Broadwind Energy Drops On Great Earnings, So Buy It

Okay, I'll admit it, I'm stumped. Broadwind Energy (BWEN) has been on my radar for a while, so I was interested to see what Thursday mornings Q2 earnings report brought. The answer was a slew of good news with big improvements in revenues and margins leading to a profit before extraordinary items for the first time in the company's history. Great, I thought, Broadwind is fulfilling its potential and has begun to do the thing that corporations exist for…make money.

Unsurprisingly, the initial move in the pre-market was to the upside, and BWEN opened over 6 percent higher than Wednesday's close at $9.28. Then, shortly after the open, the slide began.

By mid afternoon the stock was trading 2 percent down on the day. Okay, thought I, I must have missed something important, so I went back and listened to the earnings conference call given by management later in the morning. That didn't really shed any light either. After a great quarter, guidance for revenues next year was lowered slightly, but would still represent growth… maybe it was that? Or, was it the uncertainty that still surrounds the tax credit situation for wind energy? Or was BWEN just dragged down on a bad day for stocks generally?

All of these combined could, I guess, result in a drop, but a company that has no debt, is seeing significant improvement in all divisions, has plans for moderate capital expenditure next year (paid for from cash on hand) to increase production and has turned the corner to profitability still looks like a buy to me. Still, I must be missing something because the market doesn't lie. I must be the only one who thought that the good news outweighed the bad, I keep telling myself.

Try as I might, though, I cannot find a reason for such a drop. Maybe there is a rumor around concerning the SEC investigation into accounting irregularities at the company in 2009/10, but that investigation has been going on for four years and a charge against a possible undesirable outcome was included in management's calculations going forward. Maybe it was the fact that the inclusion of that charge resulted in a slight lowering of EPS guidance for next quarter, in which case traders are missing the obvious.

Eventually, after a few hours of looking for something that probably doesn't exist, I gave up. As far as I can see, the fact that BWEN fell on good news just makes it a more compelling opportunity than it was before. There is certainly a strong case that can be made for the stock.

Broadwind make equipment for the wind energy, mining, and oil and gas industries, and specialize in wind towers. In general I am not a huge fan of industries that rely on government support, but there have been some rapid recent advances in the cost efficiency of wind power and, like solar, as wind farms become more widespread, so economies of scale accelerate that process.

The threat of an end to the tax credits associated with the business in the U.S. has caused a significant pullback in the price of wind energy stocks this year all the same, and BWEN is no exception having lost over 35 percent from the April high. That news, though, looks fully priced in and, as Peter Duprey, Broadwind's President and CEO, said on the investor call, a recent study showed that most of the wind farms that could be adversely affected by the removal of the credits are located in the congressional districts of the very Republicans who are seeking to end them. Am I too cynical or is it just possible that when they realize that, some of the ideological opposition to government subsidizing an industry will melt away?

All speculation aside, though, this to me is a simple, company story. After a painful four years of restructuring, Broadwind Energy is seeing improvement in both Wind Towers and Gearing, their two major divisions. Prudent fiscal management has left them with no debt and cash in hand. They look set to survive and maybe thrive, even if some government support for their industry is withdrawn and, most importantly, they are now profitable.

That all of this news was greeted yesterday by a selloff defies any logical explanation that I can see. It may well be unfair and disappointing to management and existing stockholders, but for those of us not yet invested it simply means an opportunity.