The wind energy industry is one that has been facing sluggish growth, impacted mostly by concerns on sustainability and stability of wind-generated power. An industry that came into the limelight over a decade ago, it is disheartening that companies operating within the industry still rely mostly on government subsidies for revenues. Over the years, these companies earnings power has been determined by political winds - negative or positive.
An example of how political winds affect companies in this industry is the effect of the 2012 US Presidential election. With investors not sure of what the Renewable Electricity Product Tax Credit would look like, there was a decline in demand for wind-powered products prior to the elections. This resulted in these companies suffering significant net losses in 2012. Two companies that were adversely affected by this occurrence are Vestas Wind Systems (OTC:VWDRY) and General Electric (GE).
A little about Vestas and General Electric
Vestas, a well-known global manufacturer and seller of wind turbines and wind power systems, was founded in 1898 as a local blacksmith workshop by H.S. Hansen in Denmark. In 1928, Smith Hansen brought his son, Peder Hansen, into the business as they initiated the windows frame production business. Then in 1945, father and son with other colleagues formally established VEstjysk STaalteknik A/S and due to pronunciation issues, shortened it to Vestas and started production of household appliances like mixers and kitchen scales.
By 1950, Vestas shifted its focus to agricultural equipment, moved to intercoolers in 1956, and by 1968, it was producing hydraulic cranes. The great change came in 1979 when the company dipped its foot in the wind energy industry with the sale and installation of its first wind turbine. By 1989, Vestas started exclusive production of wind turbines. Presently, other services it offers in the industry include wind project planning, procurement, construction, operation and optimization services. The company also offers after sale services with availability of wind turbine spare parts.
General Electric is an American multinational conglomerate founded in 1892 by Thomas Edison, Elihu Thomson and Edwin J. Houston. The company is headquartered in Fairfield, Connecticut. The company operates in the aerospace, wind energy, water, consumer goods, medical and consumer financing industries.
With its foot in over 100 countries, the company, which has maintained enviable organic growth, has also been able to grow inorganically through strategic acquisitions, the latest being acquisitions of Lufkin Industries, Inc. and Ario S.p.A.
One thing that led investors to stake their money on wind turbines is the reality of enjoying clean and efficient alternative energy as wind turbines are synonymous with zero emissions. However, the high start up costs turned out to be the albatross of this promising energy source, especially when it is compared to other cheaper sources of energy like coal. Presently, with the improved technology that has made it possible to drill natural gas and oil from peculiar formations, natural gas is also beginning to compete with wind-powered generators in terms of low emissions, costs and maximum reliability.
Another headwind the industry is battling with is the possible health ramifications associated with the use of wind turbines. Recently, there were reports of dizziness, headaches, ear aches and change in sleeping patterns in communities where wind turbines are installed. This led to suggestions that the low frequency sounds emitting from the turbines might have something to do with the reported physiological complaints. It is so bad that some communities are considering uninstalling their already installed wind turbines. One example is Falmouth, Massachusetts.
Although this industry is presently facing significant headwinds (most industries do), it is an opportunity for risk-tolerant investors to take advantage of the huge growth potential the industry offers on the long term. First, I want to point out that the issue of the health ramifications might be speculative and even at that, with considerable upturn in the global economy, companies operating in the industry will experience a surge in demand for their products. This is where Vestas and General Electric comes in.
Recent reports show that with more economic affluence in emerging markets like China and India, the demand for alternative environmentally-friendly energy will also increase, with the wind energy industry projected to gain a fair share. Also set to benefit from this trend is Siemens AG (SI). With management's decision to divest the water technologies segment, which is estimated to bring in approximately $700 million, Siemens will then pay more attention to other profitable segments including the wind energy segment.
Another company that would surely have a share in the future growth of the wind energy industry is Gamesa Corporation (OTC:GCTAY). With its footprint already in China and other countries, Gamesa reported improved profitability in the first half of 2013, along with other contracts in the pipeline.
Component makers in the mix
In one of my recent articles, I pointed out that no matter the technological advancement in manufacturing, there will always be demand for replacement parts and the wind energy industry is no exception. This is where component makers in the wind energy industry come in. Woodward, Inc. (WWD) is one of the component makers that should benefit from the impending trend in the wind energy industry. Although the company has one foot in the aerospace industry and the other in the wind energy industry, Woodward has its primary focus on providing long lasting solutions. One of its solutions includes integration of new wind plants with existing power grids.
With the companies operating in the wind energy industry replacing their traditional glass fiber technologies with more advanced carbon-fiber technologies to enable them build rotor blades that are bigger and lighter, Zoltek Companies, Inc. (ZOLT) is on hand to benefit from their demand for the technology it offers. Zoltek also offers its products to the aerospace industry and is recently rumored to be an acquisition target. Another company that would also take advantage of the impending trend is Hexcel Corporation (HXL). Just like Zoltek, Hexcel services multiple industries including wind energy, defense, aerospace, automotive and marine industries. With its full spectrum carbon-fiber technology, Hexcel is sure to secure contracts from wind energy manufacturers like Vestas, General Electric and Siemens when the tide finally rises.
There are also other developments that make it worthwhile for investors to keep an eagle's eye on the industry. These developments go a long way to substantiate my claims that with improvement in the economy, the demand for environmentally friendly alternative energies will be on the rise. The developments include the recent technologies like Ewicon, Saphonian, Airborne, Invelox and Catching Wind turbines. These new technologies have been noted to emit minimal noise with higher efficiency, with potential to revolutionize the industry. But the question remains if they would be successfully commercialized and as such be able to replace what is currently offered by Vestas and General Electric.
With constant technological advancements which are also visible in the wind energy industry, and signs of improvement in the economy, the ball is now left in investors' court. There is more to gain from investing in these high-risk companies with potential greater rewards. With a better economy and positive sentiment toward alternative energies with zero emission and lower operating costs, long-term and risk-tolerant investors would surely be rewarded as demands for wind turbines and its components go off the charts.
In all, I believe that it is only risk-tolerant investors who will be able to gain from the potential growth in the wind energy industry. Based on the fact that product demand in the industry is mostly subsidy-driven and as such, the volatility is very high, and risk-averse investors are sure to shy away from investing in this industry, leaving all the risks and accruing benefits to the former.