American Superconductor Corporation (NASDAQ: AMSC) is a power technology company that supplies electric power infrastructure. I have recently noted the riskiness of investing in companies that have highly concentrated revenue sources (i.e. sell predominantly to a small handful of customers). AMSC had not only a concentrated revenue stream, but it was becoming more concentrated each year. According to its last 10-K:
Sinovel represented approximately 70%, 67% and 51% of our total revenue for fiscal 2009, 2008 and 2007, respectively. Sinovel was the only customer exceeding 10% of total revenue for those fiscal years.
On April 5, the company announced that Sinovel refused to accept shipments.
On March 31, 2011, Sinovel Wind Group Co., Ltd. (Sinovel) refused to accept contracted shipments of 1.5 megawatt (MW) and 3 MW wind turbine core electrical components and spare parts that AMSC was prepared to deliver. AMSC believes that Sinovel intends to reduce its level of inventory before accepting further shipments.
Though Sinovel will likely continue ordering from AMSC in the future, it will take a while to work through its inventory:
Citigroup analyst Timothy Arcuri estimates AMSC has about 2.5-3 gigawatts of excess inventory of produced for Sinovel.
“It will take about six months to work through this inventory before AMSC’s production would start to return for a more normalized level,” Arcuri said.
Six months of revenue declining by ~70% will have a significant impact on the company’s financial performance. Luckily for AMSC, the company has zero debt so it should be able to survive this, but it is easy to imagine a situation where a more leveraged company would be pushed into insolvency as a result of losing such a large portion of revenues – even if only temporarily.
The market reacted by sending shares down 44%.
Lesson: If you are going to invest in a company with highly concentrated revenues, be sure to recognize the risks associated with it and demand a larger margin of safety.
Author Disclosure: No position
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