Blowing in China’s Wind

07/16/2009 1:00 pm EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith and Joshua Levine of ChangeWave Research find a US-based company whose wind-power technology is profiting from China’s stimulus plan.

Following an impressive recovery in stock valuations, investors are struggling to understand what drivers, if any, will sustain these gains. In other words, are the hopes of a US economic recovery in the second half of 2009 actually going to be realized?

There is good reason for some near-term caution. In this kind of environment, the stocks to own are the ones that aren't constrained by the new spending trends dictated by overstrained US consumers. Rather, the companies to invest in are those leading the big secular growth waves in the US and globally.

One of the best examples of powerful secular growth at work is occurring in China. Even as the United States and most world economies struggled, China managed to grow its GDP by 6% in the year ending March 2009.

One of the initiatives that the Chinese government is pushing aggressively is green tech. Government mandates for cleaner energy are a big factor driving the blossoming wind and solar projects. This year, China will surpass the US as the world's largest market for wind turbines—after doubling wind power capacity in each of the last four years.

American Superconductor (Nasdaq: AMSC) is a direct beneficiary. The company's advanced turbine technology is a big success in China and, particularly, with the biggest domestic wind turbine supplier, Sinovel Wind, which signed a $450-million contract with AMSC last summer.

Today, AMSC makes most of its money from its wind business, by designing blades, sourcing materials and selling electrical systems to turbine manufacturers around the world.

Earlier this year, AMSC surprised its skeptics when it reported a 60% jump in [fourth fiscal quarter] revenues to $61.2 million—along with its first quarterly profit in its history! For the [March] quarter, AMSC earned $1.3 million (EPS: three cents), reversing a year-ago loss of $1.8 million. The company also topped consensus among analysts, which had called for a profit of a penny per share on sales of $58 million.

The company's superconductor wire can carry up to 150 times more electricity than similarly sized copper wires and is already installed in a number of grid applications—including utilities American Electric Power (NYSE: AEP) and the Long Island Power Authority (LIPA).

In March, AMSC inked its biggest sale ever of superconducting wire (50 miles worth of 344 superconductors) to South Korean-based LS Cable. LS Cable will make cable for a distribution system for national utility Korea Electric Power Corp. It's the longest distribution system ever of its kind, and is expected to be up and running in 2010.

AMSC is currently enjoying momentum from China's wind power industry, but the company's future will belong to the superhighway for power and the smart grid, in which its superconductor wire will potentially play a central role.

American Superconductor is a great long-term stock just to put away. Accumulate it below our Buy Under price of $25; buy aggressively below $23. (It closed Wednesday at above $24—Editor.)

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