Wind Turbines: The New Renewable Bull Market

Blackstone, one of the largest U.S. private equity firms, recently announced it's lobbing over $1.5 billion at a German offshore wind farm.

They're not doing it because they feel all warm and fuzzy inside. They're doing it to turn a profit. And I think that we should be heeding their advice.

But the wind farm, which would supply power to more that half a million homes, will need to overcome supply and labor bottlenecks in order to be a success.

Renewable energy is in such high demand that it is sometimes difficult to procure labor and materials. And if you've been following oil prices, you know exactly what happens when demand is high and supply is low: prices rise.

That's precisely what's happening in the wind industry. Materials like turbines and gears are in short supply, requiring long lead times, but the offshore wind industry is forecast to grow at 50% annually for at least the next five years.

And the onshore wind industry is forecast to grow just as quickly. Europe has a goal of attaining 12-14% of its power from wind by 2020. On this side of the pond, the DoE has said that getting 20% of our power from wind by 2030 is also within reach—but it will take trillions of investment dollars, considering we currently get less than one percent of our electricity from wind.

Backlogs are growing quickly, while the orders keep pouring in. It's shaping up to be giant bull market for wind turbine stocks.

The Largest Wind Turbine Companies

First, let me clarify that the turbines used for offshore wind are of different quality and cost than those used onshore. Right now, General Electric (NYSE: GE) and Siemens AG (NYSE: SI) are the two most viable candidates in the offshore business. But a few analysts have claimed that Siemens is the only company currently capable of accepting large new orders for offshore turbines—another indication of a looming, if not present, wind turbine supply crunch.

Nonetheless, each of those companies is a leader in the overarching wind turbine business. And there are other companies worth paying attention to. So let's dissect the wind turbine business, one company at a time.

The race to become the world's largest manufacturer of wind turbines is highly contentious, with a handful of companies vying for the top spot.

By nearly all estimates, Danish wind company Vestas (VWDRY.PK) holds the largest market share with about 23%. In fact, the company produced enough turbines in 2007 to power about 4.5 million homes, and has already made deliveries of wind turbines capable of producing 4.5 GW of power to 28 countries.

Spain's Gamesa (GCTAF.PK) is next in line, with a 16% global market share. Gamesa also perfectly illustrates the current backlog of wind turbines worldwide. In 2007, for example, the company sold enough contracts to to max out its production capacity. . . for the next two and a half years!

The wind turbine business is so hot that Gamesa—once a diversified renewable energy company—recently sold off its solar segment to devote more time and energy to its wind business.

Just in the past 18 months, Gamesa has built four wind turbine production facilities in the U.S., three in China, and two in Spain. So you can see how manufacturers are racing just to keep pace with demand.

The third largest wind turbine manufacturer is India's Suzlon Energy Limited (Bombay: 532667), with a 14% global market share, depending on the source.

Suzlon has been highly successful since 2005, with its revenues and profits growing by an average 100% each year. Interesting to note is that the percentage increase in profits has been greater than the increase in revenues, illustrating the company's ability to lower costs and increase margins.

General Electric comes in fourth on the list of wind turbine companies by market share, with about 15.5%. In the first quarter of 2008, GE sold $1.8 billion worth of wind turbines, which is 40% higher than the previous quarter.

What's more, the company's backlog of wind turbines has grown to $12 billion, up from $11 billion in the fourth quarter of 2007, and more than double the backlog in the first quarter of 2007.

If you're still counting, Siemens comes in fifth, with an 8-9% market share.

But enough about companies, what we're really interested in is. . .

The Wind Turbine Stocks To Invest In

Without divulging all the secrets of Green Chip International and the Alternative Energy Speculator, the two no-brainer wind turbine investments right now are Vestas and Gamesa.

Vestas has been able to boost its earnings at a terrific pace, rising from 201 million euros in 2006 to 443 million euros in 2007—a 120% increase!

And in its fiscal year 2007 earnings announcement, the group said it anticipates international wind power capacity to increase by 20% to 25% each year for the next decade.

To be honest, the company reported lower than expected first quarter 2008 results, and the share price has reflected that of late.

Vestas's second quarter earnings come out on August 12, 2008. Estimates are claiming the company will report 1.1 billion euro in revenue and .42 eurocents per share profit.

While I'm certainly bullish on this company, I (and Piper Jaffray) think they'll miss the estimates slightly to the downside. Best advise: wait for the earnings to come out. If they miss, and I think they will, you'll be able to pick up shares on the cheap after it takes a hit.

The third and fourth quarter numbers will be stellar.

Gamesa, for its part, is an utterly undervalued stock play. The company recently announced first half (H1) earnings of nearly 1.9 billion euros, about 9% higher than analyst estimates.

As a result, many analysts have upped their estimates for for full year revenue and earnings. Most agree that the second half will much more impressive than the first—as is the case with Vestas.

Plus, the fact that Gamesa has an orderbook that extends through 2011 means that investors have clear earnings visibility. And the company recently secured its first order in China since 2006.

I think this wind turbine stock could reveal a 25% upside by the end of the year.

Disclosure: none

Comments

[Jason Liu]

I was just wondering where you got your source for market share figures as I've seen vastly different numbers.

