Broadwind: Constant Innovation Resulting In Extensive Outperformance (NASDAQ:BWEN) | Seeking Alpha

Justin Paget

Broadwind (NASDAQ:BWEN) has recently experienced significant share price growth in the past year. Even with such growth, I believe that Broadwind stock is still a buy due to the company’s strong earnings, growth potential, undervaluation, and constant innovation.

Business Overview

Broadwind is a business that predominantly operates in the United States and specializes in producing and marketing structures, machinery, and components for clean technology and other specialized applications. Heavy Fabrications, Gearing, and Industrial Solutions make up the business’ three divisions.

Broadwind offers fabrications to numerous industrial customers in the Heavy Fabrications category. Steel towers and adapters are among the products it offers, especially for wind turbine producers.

For a variety of sectors, including onshore and offshore oil and gas fracking and drilling, surface and underground mining, wind energy, steel, material handling, and other infrastructure areas, the Gearing section focuses on delivering gearing, gearboxes, and systems. Additionally, this section provides heat treatment services for applications in the aftermarket and with original equipment manufacturers.

Broadwind’s Industrial Solutions division provides supply chain solutions that include electromechanical devices, electrical junction boxes and wiring, energy storage services, instrumentation and controls, valve assemblies, sensor devices, fuel system components, and valve assemblies. For the market for combined cycle natural gas turbines, it also offers light fabrication, inventory management, kitting and assembly services, packaging solutions, and fabricating services for panels and sub-assemblies.

Seeking Alpha

Broadwind, Inc. has a market capitalization of $82.44 million and a return on invested capital of -3%. Its current stock price is $4.30, which is close to its 50-day moving average of $4.07. The company’s GAAP P/E ratio is -13.5, indicating that it’s comparatively underperforming its peers in regard to earnings. This suggests that when conducting a valuation analysis, it may be necessary to apply an additional margin of safety or premium to account for the company’s relative underperformance in terms of earnings.

Broadwind P/E GAAP Compared to Peers 1Y (Seeking Alpha)

Although the company currently does not offer a dividend, Broadwind is currently a minor player in the industry with a relatively smaller size meaning there is a large room for growth and a need to become more prominent to hold greater market share and industry relevance. Thus, focusing on the growth of the core business through innovation would be the correct option when allocating FCF to attempt a spark of growth and to capitalize on industry trends such as recent government bills resulting in long-term compounding shareholder value and reduced volatility once a strong foothold upon its operations is created.

One metric that I would keep an eye on prior to any dividend payments beginning is the annual shares outstanding as management has diluted shareholders by ~25% in the last 7 years resulting in a loss of shareholder value. I believe that since the company is currently small and can capitalize upon growth much easier, this dilution will provide the necessary cash without the firm further leveraging its balance sheet as discussed later in this article to maintain performance with larger firms in regard to innovation of products.

Annual Shares Outstanding (Trading View)

Share Price Performance (Seeking Alpha)

Broadwind’s Q1 2023 earnings exceeded expectations both in terms of revenue and earnings per share, showcasing the company’s ability to outperform in challenging macroeconomic conditions, such as high-interest rates. The EPS came in at $0.07, surpassing expectations by $0.12, while revenues reached $48.9 million, beating estimates by $0.77 million, representing a year-over-year growth of 17%. Additionally, Broadwind’s total backlog of $287.8 million, a significant increase of $170.7 million compared to the previous year, provides the company with a solid pipeline of future revenue and highlights the growing demand for its high-quality products.

With earnings guidance looking positive moving into the second half of 2023 and 2024 such as revenues growing at ~20% and earnings almost tripling, Broadwind is demonstrating its ability to expand its core business rapidly along with growing margins which will improve its financial situation as a small firm and provide additional FCF to capitalize on future opportunities and trends.

Earnings Estimates (Seeking Alpha)

Underperforming the Broader Market

Broadwind has underperformed the S&P 500 over the past 5 years demonstrating Broadwind’s need to effectively achieve growth as seen in the past year consistently.

Broadwind Compared to the S&P 500 5Y (Created by author using Bar Charts)

Analyst Consensus

Analysts in the last 3 months currently rate Broadwind as a strong buy with an average 1Y price target of $8.75 demonstrating a potential upside of 103.49%.

