perhaps overly excited about A-Power's new wind turbine manufacturing capabilities, forecasted revenue at more than $600 million.
At least I proclaimed ignorance.
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Those institutional investors who bought into January's private placement at $14.37 per share are now down a quick 25% or so. Once bitten, they may be twice shy the next time A-Power passes the hat around. That's a big problem, given that the company needs to keep financing new manufacturing plants abroad to compete with giants like General Electric
Beyond mismatched expectations and their impact on A-Power's cost of capital, another issue is that A-Power is now looking at three consecutive years of approximately flat earnings per share, on a non-GAAP basis. This was supposed to be a growth business! A-Power has certainly grown into all sorts of new alternative energy businesses, like solar panel manufacturing, and its average share count will be up by around 50% this year compared with 2008. The good kind of growth is so far proving elusive, though.
The good news in all of this is that $45 million in net income would still represent a nearly 18% return on beginning shareholders' equity. While A-Power has disappointed investors today, it does have a shot at generating satisfactory returns this year. At today's share price, A-Power looks cheap on a forward earnings basis, but you should also bear in mind that a company's value derives from a long-term stream of future cash flows -- not one year's earnings.
The key question, then, is whether A-Power can increase intrinsic value per share for many years to come. I think the company's scattershot growth model is not doing it any favors. Had the company stuck to its distributed generation business, we would likely be having a very different conversation today.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.