I'm a strong supporter of wind energy but I think a lot of the wind turbine manufacturers seem over-valued.

1. Their growth isn't decided by the demand, but by their manufacturing capacity. So the projected growth in the wind industry won't directly correspond to Vestas' fortunes.

Many smaller manufacturers are eating to Vestas' market share because the firm can't keep up with demand. And if Vestas does ramp up production, earnings will take a hit from the capital investment.

2. Growth is mostly going to originate from India, China and the U.S. where GE, Suzlon and Goldwind/Sinovel are strongly entrenched. In fact Chinese law decrees that 70% of hardware used in wind farms must be sourced from domestic manufacturers making it difficult for foreign companies to break in.

This will hurt Gamesa more than Vestas. Gamesa has benefited from the strong home market with 54% of revenues originating from Spain. However it'll have to really ramp up production elsewhere to keep growing and as you said, they've secured their first order from China in 2 years, despite China building 5.6 GW of wind energy capacity in that time.

Both Vestas and Gamesa are great companies. Unfortunately that doesn't mean they're great investments.

[fatwollit]

Interesting article and equally interesting response from Jason Lui. One aspect the writer missed, maybe to keep the article short, was that he didn't mention any of the companies who supply the companies he did mention. Just one example, Trinity Industries, better-known for making rail-cars, also make structural wind towers. Yes, I am invested in Trinity, but how would I know Trinity makes wind towers if I wasn't?

[capgain]

Both the article and the comments are well thought out. Whether the limiting factor will be the over-taxed current production facilities, the political strictures, the high cap-ex to ramp up production, or, for the average investor, the hesitation to invest in pink-sheet companies, there is a way to cash in. Fatwollit is on the right track, and I offer another common-sense alternative. No matter who produces the wind generated power, and no matter where it is harnessed, it has to be delivered to the grid to monetize it. The industry leader here is Quanta (PWR) and I like companies whose products/services are in demand worldwide!

[CLH]

Wind is not the answer unless you want to return to the 1600s. The German greenies obviously do.

[Luker]

One of the best ways to capitalize would be to invest in one of the Wind Power ETFs such as PWND. I believe that the top 2 holdings, Gamesa and Vestas comprise 20% of the fund.

[chetan vekaria]

Best to invest in India's Suzlon Energy, because it has lots of supply chain source at the moment and order booked as well.
Suzlon reported a strong consolidated order book position of USD 4,304 million; with USD 208 million in domestic orders, and USD 4,096 million in international orders, as on May 19, 2008.

[john s. gordon]

buy stock in ZOLT ?
> jack

[paultaut]

CRPWF, Clipper Wind Power.

[nickgogert]

bearings and hobbing machines are also in short supply and constraining demand.

[nakedjaybird]

The alternative energy company you want to buy is the solar silicon processor that runs his plant on solar PV. That should make for a low-cost producer.

[nakedjaybird]

PS - that's called REPRODUCABLE RENEWABLE ENERGY!!!

Free energy from the sun; free processing energy to make more to the same.

Drill, drill, drill, can't TOP this; nor can it STOP this (other than in the US, etc.).

[Roly]

Wind power will become competative and the technology is save. Electricity demand will grow, especially in emerging markets. China is and remains a growth story, the leaders have decided to invest in alternative energy. Coal needs transportation and logistics, the railroad capacities are at the limit in China. There are many windy regions in this big country, where windturbins can be installed. I was in 2007 in China and was surprised to see windturbine farms in operation and under construction in the region between Urumqui and Turfan.
So I invested in WELWIND ENERGY / WWEI.OB. I belive in the China story.
Roly

[Richard Carlson]

It should be clear from looking at the European market that there are many opportunities out there for investment, particularly in countries which have feed-in tariffs or premiums.

This can be seen as some markets in Europe (Spain and Denmark and others) have been growing rapidly, while others have been much slower (read UK)... There are still many possibilities in Europe, especially in Eastern Europe.

Check out our publication where we look at the reasons for this in Europe ((www.LondonResearchInte...).
Richard Carlson
London Research International
London, UK

[swimjames]

The Danish wind industry had a 4.7 billion euros export in 2007
Rune Birk Nielsen (2008-06-02)

The Danish Wind Industry Association has just published the annual industry statistics for 2007 and for the industry, the authorities and the green Denmark it is impressive reading.

With a total export of 4.7 billion euros in 2007, the Danish wind industry sets another record, compared to the year before, an increase on 1.1 billion euros or a 30.7 % growth.

"The wind industry is already Denmarks largest exporter of energy technology. If global growth and market development for wind power continue in double digits as expected the wind industry is poised to become our largest industry within a few years," says Jakob Lau Holst, Acting Director of the Danish Wind Industry Association.

"All industry forecasts show that the market for renewable energy and wind power will expand at an impressive rate. Danish manufacturers and suppliers are in an advantageous position to benefit from this growth," says Jakob Lau Holst, but adds: "However, it is crucial that the industry also in the coming years is allowed to install, test and demonstrate state of the art wind turbines in Denmark. Even though the Danish market is dwarfed by the combined global markets, it is hugely significant as a global industry show room."

More information contact Economist Rune Moesgaard, [phone] or [phone]
Or acting director Jakob Lau Hols, [phone] or [phone]