Vestas: Having Q1 Disclosed May Put A Halt To Recent Volatility And Give Investors Clarity
- Vestas delivered a disappointing top- and bottom-line financial performance for Q1-2021.
- Management maintained full year 2021 guidance despite its close competitor Siemens Gamesa lowering its FY in face of same challenges.
- Order backlog is significantly stronger year-on-year and renewables is still full steam ahead.
- Trading 3% up intraday on what appears to be a relief rally considering a combined 10%+ drawback in stock price so far this week.
- Despite a strong runway for wind renewables, I think the potential investor must be able to stomach volatility and I advocate for dollar cost averaging for potential investors.
Vestas Wind Systems A/S (OTCPK:VWDRY) just released its Q1-2021 statement with a disappointing performance. Revenue was down 12% compared YoY as the company delivered fewer projects but also experienced supply chain constraints in the face of Covid-19 impacts. EBIT landed on -€71 million compared to analyst consensus of €41, it did however perform better YoY as the gross margin improved. Most importantly, Vestas maintained its full year guidance and the stock is trading 3% up intraday in what appears to be a relief rally on top of Janet Yellen's interest rate comments the day before sending Vestas down 6.7% in conjunction with the general market. Vestas is the dominant wind turbine manufacturer, making it a potentially interesting investment as also seen by being the largest holding in the popular renewables ETFs the Global Clean Energy Index ETF (ICLN) and First Trust Global Wind Energy ETF (FAN). The stock has taken a beating since beginning of 2021 and having the financials out in the open combined with a fresh commentary from Treasury Secretary Yellen, the tree might have been shaken sufficiently allowing investors to take a breather and look forward. Given vulnerability to interest rate scares, the adversely impacted market conditions, optimistic operating margin analyst consensus for 2022 and 2023, general market cap expansion in face of reduced profits, I would consider utilising a dollar cost average strategy if I were to initiate a position as I believe there will be more volatility in coming quarters as we see how these four topics play out. One thing is certain, renewables is still full speed ahead when considering order backlog developments YoY.
Vestas just released its Q1-2021 earnings on May 5th with a couple of takeaways I’ll dive into for this piece. Tracking Vestas would be of interest to both direct investors and those who are indirectly invested via the popular clean energy ETFs the Global Clean Energy Index ETF or First Trust Global Wind Energy ETF where Vestas currently happens to be the largest weight of both ETFs. Vestas currently represents a roughly 9% weight in FAN, and 8% weight in ICLN.
Being the largest player in its industry and a significant holding in both of the aforementioned ETFs, it’s little surprise to see that Vestas has outperformed SP500 on both a 1y, 5y, and 10y horizon. Having returned 175% on a 5y horizon compared to SP500’s 101%, 182% on a 3y horizon compared to SP500’s 57.6% and finally having returned 120% YoY compared to SP500’s 46%. Despite having delivered impressive returns YoY, Vestas is substantially lower than its 52-week high which stood at $87.3 per share, compared to recent price of $62.7
I’ve previously been long Vestas several times and made the mistake of offloading my shares a long time ago, but I’ve been monitoring it more intensely the last couple of years. One of the metrics I’ve been paying close attention to is the development within operating margin versus revenue growth. I’ll come back to that later.
The Marketplace In Brief
For a fifth year in a row, Vestas ended 2020 by being the world’s largest wind turbine manufacturer when measured on installed capacity. In a close second, we have General Electric Company (GE), with Xinjiang Goldwind Science & Technology Co (OTCPK:XJNGF), Envision Energy, and Siemens Gamesa (OTCPK:GCTAF) making up the rest of top 5. Those five companies make up more than 50% of the total market and therefore dominate the space on a global scale. With the global commitment to a greener and more sustainable future with wind being a dominant component in that story arch, Vestas is a natural focus point for those who are looking to invest in renewables. Vestas can trace its history all the way back to 1945, initially focusing on household appliances before entering wind turbine production in 1979 with exclusive wind turbine production from 1989 and forwards. As such, Vestas has been part of shaping the technology all the way up until today and seems like a significant player within the industry for many years to come. The Chinese players are benefitting greatly from their national market expanding massively, and may very well take the number one spot in a not too distant future, but given the runway ahead, there should be plenty of work for those who can run an efficient business.
