Opportunities in the Wind Energy Value Chain

by: The Green Investor

After having introduced the wind energy market and established why it has such a very promising future in “Wind Energy: Now Is the Time to Invest”, we explored ways to invest in this space, from the broad industry index approach of the specialized wind ETFs (NYSEARCA:FAN) and (NASDAQ:PWND) to the targeted method of focusing on top wind turbine manufacturers such as Vestas (OTCPK:VWDRY) outlined in “Finding Opportunities in Wind Energy ”. For all practical purposes, this latest article could have been entitled “Investing in Wind Energy, Part 3” and it takes us to mostly unsuspected ways to invest in this vastly untapped source of renewable energy.

When it comes to the selection of wind energy stocks, a look at the value chain beyond turbine manufacturers reveals what are, in our opinion, some of the best ways to play this market. With the turbine manufacturers located approximately in the middle of the value chain, we first look downstream to where the demand is coming from.

Demand for electricity ultimately comes from the consumers, industry and individuals, but the demand for renewable energy mostly originates with the utilities that are forced by regulatory mandates to gradually decrease the percentage of their energy mix coming from fossil fuels. Utilities seldom develop their own wind farms; instead they acquire them from project developers or simply buy the electricity from Independent Power Producers (IPPs). Table 1 below lists some of the key downstream wind market participants: the project developers, Independent Power Producers and utilities.

Table 1: Project Developers, Independent Power Producers, Utilities

Company Name Ticker Symbol Country
A-Power Energy Generation Systems APWR China
Iberdrola Renovables OTCPK:IBDRY Spain
Nacel Energy NCEN.OB USA
Naikun Wind Energy Group NKWFF.PK Canada
Otter Tail Corporation OTTR USA
Western Wind Energy Corporation OTC:WNDEF Canada
Xcel Energy XEL USA

The list is ranked alphabetically and includes some of the larger players in their respective fields as well as some emerging ones. Besides a couple of large U.S. utilities, many of the companies are either foreign or small (or both), but they all can be traded on the over-the-counter markets. The list also varies widely in terms of exposure to wind energy. Some, like A-Power Energy Generation, a small-cap Chinese Project Developer which has positioned itself masterfully as a wind pure-play to Wall Street investors, in fact generates the bulk of its revenue from waste heat cogeneration projects. At the other end of the scale we find companies such as E.ON, an $81 billion German energy behemoth which recently came to the attention of U.S. investors when they opened the world’s largest wind farm in West Texas. It might be a great energy company, but a wind pure-play they are not. To find pure-play wind companies you need to look to much smaller companies such as Nacel Energy, Naikun Wind Energy Group, and Western Wind Energy Corp. which, at $20 to $25 million in market capitalization, are not even ranked as micro-caps.

While no publicly traded utility company offers exclusive focus on wind energy, we like the U.S. utilities as they stand to profit from the long-term shift to renewables. With a market cap of about $825M, Otter Tail Corporation is a smaller utility but they have made great strides in incorporating wind in their generation portfolio. Larger utilities we prefer for their forward thinking strategies are FPL Group Inc. which already generates 10% of its electricity from wind, and Xcel Energy, as their NextEra Energy Resources subsidiary owns 25% of current U.S. wind capacity.

The last and maybe the most unrecognized but also the most promising segment of the wind energy supply chain can be found upstream from the turbine manufacturers. It turns out that wind turbine manufacturers are mostly system integrators and they outsource many of the critical components to specialized firms. Table 2 below includes a broad collection of wind components manufacturers which produce blades, bearings, transmissions, generators, towers, power electronics and other key ingredients.

Table 2: Wind Turbine Components Manufacturer

Company Name Ticker Symbol Country
ABB ABB Switzerland
American Superconductor Corp. AMSC USA
Ameron International Corp. AMN-OLD USA
Broadwind Energy, Inc. BWEN USA
Hexcel Corp. HXL USA
Trinity Industries Inc. TRN USA
Timken Co. TKR USA
Toho Tenax OTCPK:TINLY Japan
Toray Industries OTCPK:TRYIY Japan
Xantrex France
Zoltek Companies Inc. ZOLT USA

The list is a sampling of publicly traded companies and is by no-means exhaustive. Few of them are wind pure-plays, but this gives them some solid diversification and financial strength. While new wind turbine makers appear by the dozen, the components used in their assembly require very high levels of expertise and specialization. Many of these specialties have significant barriers to entry and the incumbent suppliers are not easily displaced. They promise to grow as fast as the wind energy market grows and their margins tend to be easier to maintain and several have the fundamentals to provide great investment potential.

Not all wind turbine components present good opportunities for investment. Towers, for example, are mostly outsourced to an ever growing list of local suppliers. With no real barrier of entry and transportation a permanent confining factor, the market for towers will continue to be very fragmented and local. Ameron International Corp. and Trinity Industries Inc. are two such companies which produce wind towers as one of many other businesses such as rail cars, barges, gas tanks, pipelines, etc. Almost at the other extreme in terms of industry concentration and geographic reach are gears and bearings which are in every wind turbine. There are a few very large global manufacturers like Germany’s SKF and Timken Co. who split the market amongst them, but in our opinion present little attraction as investments because they offer relatively low exposure to the wind market and modest profitability prospects. Much of the same statements apply to generator manufacturers which include large multinationals like ABB and General Electric (NYSE:GE).

A different breed of wind player is represented by Broadwind Energy, Inc. which is providing a broad array of components and services for the wind industry. They build everything from towers to bearings and gears, and provide heavy haul transportation for the massive parts as well as complete wind farm maintenance and operation services.

With the industry pushing to ever larger, stronger and lighter turbines, carbon fiber blades have emerged as a substitute to fiber glass and other composites. Our list of manufacturers includes Japanese firms Toray Industries and Toho Tenax, a wholly-owned subsidiary of Teijin and the dominant US-based blades companies: Hexcel Corp. and Zoltek Companies, Inc.

On the power electronics front we have a large number of vendors providing anything from inverters, to wind turbine current-leveling and backup power for blade pitch control systems. ABB once more heads the list of the large players competing with specialist companies such as American Superconductor Corp. and Xantrex, which has now been acquired by French giant Schneider Electric.

The wind energy value chain features many more companies than we could list here, and not all we listed necessarily make great investments. There are several dozen companies to investigate among which many outstanding gems can be found by the informed investor.

Disclosure: No positions.