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Alternative Energy Winners: A-Power

A-Power Energy recovers from a two-day trading slump as analysts downplay the Chinese alternative energy company's downbeat 2010 guidance.



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A-Power Energy Generation Systems


recovered from a two-day slide on Monday, up 4.5% at the market close, with trading slightly above its typical daily volume.

Alternative energy is a volatile sector, so a one-day gain of between 3% and 4% is far from atypical. However, what was notable about A-Power Energy's gain on Monday was that it reversed a two-day losing streak for the Chinese alternative energy stock. The negative market turn on A-Power shares was

triggered by weaker-than-expected 2010 guidance issued by A-Power Energy last week.

A-Power last week issued 2010 revenue guidance of $380 million. A-Power shares lost more than $2 in value over the course of last week's trading, from above $12 a share last Monday to a close at $9.90 last Thursday before the holiday break.

To start the new post-Easter week on Monday, Raymond James reiterated its outperform on A-Power Energy shares, while lowering its revenue and earnings estimates to take into account A-Power revised guidance. Raymond James had previously forecast A-Power 2010 revenues of $639 million. Raymond James now has a $392 million revenue target for A-Power in 2010.

Raymond James analyst Pavel Molchanov noted that in A-Power Energy's annual report filed with the Securities and Exchange Commission last week, the company listed a backlog of $367 million, which is supportive of its guidance, and leaves the room for upside with any additional contract wins.

The Raymond James analyst pointed to a slower-than-expected pickup in wind turbine sales as the primary reason for the gap between the Street and A-Power's guidance. However, the analyst said that the margins that A-Power was able to generation from wind turbine sales were higher than anticipated. A-Power Energy has $94 million of its backlog in wind turbines, according to Raymond James calculations based on the annual filing.

In fact, while A-Power's sober outlook for 2010 led to the market selloff last week, its fourth quarter included company high points in top line and margins. What's more, while the Raymond James analyst reduced his revenue guidance by $247 million, his earnings adjustment was much less significant given A-Power's margin profile.

The new Raymond James 2010 earnings per share estimate is $1.08, versus $1.14 previously. For 2011, Raymond James is now forecasting revenues of $502 million -- down from its previous $1 billion estimate --but the impact on earnings is only 3 cents, from $1.35 to $1.32.

Raymond James' Molchanov was not the only analyst -- of the small group of research officials that cover A-Power Energy shares -- who was more bullish on the Chinese alternative energy company than last week's selling action would immediately suggest.

Brian Yerger of Aerca Advisors said A-Power's fourth quarter had some good positive data points, including the top line and margin improvement, but, as is typical with earnings reports, past performance was overshadowed by guidance much lower than Street expectations.

What's more, Aerca Advisors' Yerger said he read the lower-than-expected revenue guidance as a sign that A-Power was becoming wiser about managing investor expectations. "A-Power has been a bit on the high side of overpromising and under-delivering on financial results. That's not the best method of managing expectations, and this guidance may be obtainable, and a sign that they have wised up," the analyst said.

A-Power is guiding investors to $45 million in net income, even with the much lower revenue forecast. Aerca Advisor's Yerger thinks that A-Power has the room for enough margin improvement to executive on its income guidance.

A-Power's goal for net margins for their distributed generation business, which is the larger portion of its backlog, is 12%, from 10% previously. Yerger thinks that the 2% gross margin improvement for the distributed generation business is achievable. Additionally, A-Power should be able to mix in what Yerger referred to as a "modest amount of wind turbine sales. One advantage of being small is that gross margin improvements can pass through to the bottom line."

Raymond James' Molchanov noted that the A-Power net income guidance of $45 million is also an important benchmark for the alternative energy company's executive pay. The A-Power management team's contract incentives for the period between 2007 and 2012 are linked to hitting earnings guidance. The 2010 incentives target for net profit is $44 million, the Raymond James analyst said.

It has been up and down for wind stocks, more generally, in the past few months.

American Superconductor


, a U.S. firm focused on wind turbine sales in Asia,

suffered in recent trading due to the weaker-than-expected demand from China. However,

a new order from American Superconductor's primary Chinese customer, Sinovel, buoyed American Superconductor shares on March 22.

Broadwind Energy


received outperform ratings from JPMorgan Chase and Raymond James, but the ratings came right before

a big fourth quarter earnings disappointment from Broadwind and weak outlook for the first half of 2010.

While American Superconductor shares are only slightly lower over the past month of trading, Broadwind has not yet recovered from its post-earnings swoon. After its Monday's rally, A-Power has a ways to go before it reaches back to its March high point, at $13.95 per share.

-- Reported by Eric Rosenbaum in New York.


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