Analyst Consensus (Trading View)

Balance Sheet

Being a small firm in need of growth to improve its financial situation, Broadwind has a lot of leverage on its balance sheet to support the growth of its core business model. With debt growing 179% in the last year along with no interest coverage due to negative operating income, Broadwind must expand margins quickly before being trapped in large debt with rising rates which will limit future FCF and throw the business into a painful decline which would require shareholder dilution to recover. Lastly, with a current ratio of 1.09 and a low Altman Z-Score of -1.6, Broadwind must be careful in the future in regards to leveraging in macroeconomic headwinds as large instability in the economy will impact high leveraged businesses’ heavily.

Financial Position (Alpha Spread)

Interest Coverage (Alpha Spread)

Before determining a fair value for Broadwind, I decided to calculate the company’s Cost of Equity and WACC to create a more accurate discount rate baseline. After considering a risk-free rate of 3.85% which is in line with the current 10-year treasury yield, I was able to calculate a Cost of Equity of 8.16% for Broadwind.

Cost of Equity Calculation (Created by author using Alpha Spread)

Assuming my previous Cost of Equity of 8.16%, I was able to calculate the company’s WACC to be 7.81% which is below the industry average of 8.93%.

WACC Calculation (Created by author using Alpha Spread)

Now that I have calculated the necessary metrics to determine my discount rate, I have formulated a 5-year Equity Model DCF using net income. Incorporating a discount rate of 12%, Broadwind is currently undervalued by 52% with a fair value price of $8.53. I decided to add a 3.84% risk premium to my assumptions for this DCF to account for macroeconomic headwinds along with the unpredictability of the company’s revenues and financial situation due to high leverage and small size. I also assumed revenue and margin growth in line with analyst estimates demonstrating consistent growth which plateaus as the business becomes larger and larger.

5Y Equity Model DCF Using Net Income (Created by author using Alpha Spread)

Capital Structure (Created by author using Alpha Spread)

DCF Financials (Created by author using Alpha Spread)

Constant Innovations Sparking Long-Term Growth

In order to fulfill the changing needs of its clients and promote expansion in the renewable energy market, Broadwind’s innovation strategy is focused on developing and putting into practice cutting-edge technologies and solutions. To encourage innovation and maintain its position at the forefront of technological developments in the wind and other renewable energy industries, the company makes investments in research and development operations.

The emphasis on creating cutting-edge wind turbine components is one illustration of Broadwind’s innovation strategy. Critical parts like towers, gears, and bearings are always being improved upon by the company in terms of design, materials, and production techniques. Broadwind helps to enhance wind energy technology by enhancing the functionality, dependability, and effectiveness of these parts.

For instance, Broadwind has created creative tower designs that allow for the development of wind turbines that are both taller and more durable. These larger towers enable taller turbines, which in turn capture stronger winds and produce more electricity. Broadwind enhances the energy production potential of wind farms by pushing the limits of tower design, making them more effective and profitable. This will expand margins through efficiency from the production and maintenance side of operations which will provide the company with the ability to deleverage due to the compounding growth of the company due to FCF expansion over the years which will accumulate to further improve core operations.

Additionally, Broadwind focuses on utilizing digital technology and data analytics to enhance the operation and upkeep of wind turbines. The company gathers and processes real-time data from turbines using sophisticated monitoring systems and predictive analytics. Proactive maintenance, early identification of potential problems, and improvement of turbine operations are all made possible by this data-driven approach which will lower costs as previously mentioned.

Broadwind promotes itself as a top supplier of cutting-edge solutions in the renewable energy industry by consistently investing in innovation and keeping up with technological developments. Due to its dedication to innovation, the company is able to fulfill the changing needs of its clients, increase operational effectiveness, and support the expansion and sustainability of the renewable energy sector as a whole. In the long run, as trends and financials align for the company, this will produce relative outperformance and propel Broadwind as a potential significant industry player with significant growth in store.

Cyclical Nature of End Markets: The demand for oil and gas drilling, as well as wind energy, fluctuates, and these changes are impacted by a variety of factors including governmental regulations, the state of the economy, and energy pricing.

Intense Competition: Wind energy and industrial solutions are two markets where Broadwind competes fiercely. In order to earn contracts and keep clients, the company must consistently innovate, set itself apart from competitors, and maintain competitive pricing.

To summarize, I believe that Broadwind stock is currently a buy due to the company’s strong earnings, growth potential, undervaluation, and constant innovation.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.