Bob Czeschin edits a few newsletters, some of which look at really tiny mining and energy stocks, but the ad that has been coming through lately is for his relatively inexpensive Oil & Energy Investment Report that often looks at more mainstream investments, and it’s all about a breakthrough technology that he compares to getting in early on huge world-changers like Microsoft and Intel.
Here’s some of the excitement:
“Breakthrough ‘superconductor’ technology spawning a tidal wave of startling innovations
“Trains that float 2 inches in the air and go 250 miles per hour with no engine (or wheels!)
“Transmission lines that carry 140 times as much electricity than regular copper wire
“Pound-for-pound, the most powerful ship engines ever built. 49,000 horsepower from a motor the size of a dining room table
“Technological revolutions like this produce some of the greatest profits in the history of the stock market. Indeed, I expect this one little company (with 503 patents) commercializing superconductivity to produce similar profits to those early investors made in Microsoft ($2,000 grew into $711,500).”
Sounds pretty cool, right? Hmmm … no pun intended, but that’s kind of the idea — superconductors are metals that are cooled to super-low temperatures, and then are able to conduct electricity much more efficiently than conventional metals (ie, copper wire). We’ve known about this property for a long time, but the feasibility of cooling all those electrical motors and transmission lines down to sub-arctic temperatures made it more of a science experiment than a practical bit of knowledge.
That’s slowly changing with that they call High Temperature Superconductors (HTS), which are still super-cooled, and shielded and insulated, but much more practical than “conventional” superconductors — “high temperature” for superconductors meaning something very different than “high temperature” for the rest of us (ie, the temperature that you have to keep the wire at for superconductivity might be around -300 degrees, rather than the -500 degrees in the teaser). * I screwed up these numbers a bit and they’re both rough and in Fahrenheit, see my note in the comments section, and the many kind corrective comments of readers, for the details
Czeschin teases us about a few of the potential and existing applications for this technology — including maglev trains that use superconducting magnets, incredible new electric ship engines for the Navy that generate “49,000 horsepower from a motor the size of a dining room table,” power conditioners that make wind energy more efficient when its brought onto the grid, and transmission lines that “carry 140 times as much electricity as the same sized copper wire.”
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And he makes the same kind of argument that would have very wisely been made about computers 25 years ago — miniaturization and scale can make a world of difference:
“Right now, superconductor technology is only practical in bigger applications, but that’s only because this technology is still in its infancy. As it matures, what superconductivity is doing for ship engines, it’s going to do for truck motors, car motors, or just about any other kind of electric motor.
This miniaturization will spawn products and innovations inconceivable today, and comparable to the revolution that took us from mechanical adding machines to today’s laptop computers connected to the Internet.”
So what do we learn about the specific company he’s teasing here?
It’s got 503 patents, and $587 million in its order backlog.
Shanghai and Seoul have been “eager buyers” of this company’s transmission lines, those power lines that carry 140X the electricity of conventional copper wires, curing congestion problems. (He thinks that this superconducting transmission wire is “where this pioneering superconductor company will make one of its first fortunes.”)
So who is this company? Well, you probably won’t be surprised to hear that they must be teasing …
American Superconductor (AMSC)
American Superconductor has been around for decades, losing money for early investors at a magnificent clip and even participating in the tech bubble and ensuing crash — but they are just now starting to be profitable, which is a very encouraging sign.
While they do have a huge portfolio of patents in superconductors and other electrical technologies (others do too, I don’t know that we’ve seen the big patent “fights” yet in superconductors, but we might someday when they become more lucrative), the company today is largely … a Chinese wind energy company. They get 75% of their revenue from China, and most of that comes from their deals with the big Chinese wind turbine manufacturers, who use AMSC core components and designs. Sinovel, the biggest Chinese wind turbine company, is AMSC’s largest customer, and a fair portion of their growth in the coming years is dependent on new designs like their SeaTitan offshore mega-turbine.
Not that this is necessarily a bad thing, but the riches from the transmission lines and the smart grid upgrades using HTS are probably a ways in the future, and the miniaturized super-efficient electric motors and such that Czeschin teased will probably be much further off still — it might be that they’ll make their “first fortune” on HTS transmission cables, but the first steps to profitability have been thanks to their wind turbine components. It takes ages to develop new grid systems, and some of the initial projects they’ve built with US electric utilities have taken 3-5 years to build and energize. There are a large number of projects around the world that are in the early stages, many of which are powered by AMSC’s HTS wire, and with the increasing need for transmission capacity it does seem like there’s plenty of opportunity for AMSC and its competitors.
I can’t do justice to all of the company’s projects in a quick note for you here today, but they are a pretty “investor relations-savvy” firm, as befits an R&D-heavy company that has had to sell the “story” rather than the “profits” for the past decade. They have a very thorough presentation on their site from their Analyst Day last Fall [pdf file], and a briefer investor presentation from this month [pdf file]that gives a good overview. The latest earnings release is available here, and the conference call transcript is here.
American Superconductor’s backlog has actually shrunk recently — it was at the $587 million teased a few months back, but they delivered a fair amount of the backlog in the last quarter (mostly on a multi-year Sinovel order) and it now stands at $546 million. The valuation looks pretty reasonable if you believe some of that growth is going to continue to come through, both in their global wind turbine businesses and in their developing power grid systems and related HTS stuff — analysts expect AMSC to earn 67 cents per share this fiscal year, which ends this quarter, and $1.19 next year (both per Yahoo Finance), so that’s a forward PE of about 25 (AMSC shares are just under $30 at the moment).
AMSC has been buffetted by the winds of clean energy investment for several years, with the shares spiking up above $40 in early 2008 and then collapsing when wind project funding was being cut all over the place during the financial crisis, getting briefly down under $10. They spiked again this past Fall and into the end of the year, in part because of persistent rumors that ABB or GE would look to acquire them and their technology, and in part simply because the numbers — thanks in large part to China’s continuing wind investment — have been improving. This is still a small firm when you’re talking about the wind turbine and electrical equipment space, with a market cap of about $1 billion, and not for the queasy — if you think of this as a long term investment, it’s worth considering how you would have reacted as the stock fell 75% then climbed by 300%, all in less than two years.
Now that the shares have experienced a significant dip, getting down to more reasonable valuation range in recent weeks, I’ll admit to being tempted by Czeschin’s tease — there are a lot of investors out there who’ve been burned by the promise of superconductors in the past, and specifically by AMSC, but they do seem to have an enviable position: a strong and profitable business that’s giving them a good footing right now, a HTS superconductor wire factory running in MA that’s ready for the expected boom in that business in the years to come; and some exciting possibilities, particularly overseas, for working on developing much more advanced electric grids in developed markets like urban China and South Korea as well as in less advanced power-thirsty countries like India.
This is obviously still a pretty speculative play, with the possibility that recent advances to profitability might not be sustainable and the possible growth might not come through, to say nothing of the fact that while they are a leader in the superconductor space, they’re not the only company with advanced technology … and in the wind turbine business they’re even less unique. But it’s equally obvious (to me, at least) that wind energy and superconducting electric transmission should continue to be significant areas for sales growth in the decade to come, and that their strong presence in China is nothing to sneeze at. Clearly, any dip in sales growth or earnings growth will lead to the shares being punished, as for all “story” growth stocks, but after not thinking about this company for many years, and having been unaware that they’d breached the critical “we’re making money now” line, you can put me down as “intrigued.”
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