Shares fell steadily for several days after Kenetech, based in San Francisco, reported on August 8 a second quarter loss of two cents a share, compared with earnings of eight cents for the second quarter a year ago. Within a week, the stock had hit a 52 week low of 6 1/4 on a volume of 376,000, compared with average daily volume of 199,000. In 1994 stock hit a high of 29 1/2.
Among those downgrading Kenetech are Merrill Lynch and Smith Barney -- the companies which otherwise are most likely to be supportive since they were involved in taking Kenetech public in 1993. Merrill Lynch downgraded Kenetech shares from "above-average" to "near-term neutral" and Smith Barney lowered its rating of Kenetech shares from "buy, speculative" to what it called a "significantly more cautious" stance of "neutral, speculative."
Smith Barney, a financial research house, explains its reduction of the stock rating because the volatility of Kenetech's quarterly results are now compounded by its "inability to manage its internal production ramp-up as well as questions regarding the effectiveness of the company's management controls." The stringent report issued by Smith Barney, similar in tone to a report by Merrill Lynch, states it still believes Kenetech's technology is effective. But the wind company has "not been able to efficiently or profitably implement its growing backlog of wind plant projectsÉ" leading to earnings that were substantially below expectations.
Kenetech blames the disappointing results on poor winds, an unfavourable arbitration ruling concerning its non-wind technology at the University of North Carolina, difficulty in keeping wind farm operating costs down and delays in getting government approval of projects. The company's Bud Grebey confirms production is behind schedule and Kenetech will not meet its 1995 target of 1100 turbines. "We have not issued a revised production schedule," he adds.
Smith Barney, though, says Kenetech is anticipating a significant reduction in turbine production and may only manufacture 600 in 1995 and 900-1000 in 1996, compared with original estimates of 1000 and 1400-1600. During the first six months of 1995, Kenetech built 223 turbines in Livermore and shipped out 388. The number shipped includes some inventory, says Grebey.
Specifically, Kenetech's second-quarter earnings were $1.5 million, or four cents a share, down 65% from the same period a year ago. The company also reported revenues of $100.8 million, only up 3% from $97.6 million in the year-ago period. Smith Barney has now dramatically axed its 1995 and 1996 estimates of earnings per share, after preferred dividends, from $0.80 and $1.55 to $0.10 and $0.60, respectively.
No immediate solutions
The financial research house also says it believes Kenetech -- with an "inability to manage its internal production ramp up" and a lack of management controls -- will take several quarters to rectify its "production and cost control problems." Smith Barney notes that although wind farm sales had increased by more than half, from $57.6 million compared with $37.3 million a year ago, they fell short of its projection of $66 million because of production delays.
Smith Barney says Kenetech's problems include its reliance on more than 100 companies for components; permitting and other delays impacting project financing schedules; shipping and customs related problems that delayed construction schedules; and problems with the company's ability to recognise revenues in the financial quarter in question.