Company Name: TPI Composites
Entry Price: $50
Target Price: $62
Projected Yield: 24%
Time Line: 3 to 6 months
Position Size: 2%
About TPI Composites
TPI Composites, Inc. (TPIC.US) is one of the US's largest manufacturers of composite blades for wind turbines, precision molding systems, and composite solutions for vehicles. Over 80% of TPI's earnings come from overseas sales.
What's the Idea?
The idea is capitalizing on the stock that may rise with long term contracts with the companies manufacturing power generation equipment, as well as with green energy stimulation backed by various governments.
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Why Trade TPI Composites?
Reason 1: Long Term Partnership with Multinational Companies
TPI Composites is one of the most competitive industry players, with a significant market share, partnership with large companies, and good operation management. With a market cap of $1.50B, TPI accounted for 18% of global onshore wind turbine sales as per MV in 2019.
Such a large market share is mainly backed by large equipment manufacturers, such as Vestas, GE, Nordex, Siemens, Enercon, and others. Together, these companies provide 87% of the global wind energy market, excluding China.
TPI Composites customers, which are focused on manufacturing power generating equipment, value the company a lot, as it delivers components on more favorable terms than its own production, while also taking care of all logistic issues. This is good for TPI as well, as long term composite blade contracts provide a predictable revenue stream.
In 2019, 88% of TPI Composites' earnings came from overseas deals. The production facilities are mostly located close to the sites of the large customers, which have long term partnership agreements with TPI.
Currently, TPI's entire business is focused on producing composite blades, precision molding, and assembly; however, a lot of effort is being put into automotive solutions, too. Among the major agreements here one may mention Proterra (composite bus bodies), Navistar (tractor cabs), and Workhorse Group, which includes prototyping a composite body for electric vehicles.
Reason 2: Green Energy Support and Positive Industry Outlook
Green energy projects are being actively developed for years, backed by government support and large investments. Wind farms are among the most popular solutions, with a very promising outlook by many leading analytic agencies.
Thus, by 2050, the total wind farm generating capacity may reach 19,000GW, Bloomberg NEF reports, with a total wind energy share of 26%. In the meantime, Research and Markets affirms that, by 2025, the global wind turbine market could reach $123.10B, compared to $90.10B in 2019, with a yearly increase of 5.30%.
With Joe Biden having been elected as the US President, all green energy and environment friendly projects will be backed even more. One of the first thing Biden did after being elected was joining the Paris Agreement; just a few days later, an executive order was released to double the capacity of the offshore wind farms by 2030.
In case the outlook proves to be true and the additional stimuli in green energy get successful, TPI Composites will be surely winning from this.
Reason 3: Financial Performance
The conditions were quite complex under the pandemic, but TPI managed to get adjusted. Over 2020, the earnings increased by 16.20% to $1.67B, while the adjusted EBITDA margin decreased to 5.70% versus 6% in 2019. The net loss also went up, which led to the EPS changing from $0.45 t0 $0.54.
In Q4, the things got better, with the adjusted EBITDA margin reaching 8.80%, and the EPS, $0.14. The company has a moderate debt burden, $216M, while the amount of cash amounts to $130M. The net debt to adjusted EBITDA ratio is 0.92x.
The FCF is still in the negative territory: in 2020, the outflow amounted to $28M, against $17M in 2019. This is mainly due to a high CapEx ($65.70M), but the operating cash flow is positive, $37.60M, which means there is no lack of liquidity.
The latest TPI reports have somewhat conservative outlooks for 2021, and this provoked a selloff. The management estimates the earnings somewhere between $1.75B and $1.85B, with an increase of 7.80%. Meanwhile, the adjusted EBITDA is expected between $110M and $135M, with a margin of 6.80%.
After making a local high in February, the stock has so far dropped by 45%.
The ratios are currently as follows: LTM EV/S: 0.94x, LTM EV/EBITDA: 16.5x, Forward EV/S: 0.87x, and Forward EV/EBITDA: 12.80x.
This means the stock is underpriced compared to the industry average.
Since early this year, some investment companies and banks raised the target price for the stock as follows: JMP Securities, to $78, Raymond James, to $67, Morgan Stanley, to $77, Roth Capital, to $60, and Canaccord Genuity, to $70.
How to Use the Idea
- Buy TPI Composites shares at $50.
- Allocate no more than 2% of your portfolio for the transaction. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches $62.
How to Buy TPI Composites Shares?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: : In the Web Terminal section, type TPIC.US (TPI Composites ticker in the NASDAQ) in the search box, and select TPI Composites in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type TPIC.US (TPI Composites ticker in the NASDAQ) and select TPI Composites in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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