As a writer and an investor in the stock market, one thing that I take great pleasure in involves identifying unique opportunities in under-covered growth stocks and then sharing that knowledge with my followers. While my own personal investing objectives have mostly shifted from growth stocks to income-oriented investments now that I am in retirement, I still enjoy following and even investing relatively small amounts of my own money in a few select growth opportunities. One of those opportunities that I first identified about a year ago is the small cap company American Superconductor Corporation (NASDAQ:AMSC).
I was drawn to the stock when it popped over 60% in one day back in August 2023 after the reported discovery of what was thought to be a new and potentially revolutionary supercomputing compound, LK-99. The paper that reported the discovery raised eyebrows in the physics world as it purported to be a room-temperature, ambient pressure superconductor material. The reality of the discovery turned out not to live up to the hype after other researchers failed to reproduce the results, but it did have the effect of introducing me to a new company that I had not previously heard of. After doing my initial research, I rated AMSC stock a Hold and suggested putting the company on a watch list. This is what I wrote at the conclusion of that article:
If the company leadership can continue to improve profit margins, trim overhead costs, and keep growing the backlog, the stock may become attractive to growth investors. Until they reach profitability, I will remain on the sidelines and watch how things progress.
Shortly after that August article was published the company reported Q1 FY2023 (the fiscal year ends May 30) results and the stock price declined by about -20%. Then three months later after the Q2 report in November 2023, I published an update on the stock when I upgraded my rating to a Buy. I wrote that the company had turned a corner and was Transforming Power Solutions. In fact, I quoted President/CEO/Chairman Daniel McGahn who stated as much in his earnings summary:
Our business has turned a corner. It feels like we’ve arrived. Over the past several quarters, the business secured an average of $40 million of total orders per quarter. Orders for the second quarter totaled over $40 million, giving us visibility into fiscal year 2024.
As of today, AMSC stock is up over 230% since that Buy rating was published.
Subsequently, the company reported Q4 2023 (and FY 2023) results on May 30, 2024 and the stock surged to a 2 and half year high after the company beat earnings estimates.
“During the fourth quarter, we booked $39 million in orders, and our backlog at year-end stood at $140 million,” Daniel McGahn, chairman, president and chief executive of AMSC, said in a statement. “We maintain an optimistic outlook for fiscal year 2024 and believe we are off to a very good start for the coming year.”
After reviewing the latest earnings report, followed by news in June of a new multi-year, $75M contract award with Canadian shipbuilder, Irving Shipbuilding, I am again upgrading my rating, this time to a Strong Buy. AMSC stock is now up over 300% in the past year and is poised to go much higher from here, with cashflow positive earnings reports expected in FY 2024.
What are the AMSC Growth Drivers?
From the company’s May 2024 investor presentation, AMSC is driving Transformative Power Solutions in multiple industry segments. The primary growth markets include Renewables, Mining and Materials, Semiconductors, and Military applications. The following slide shows the details of the power solutions that AMSC offers to each of those and other end markets including the electric grid.
As explained by CEO McGahn on the Q4 earnings call, the growth opportunities have improved in all aspects of the company’s business
Fiscal year 2023 was one of continued business diversification, outstanding operational performance and strong overall growth. We saw total revenue grow over 35% and to nearly $146 million. During the year, we booked on average over $37 million of new orders per quarter. We booked over $39 million of new orders during our fourth quarter. Of those fourth quarter orders, over $33 million came from our new energy power systems. Our robust 12 month backlog stands at $140 million at the end of March.
In fiscal year 2023, we saw diverse revenue in renewable, industrial, mining, navy projects as well as semiconductor. About one-third of our sales were to renewable projects. Industrials represented about a quarter. Metals, mining and materials were over 15%; and the navy was just over 10%. Semiconductor projects accounted for nearly 10%.
The company’s offerings in “New Energy Power Systems” delivers power control solutions that are seeing increasing demand and integration with other subsystems. Orders for those power system solutions reached an average of $32M per quarter in 2023 as shown in this slide from the presentation.
Additional growth in the Windtec side of the business, specifically new orders for wind turbine electrical control systems, grew in 2023 as well, particularly in India where demand is exceptionally high. In fact, according to the comments by CEO McGahn on the Q4 conference call, Wind revenues grew by more than 125% compared to the year ago quarter.
In the Marinetec business, the company offers ship protection, propulsion, and power management systems with sales to the US Navy and now (indirectly via the new contract with Irving) to the Canadian Navy as well. Ship protection systems alone represent a potential $200M revenue stream.
