Broadwind Energy (NASDAQ:BWEN) is not a well-known stock, but it has recently begun to attract more attention from Wall Street. Analysts are becoming more positive about the company, even though its business is still going through changes.
On the other hand, quantitative systems are waving a yellow caution flag due to short-term earnings bumps. So what exactly is driving this new interest in Broadwind?
Analysts Are Bullish, But Should Investors Trust It?
One of the biggest reasons Broadwind is getting attention is because of its strong analyst ratings.
According to Zacks research, the company currently has an average brokerage recommendation (ABR) of 1.50 on a scale of 1 to 5, where 1 represents a Strong Buy, and 5 represents a Strong Sell. This score falls between Strong Buy and Buy, indicating positive sentiment from Wall Street.
Of the four analysts’ ratings, three are Strong Buy, meaning 75% of analysts who cover this stock have very positive views of it. On paper, it looks quite convincing. But there is one more important thing that one cannot ignore.
The reality is that analyst ratings cannot be considered completely reliable when it comes to predicting stock performance. According to several recent studies, brokerage firms are usually far too optimistic in their judgments.
One reason for such an approach may be that many brokerage firms have business relationships with covered companies. Therefore, Strong Buy ratings are more common than Strong Sell ratings.
This means that investors should not rely solely on analysts’ judgments when making decisions. In fact, many professionals try to combine them with other instruments that concentrate on earnings revisions.
As far as Broadwind is concerned, the danger signal is that earnings expectations are actually declining. The estimates for this year have fallen by 23.1% to -$0.08 per share. It means that analysts are becoming more cautious about short-term earnings despite maintaining favorable ratings.
That means there is some contradiction between analyst ratings and earnings expectations.
Broadwind Is Changing Its Business
In addition to these analyst opinions about the stock, there is more going on at Broadwind in terms of its business operations.
The company has begun distancing itself from the legacy of manufacturing towers for wind farms in favor of expanding into power generation and industrial solutions sectors.
This is significant because, in its latest quarterly report, the company reported revenue of $34.05 million, a 7.5% year-over-year decrease, largely attributable to a 35% decline in sales in the Heavy Fabrications division.
Nevertheless, not all divisions of Broadwind have been suffering. The Gearing unit increased its revenue by 42%, while the Industrial Solutions unit saw its revenue increase by 64%, driven by growing customer demand from natural gas turbine and power generation companies.
It can be said that these new areas of business have separated themselves from the slower-moving old operations.
The company also posted a net loss of $0.5 million, while adjusted EBITDA was $2.2 million, indicating positive operating cash flows.
Institutional Activity Seen In Recent Months
Another interesting development investors should be aware of is the change in demand. Orders increased 23% year-over-year to $37.4 million.
Notable mentions include Marshall Wace, LLP, which initiated a massive new position, adding 281,337 shares. Arrowstreet Capital also picked up 171,036 shares, and Jane Street Group, LLC boosted its position by a staggering 821%, adding 110,232 shares, according to data from Quiver Quantitative.
This could bode well for future revenue if this positive trend is maintained.
Finally, Broadwind is aggressively retooling its operations. For example, it has just sold one of its facilities located in Abilene, Texas, which is supposed to raise about $10 million in liquidity. In total, the company appears to leverage this period of transition in order to enhance its balance sheet position and shift toward more profitable industrial markets.
Net debt is currently at 1.7x trailing EBITDA. The company’s cash position amounts to roughly $25.1 million. As these figures show, it has some financial flexibility amid its strategic shift.
So my conclusion is that clearly, revenues are under pressure right now, but there are areas of growth in the company.
Is the Stock Cheap or Just Risky?
Valuation could be another reason investors are looking at Broadwind Industries. The current PE multiple for this stock is 17x, well below the industry average of around 33x. Valuation-wise, the company is undervalued relative to its peers.
However, the stock might not deliver high-profit growth in the coming few years, since earnings are forecast to decline in the double digits over the next two years, which raises questions about whether the low valuation is justified.
Meanwhile, Broadwind’s share price has been highly volatile recently. At present, the stock price is up 9.41% from its previous close, at $4.07, according to data from Yahoo Finance.
After looking at this stock technically, one setup I noticed in recent scans is a double bottom pattern, which typically forms when a stock falls to a support level, bounces, and then returns to test that level again.
This type of pattern is often watched by traders because it suggests that buyers are stepping in at a consistent price area. Historical data from past occurrences in BWEN show that this setup has appeared 46 times.
I'd also like to add that technical patterns like this are based on historical behavior, and past performance does not always repeat in future trading.
So, Why Is Wall Street Paying Attention?
There are several reasons behind the Wall Street optimism concerning Broadwind. Firstly, analysts are generally positive, the company has begun moving into new growth sectors, and certain segments are improving. Furthermore, order flows have picked up, and the company is reorganizing in order to enhance its position in the future.
Nevertheless, there are still risks, like its current weak earnings. Essentially, Broadwind can be described as a “wait and see” stock.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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