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Top Picks 2019- TPI Composites TPIC

Alternative energy production remains a growing industry both in the U.S. and worldwide. One potential investment candidate in the wind power segment is TPI Composites (TPIC), explains Doug Gerlach, editor of SmallCap Informer.

TPI Composites is the largest U.S.-based independent manufacturer of composite wind blades. It manufactures and sells these and related molding and assembly systems to original equipment manufacturers (OEMs) in the wind turbine industry, enabling these companies to outsource the manufacturing of some of their blades.

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The company operates in the United States, Asia, Mexico, Europe, the Middle East, and Africa, with facilities strategically located to serve large and growing wind markets in a cost-effective manner. It also provides composite solutions for the transportation industry, including the manufacture of bodies for electric vehicles and airplanes.

Consultant firm Bloomberg New Energy Finance estimates that $10 trillion will be invested in new power generation capacity through 2040 and of this, 72% will be renewables and $3.3 trillion will be wind. TPI claims 13% of the global market share of wind blade production in this expanding market.

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TPI Composites’ global presence may help the company as wind generation is growing faster in emerging markets around the world than in mature markets.

There are huge barriers to entering the wind blade production market for other companies, as blades are typically 60-70 meters long, larger than the wing span of a 787, with tolerances measured in millimeters. TPI owns patents and technology that are difficult to replicate.

Since 2013, TPI has grown revenues at an annualized rate of 46%. EPS since 2015 have grown at an annualized 107%. For fiscal 2017, ended December 31, 2017, the company reported sales of $930.3 million and EPS of $1.25.

The company has long-term supply agreements that the company says should provide up to $5.5B in visible revenue through 2023. After four years of 45% annual revenue growth, TPI is labeling 2018 as an investment year. For the third quarter ended September 30, 2018, revenues were up 4.8% to $255.0 million, but EPS fell 55% to $0.26. Both of these figures exceeded consensus estimates.

On the surface, the results might seem lackluster, but investors who dig down can find plenty of reason for optimism. The company reported $19.0 million in expenses related to startup costs in new plants in Turkey, Mexico and Iowa; the startup costs related to a new customer in Taicang, China; and costs of $2.4 million related to six lines in transition during the quarter.

We are modeling 18% annualized growth of revenues and earnings through 2022. An EPS growth rate of 18% will support a high P/E ratio of 25, which in turn implies a high price of $71.50 can be reached within five years.

Based on 2019 EPS of $1.30 (the midpoint of guidance), the stock is selling at a forward P/E of around 19, which could well turn out to be a bargain valuation with projected annual total returns through 2022 of 24.5%.

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