Actions of TPI Composites (NASDAQ: TPIC) plunged nearly 17% on November 9, the day after the company announced its third quarter results. What scared investors so much? In this segment of Backstage Pass, recorded on November 17, Fool contributors Brian Withers and Jason Hall discuss highlights from the company’s report.
Brian Withers: [laughs] These guys have an interesting logo. At the bottom it is written to decarbonize and electrify. Does it have something to do with what they do on a daily basis?
Jason Hall: No they are a Mcdonalds franchisor.
Room: I’m sorry, Brian, I couldn’t resist. Yes. TPI Composites is a really interesting company. It’s actually a company that I really like. There are some concerns that we’ll cover in a moment, but their core business is manufacturing. It is a subcontractor of wind turbine blades. For most of the world’s largest wind turbine manufacturers. With the exception of some of the big players in China who don’t use TPI. Here is the crux of their business value. These wind turbines, if you’ve ever seen one in person, it’s like the Grand Canyon – unless you actually see them in person, it’s hard to imagine how big these things really are. The blades can be longer than a football field.
The logistics of getting them to where you need them are very expensive and very difficult, so you need manufacturing as close as possible to where they are going to be deployed. It does not make sense to manufacture in all markets for all manufacturers of wind turbines. There just isn’t enough volume, is there? TPI has carved out a place of contract manufacturer for just about everyone. The good thing is that they have a very good position in the market. The bad thing is that it’s a very cyclical industry. Utility, upgrade cycle, expansion cycle.
The capital deployment cycle is determined by many factors and can vary greatly from year to year. It’s really important to manage the balance sheet, manage your capital deployments over time, and be careful with the business. Here is the thing. I’m going to share the slide and I’m going to take the plunge here. Actually, I’m not going to share the slide, Brian. I’ll share something else first. Can you see it with the highlighted text?
Withers: There first and then the text got much smaller. If you could detonate it just a little bit, let’s go. As of September 30, that’s it.
Room: As of September 30.
Withers: We were not in compliance.
Room: Yes, we were not in compliance with our financial commitments relating to the total net leverage ratio. Anytime a company says we weren’t in compliance with our commitments.
Withers: Did they overspend on their credit card? Is that how it sounds?
Room: That’s one way of saying it or we’re either spending too much on the credit card or something has gone wrong with the business and now we’re out of compliance. The short version is that they were in a position where they could have asked their lender to call their loan. As a result, I don’t know if you can see this. It’s really big here.
Room: Eleven percent a year, right? What is 11% per year? Can you see the TPI slide now or do I have to reshare it?
Withers: I can share. No.
Room: Let me share it. I’m going to come back to that now just to tell the whole story. Oaktree Capital is a company that a lot of longtime lunatics have heard of, isn’t it? This has been a recommendation in several departments. Itâs a winner. Sometimes you see the name Oaktree Capital and it’s like, oh cool they work with Oaktree Capital. Guys, it’s not good when a company that you own shares in is working with Oaktree Capital. Oaktree Capital is the lender of last resort.
They are really good at keeping money when businesses need to get money fast, like really fast. This was the position of TPI Composites. They needed a lot of money to pay off their guns quickly. In the end, Oaktree was able to set the terms, that 11% interest. we were just talking about DOC at 2.625%. On the one hand, collecting roughly the same amount of money and now we’re talking about 11%.
It is really worrying. Here’s the thing I keep going back and forth about buying stocks even with what’s going on. Here is what is going on. I want to touch this from the start.
Revenue has increased slightly, missed profits are quite large, their outlook has been lowered to their full year forecast due to what’s going on with the cycle. They were able to achieve a higher price per blade, but they sold 20% fewer games year over year. We expected a lot. All in all, the company had a fairly good second quarter that beat expectations.
But the expectations were really low. They missed expectations, they lowered the forecast, they emphasized what they told us earlier this year, and that is 2022 is not going to be a good year. It will be a slack year in the cycle. I think for patient investors it is definitely worth thinking about TPI Composites right now, here is the caveat. Management must do better.
They run a very cyclical business that requires a lot of leverage. They invest in the business because it is a long-term growth business. They need to know better how to invest at the right time. They had some problems with the transition of one of their lines, they lost. There were agreements that were pushed and that affected them. They ended up high above their skis, the water came out and they were swimming naked, whatever you want to put it.
I think it’s a great deal. I’m really concerned that management is letting this happen. With this business, you have to have very good management that manages capital well. This is what makes me think that they need a little time to earn more of my capital, but you have to be patient. Toby just shared this comment and here’s the fun thing about Toby.
Withers: Yeah, that’s what I was saying.
Room: Toby said, Oaktree Capital is the corporate version of a payday lender. I said the exact same thing in a Slack message with Nick Rossolillo not two hours ago. [laughs] Exactly the same thing, literally the same word. There are reasons to be concerned at this time about the executive leadership’s ability to execute.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.