Semiconductors Offer Potentially Significant Future Growth
Although the semiconductor part of the business currently only represents a small portion of the current revenue stream (currently less than 10%), the company foresees significant potential for growth in that industry segment in future years. This response from CEO McGahn on the earnings call from an analyst who asked the question about potential growth in the semiconductor business indicates some excitement regarding prospects for additional revenue growth in that segment.
I think when we look at our future, it is more wind, more ships and more chips. I think that the chip part of the equation here is positioned to really boom. Obviously, not next quarter, but in the coming quarters, we have a very dramatic pipeline of potential projects for our solutions, and that’s from multiple chip fab makers, not just the one that people know about because they’ve been a significant customer for a number of years. But there is a huge investment moving in the US. It is only just begun. We are kind of at the tip of the iceberg, we think with semiconductor, it’s probably around the next maybe three years could be longer, and we’re very well-positioned.
And the reason is why we win is, we are able to provide a complete solution without changing complexity or size. So we can fit our equipment easily into small substations as they expand existing fabs or build new ones. We have a very economical solution that we can deliver very quickly to our customers. It is all built in the factory, fully test, ready to plug into the grid. And it’s become, for some chipmakers the standard on how they build fast. So we think we’re in a great position, Eric for the semiconductor market. And really, we see the future very bright there.
Financial Performance and 2024 Outlook
Total revenues for Q4 FY2023 were $42 million, an increase of 32% compared to the year ago quarter. Grid business revenues increased by 21% to $34.2M, while Wind revenues more than doubled versus the year ago quarter. For the full 2023 fiscal year total revenues increased to $145.6M with Grid revenues making up about 84% of the total. The company reported $92.3M in cash as of May 29, 2024.
This slide from the May investor presentation illustrates the impressive revenue growth that has been occurring since 2017, which was the beginning of the turnaround after the company acquired ITC Power Solutions. This also shows the inflection point in gross margins that occurred in 2023 as the company “turned the corner” on profitability, as explained by CFO John Kosiba on the Q4 earnings call.
Gross margin for the fourth quarter of fiscal 2023 was 25% compared to the year ago quarter at 12%. And for the full fiscal year, AMSC generated gross margins of 24%, this was up from 8% in fiscal 2022. Our focus on gross margin expansion has been effective with both our Grid and Wind segments experiencing significant gross margin improvements throughout fiscal 2023. In fact, our consolidated gross margins expanded by over 1,600 basis points in fiscal 2023.
In the fourth quarter of FY2023 the company generated $2.2 million in operating cash flow and reported $2.1 million in operating cash flow for the full fiscal year. For the first quarter of FY2024 the company expects to report revenues in the range of $38 to $42 million and operating cash flow in the range of breakeven to positive $2 million.
As explained by CEO McGahn, the company has made tremendous strides in revenue growth since 2017, with revenues more than doubling from FY2021 to FY2023. He expects that revenues could double again from here, as he explains on the earnings call (bold emphasis mine).
Over the past two years, we have managed well to a sharp increase in revenue. If we look back to fiscal year 2017, our annual revenue was under $50 million. Fast forward four years to fiscal year 2021, and you will see that we doubled revenue to over $100 million. If we look at our revenue for fiscal 2023, we can see that we’re nearly halfway to doubling revenue again. We believe we can double revenue from today’s annual rate with our current manufacturing capabilities. We are driving operating leverage and cash flow on our improved business model without significant CapEx investment.
Wall Street Analyst and SA Quant Ratings
While AMSC remains a relatively under-covered stock there are 3 Wall Street analysts currently following the stock with 2 of those analysts assigning a Strong Buy and 1 giving it a Buy rating.
The SA Quant system has an even stronger rating with AMSC currently ranked #1 in the Industrials sector and #3 overall out of a total of 4459 stocks rated by the Quant system.
As stated by CEO McGahn on the Q4 earnings call summary, prospects for continued growth are quite positive and the company is excited about their potential for further growth in a diverse set of industries.
In summary, AMSC delivered an outstanding year of improved operational performance. We’ve become a more diversified and financially stronger company. Through diligent execution of our strategy during 2023, we expanded gross margins dramatically versus a year ago. We delivered three consecutive quarters of non-GAAP net income and operating cash flow.
We’re optimistic our business may benefit from the investments in our key growth markets, renewables, mining and metals, semiconductors and military. We are off to a very good start for fiscal 2024 with tremendous opportunities ahead of us. We believe we have a conceivable pathway to get to $50 million a quarter and potentially generate net income. Several years ago, our annual revenue was under $50 million for the entire year. We are confident of our near and long-term prospects.
I have been impressed with the progress that AMSC has made since I started following them almost a year ago and I believe that the momentum is just getting started. I own some shares in my taxable account and may add more on any price weakness due to a market correction if that should occur.
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