The following is my first draft article for CTW. I’m not sure when I’ll get the time to finish this article so I’m posting it now to gives readers a heads up on what I think is a very exciting opportunity. I wasn’t going to post about this company until after they received some orders, but the price has moved quickly over the last couple weeks and I’m hoping it will now take a breather allowing lower entry points for any investors who upon their own due diligence decide to speculate on this opportunity. As always this is not a recommendation. I am not qualified or registered to give specific advice. It is essential that you make up your own mind. I hope to update this article next week.

Profile and Pitch

Catch the Wind Inc. (CTW.S) is a high technology company headquartered in Manassas, Virginia and listed on the Toronto Venture Exchange. CTW was founded in 2008 to develop and manufacture laser based wind sensor systems with a primary focus on developing technology to serve the wind power generation industry. Their lead product the Vindicator has billion dollar blockbuster potential and could easily have $500 million in sales in a couple years.

Everything is in place for sales to begin; the Vindicator had fantastic results in multiple trials and applications, CTW have a manufacturing agreement in place with initial 35% gross margins, an agreement with a major OEM and CTW is now actively trying to sell the Vindicator. With a current market cap of $156m, five to fifty bags over the next five to seven years is possible.  Actually CTW could be a five bagger this year. It is beyond a doubt my pick for 2010 and why I called CTW My Favourite Stock for 2010.

CTW was spun-off of Optical Air Data Systems, LLC (OADS), a high technology R&D firm supporting the defense industry. OADS has been developing next generation laser sensors since 1990, and has licensed technology to Rockwell Collins for use in commercial avionics and military applications such as the super cool laser landing system used by helicopters landing in dusty gusty places like Afghan. It’s cool tech which bounces ‘a laser‘ off dust particles 300M away to accurately determine the oncoming wind direction and speed. That’s life and equipment saving for landing helicopters and it turns out power boosting and maintenance minimising for wind turbines.

My sixty second wind energy blurb. Vestas, Gamesa and GE  have dominated turbines, but with Chinese companies entering the business, turbines are becoming commodities. There are lots of players looking at the blades to improve performance , I can’t pick a winner there. There are two companies with patents looking at superceeding the 164 year old anemometers currently sitting on the top of turbines. CTW is, at best guess, a year ahead and the only publicly traded company. The Vindicator has been field tested and shown to improve turbine performance by at least 10%. That translates to an annual return of $56k per 2.5MW turbine before adding any maintenance savings. At $125,000 the Vindicator is a no brainer for wind farm operators and it or a similar product will probably sit on top of all the 40,000 turbines manufactured a year over the next decade.

$70M in R&D over 18 years was spent developing the Vindicator technology. A laser wind detection system that has a proven 12-20% improvement in energy output and reduction of stress. The short payback and increased profit to operators makes the Vindicator a must have. 26 patents and a head-start provides the moat.

Risks

With no sales this is a speculative company. Plus another company with competitive technology appears to be less than a year behind CTW and then there’s execution risk. Of less concern is currency risk.

No Revenue Thus Far

While the Vindicator appears to have sensational results and a price that should see the company struggling to meet demand, CTW is yet to make any sales.

Competition

• Michigan Aerospace spin-off OptoAtmospherics
• July 2009 DOE Announces Nearly $14 Million to go to 28 New Wind Energy Projects and more details
• They have similar patents to CTW.

Execution Risk

• Sales don’t eventuate.
• Sales don’t translate to profits. Watch how fast operating costs increase and why. Check ISRG for comparison.
• Manufacturing problems. Trial units were hand built, no mass production yet done.

Currency Risk. Shares are bought in some obscure North American currency called the loonie used by people called Canucks. I’m still considering whether to hedge the currency risk, as the CAD is riding high on commodities.

Opportunity

Quantity of Wind Turbines 1MW+

• 80,000 installed
• 30,000 more by 2011
• 400,000 more by 2020

A rough conversion of MW to turbines is divide by 1.5. S0 120,000MW is 80,000 turbines.

Valuation

I’ll go through this in a single pass, from rough quick valuation and risk to reward, down to probability based on comparable history and statistics and finally to a  to more detailed DCF and options based analysis for comparative purposes. Then I’ll cover other analysts’ opinions. [This article is getting to long so I'll cover those last three in another post.] While you’ll read this as one analysis, in real time it was intermingled with the rest of my analysis. Each valuation acting like a gate to see if I should continue delving deeper into the story and company. I think the last time I worked through an example was Biota in late 2008 or maybe Hunter Hall in June 09, either way a more in depth analysis is overdue.

