Saturday, February 8, 2014

Superconductor Technologies ( Nasdaq - SCON ) -- High Wire Act

Superconductor Technologies (SCON $2.50) appears to be the technology leader in the manufacture of high temperature superconducting ("HTS") wire.  Volume production is scheduled to begin in the June quarter.  Superconductors carry 10x more electrical current than conventional copper or aluminum cables, with superior efficiency (less juice lost during transmission).  Until now the technology required cooling systems that approached absolute zero, making them impractical for business applications.  Superconductor Technologies may have cracked the code, however, enabling the higher performance to be achieved with standard cooling mechanisms that are reliable, easy to maintain, and inexpensive.  Pilot plant production has been underway for the past year.  Potential customers in several industries have been testing those wires.  Many are engineering new products in which HTS wire is the key component.  The company's production line will be modular in nature, enabling it to raise output in a methodical way if demand materializes.   Markets that are being addressed right now include electric utilities, medical equipment, high performance windmills, and electric motors.  New markets could emerge if Superconductor Technologies is able to reduce costs down the road.

An entirely new product for the utility industry could be the first application.  A leading maker of utility equipment has developed a line of "fault current limiters" that smooth out abnormal electricity flows and protect substations from failure.  The threat of faults and blackouts has increased in recent years due to a variety of factors, among them the addition of renewable energy sources that flood the system at some times and go dark at others.  The threat of terrorist computer hacking and sniper attacks pose additional problems.  Fault current limiters behave like gigantic surge protectors.  Besides guarding existing sites the new technology is expected to shrink overall capital costs by reducing the amount of back-up equipment.  Longer term, utility customers may employ superconductors in transmission cables, as well.

MRI machines represent another large possible market.  Better imaging could be obtained at lower costs.  Offshore wind farms are a likely target, too.  Wind technology has barely improved since 2000 because generation gains require longer blades and bigger generators.  HTS wires could raise power density and sharply reduce generator weight, enabling larger turbines to be constructed.  The offshore market is thought to hold the greatest potential.  Electric motor producers also are examining the technology.  Superconductor Technologies currently is working with eight prospective customers altogether.  Each one is believed to be capable of buying 100% of the company's output once production begins in Q2.

Superconductor Technologies's initial full scale production line is expected to generate $35-$40 million in sales at current prices.  A modest capital expenditure could double output, creating a full modular package yielding $75 million annually.  The company has ample space in its facility to add more lines.  Each is expected to cost $12.5 million to build.  Gross margins are anticipated to reach 60% to start and improve to 90% once efficient operation is realized.  Overall profitability is expected at the lower rate.  Selling prices are likely to remain hefty for a while due to a lack of competition, and relatively high costs.  Most customers are asking for custom designed wires, which will keep production runs short.  Superconductor Technologies hopes to establish a standard format over time, enabling longer runs and reduced expense.  That could facilitate significant price reductions while preserving attractive margins, opening up new applications.

Our estimates assume the machine will work when the switch is pulled in Q2.  Depending on what kind of delays are encountered, sales for the year could reach $10-$15 million.  Orders are likely to exceed shipments by a wide margin.  Superconductor Technologies raised equity capital last fall.  Warrants covering 10.7 million shares are outstanding, as well, exercisable at $2.57 a share.  Sufficient capital is in place to support the initial launch.  The warrants could cover the next round of spending.

In 2-3 years sales could reach $100-$150 million to provide fully taxed earnings of $.50-$1.00 a share.  Joint ventures are likely to emerge, in addition.  The potential market for affordable high temperature superconductors is enormous.  Major industrial companies are virtually certain to pursue the technology, if it can be made to work.

These shares entail a high degree of risk.  The most likely outcome is a delayed product launch.  A lengthy setback could force the company to raise additional capital, creating dilution for shareholders.  A complete failure is possible.  Success, however, could yield unfathomable appreciation.  The pilot plant worked well.  The customers are excited with the wire's performance.  The design for the production scale line is locked down.  The components are scheduled for delivery to the company's Austin, Texas facility this quarter.  The launch date hasn't budged for the past six months.  Competitors exist.  But they are pursuing different methods that have shown little sign of success to date.

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