AMSC Upgraded To Outperform

We recently upgraded our long-term recommendation on American Superconductor Corporation (AMSC: 36.00 -1.48 -3.95%) from Neutral to Outperform. Our bullishness stems from a strong backlog of $952 million, solid financial position, acquisition of a quarter stake in Blade Dynamics and ambitious growth plans of its largest customer Sinovel.

American Superconductor offers an array of proprietary technologies and solutions spanning the electric power infrastructure — from generation to delivery to end-use. The company is a lead player in megawatt-scale wind turbines and electrical control systems.

American Superconductor also offers a host of smart-grid technologies for power grid operators that enhance the reliability, efficiency and capacity of the grid, and seamlessly integrate renewable energy sources into the power infrastructure. These include superconductor power cable systems, grid-level surge protectors and power electronics-based voltage stabilization systems.

American Superconductor competes with Power-One Inc. (PWER), Exide Technologies (XIDE) and AVX Corporation (AVX). American Superconductor focuses on rapidly-growing areas of the power and utility industry, specifically wind energy and smart grid infrastructure technology.

The company’s core areas of expertise include megawatt-scale wind turbines and electrical control systems, along with a host of smart grid technologies for power grid operators to increase reliability, efficiency and capacity of the grid, apart from seamlessly integrating renewable energy sources into the power infrastructure.

Its expertise in growth areas resulted in the company finishing the quarter ending June 30, 2010 with an order backlog of $952 million, compared to $588 million at quarter ending March 31, 2010.

American Superconductor was able to grow its revenue base by 58.8% over the past five years and per the Zacks Consensus Estimate, revenue will grow by more than a third in 2011. Top-line growth came from the company s consistent focus on emerging economies with higher growth in the Asia-Pacific area, such as China, India and South Korea.

The company has also built significant sales momentum in countries where dynamic voltage standards for wind farm plants have been put in place, such as Australia, Canada, New Zealand and the United Kingdom.

American Superconductor in August 2010 acquired a 25% stake in Blade Dynamics Ltd., a U.K. based designer and manufacturer of advanced wind turbine blades based on proprietary materials and structural technologies. This move expands the global reach of its products and increases its technical edge.

American Superconductor generates a substantial portion of its topline from its largest customer Sinovel, China’s largest and the world’s third largest wind turbines manufacturer. Sinovel accounted for approximately 70% of its total revenues for the fiscal year ending March 31, 2010.

Going forward, American Superconductor’s fortunes will shine with Sinovel expanding its capacity, line-extension of wind turbines and ambitious export sales growth.

American Superconductor’s substantial focus on China will aid its growth and offset the impact of a tepid U.S. and European wind power market due to the after-effects of the global recession. In 2010, the company expects Chinese wind power installations to rise to between 16 and 18 GW, and exceed 20 GW in 2011.

Overall China plans to invest about $740 billion over the next decade to increase its non-hydro renewable exposure to 15% of its total power generated by 2020. This presents a golden opportunity for growth to the company to capitalize on its position as a leading provider of electrical components to Chinese wind turbine makers.

Moreover, compared to its peers in the electrical components industry, American Superconductor has a debt-free balance sheet (Zacks Industry Average is 10.9%). As of June 30, 2010, the company had cash, cash equivalents, marketable securities and restricted cash of $120.7 million. It also had unused, unsecured lines of credit consisting of CNY 11.9 million (approximately $1.8 million), $2.0 million (approximately $2.4 million), and $3.5 million in bank guarantees and letters of credit.

All of this will help the company to fund its working capital needs, capital expenditure plans, earnings accretive acquisitions and other cash requirements in the near-term, while keeping its debt-free status intact.