For a speculative growth company my first valuation target is 1:3 risk to reward. For each dollar at risk I want a good probability of at least three back.

Consequently I need to determine some probable losses and gains. I use a matrix format as spreadsheets make that easy. However, once I understand the companies big picture story, i.e. profile, opportunity and risks a rough mental calculation will do for the first valuation. For Catch the Wind the big picture is selling wind sensors for wind turbines with a two year payoff on turbines with 20 year life spans. 40,000 turbines, which are now boarder-line commodities, will be produced every year for the next decade. CTW’s wind sensors sell for $125,000 each, they’ve negotiated outsourced manufacturing with 35% gross margins and already have an OEM agreement with Spain’s Gamsea, the number two wind turbine manufacturer. Start up production is 3,000 annual units and management have stated they don’t want to start the contract manufacturer going until they know they can keep them manufacturing.

Boiling that down to our first rough number is easy maths. $125,000*.35*3,000 = $131,250,000 gross profit.  10% net margins gives $37,500,000M, 65 cents per share. If they achieve that then the multiples will be high, but let’s say P/E of 20 to introduce a little conservativeness, for a price of $13. That four to five bags. So even if I allow the most conservative downside of total loss, I’m over my 1:3 risk to reward hurdle.

Dig dig. Risks. As I mentioned there’s one competitor who appears about a year behind; however, it is possible they could piggyback on Catch the Wind’s success and narrow that gap.

I’ll use the Tech adoption cycle for ambitious targets and years. Though first for another quick look let’s say that 90% of new turbines will ultimately have wind laser systems and CTW gets half the market, that’s around 18,000 units a year. At 15% net margins that’s $125,000*.15*18,000=$5.5 a share earnings. A multiple of 30 gives almost 60 bagger potential. I am not speculating on 6,000% returns or even 10x and any reference to returns of that magnitude are at this point wild predictions.

Tech adoption cycle based price target

Dig deeper. Build a valuation model to help dig deeper into the company. Though before that it’s more important to check deeper into the story and risks. Clearly fantastic returns are possible so the probability of those is most important. Is the technology good? Can management deliver? Time frames? My quick answers are the technology is fantastic, management appear to be top notch and it should go off this year.

Here are the estimates I used for my model.

Combine those with the wind turbine quantities from above and you’ll see why I excited at the amazing potential CTW has with the Vindicator.

Shares outstanding 54,883,972.

Catalysts

• First orders. Should hear more about orders in March conference call.
• Start of manufacturing. Late 1H 2010.
• OEM agreements. Hopefully throughout 2010.

Digging Deeper

Q3 Conference Call

http://webcast.newswire.ca/archive/catchthewindltd/catchthewindltd20091125.wma

Phil Rogers

• Breconridge can produce up to 3,000 units a year.
• Gross margins over 35% in early production phase using outsource model
• Strategic Direction
• Upcoming Milestones

Q&A

• Building backlog of orders and anticipate building orders thru Q1 and then start B with production with install starting late Q2 or Q3. Once start Breconridge what them to continue producing.
• Should be able to provide idea of backlog in next conference call in March.

Technical View

Rocket ship. I’m posting this now in the hope that the shares pull back over the coming days to give better entry points. Volume has been decreasing.

Price history.

• Funds bought in at $1.30 in September(?) $1.30
• Successful results December $1.80
• Price rising since then.

Documents and Articles

• Peter Hall from Hunter Hall Limited, one of my favourite Australian fund managers, talks excitably about Catch the Wind’s 10 to 100 bag potential.
• James McDonald from Hunter Hall on CTW. This was my intro to CTW.
• Wall St Journal article on Catch The Wind
• Catch the Wind releases final results of trial program with Nebraska Public Power District
• Financial Returns
• Quotes and Charts
• Filings
• Gaining 10% The science behind reducing yaw.
• Q2 Call Beta models adjustments at $125,00 each. Targeted sales price of $125,000. 35% GM 3000 units.
• Catch the Wind and Gamesa agree to launch collaborative R&D Project. Gamesa are the number two wind turbine manufacturer behind Vestas with GE and Enercon filling the next two slots.

Disclosure: Long CTW. Buying 10,000 shares a day at weighted average starting today for the next five days, for the Fusion Investing Portfolio.

This is a speculative stock. If you desire less risk then wait until the March conference call to check on sales.

Related posts:

1. Catch the Wind Quarterly Results Q1 2010
2. OT: Without Hot Air or Within the Box
3. My Favourite Stock for 2010