Vestas is active in manufacturing for both onshore and offshore wind turbines, but naturally with a broader onshore portfolio as that part of the market has a higher maturity, as also evident by the illustrations seen below. The International Renewable Energy Agency has constructed a market outlook for both onshore and offshore and I think it is a great read for anyone who wants to understand what this marketplace might hold in store for its operators.
Future of wind, International Renewable Energy Agency, p. 25.
Future of wind, International Renewable Energy Agency, p. 43.
When I observe the wind turbine industry, I view it as two main activities taking place. The wind turbine construction and then the downstream installation of wind farms, with Ørsted A/S (OTCPK:DNNGY) as the largest downstream wind farm installer. Last week I published an article concerning Ørsted’s Q1-2021 performance published (for those interested in that part of the value chain). Anyway, what separates the two main activities, is the competitive landscape. Except for mergers between existing companies, such as the case for Siemens Gamesa back in 2016 and the entrance of the Chinese manufacturers in the early 2000’s not a whole lot has changed within the wind turbine manufacturing landscape, except of course for technology developments that come step-in-step every few years to create ever-larger wind turbines. The same isn’t the same case when observing the downstream wind farm developers. Despite being the largest, Ørsted operates in a much more fragmented marketplace. Traditional offshore oil & gas giants like Equinor ASA (EQNR) and British Petroleum plc (BP) have entered the field and proclaimed their commitment to offshore wind. Their entering of the marketplace will cause more pressure driving down prices for the existing players. This should make for a more attractive and stable environment amongst the turbine manufacturers.
The Devil Is In The Detail
Prior to looking at Vestas’ own performance, Siemens Gamesa released their own first quarter (Q2 accounting-wise) performance of 2021 on April 30th. During their investor call later in the day, their CEO, Andreas Nauen commented on the market development.
“Let me come now to the second and very important point of today’s earnings release. That is our guidance. Based on the good visibility, we have now for the operational business for this year. We have narrowed our revenue guidance down to €10.2 to €10.5 billion. This guidance is the result of all the order deferrals especially in Onshore and project execution delays driven by a number of factors included COVID impact in few countries. The margin guidance of 3% to 5% is maintained. It is supported by the H1 EBIT performance, but we also see some headwinds in the second half. We expect performance to be impacted by a number of factors, such as higher supplier cost and raw material costs”
-Andreas Nauen, Siemens Gamesa, CEO, April 30th 2021 Earnings release
What we may derive is a worsening of the marketplace conditions, still seeing impact from Covid-19 around the world in terms of logistics and actual deliveries. Further, 2021 will be negatively impacted by an upstream cost pressure in the form of raw material prices increasing and supplier costs also increasing. Now, how companies handle this will be individual. For some companies, there might be clauses in place to ensure cost-sharing as well as price hedging on raw materials, but it does provide some interesting insight. It does raise the question of to what extent the wind turbine manufacturers can transfer these costs onto their customers. In a fiercely competitive market, there is the chance that they might accept lower profits to maintain market share, time will tell. It did however cause Siemens Gamesa to lower their full year guidance. Now, Siemens Gemesa did report rising order intake YoY by 18%, so not all in the marketplace is out of order, as the green transformation is still well.
“A final point from the U.S. the new target of 30 gigawatts for Offshore by 2030, and also the PTC and ITC to be extended, and commitment to ease the permitting process, I think we could have hardly expected more from the new administration in such a short time. But also in Europe, we make progress. As well as tougher emission targets, the UK’s industrial decarbonisation strategy was published, including an ETS system, supporting energy supply contracts with renewable energy plants. Also important for Germany, the UN – the European Union, approved the support mechanism for offshore projects. So 10 gigawatts of auctions are now scheduled for 2021 to 2025. And on top of all of that, we have China that announced the staggering wind and solar target of 1200 gigawatts by 2030 and its plans advance towards a carbon neutral goal by 2030.”
-Andreas Nauen, Siemens Gamesa, CEO, April 30th 2021 Earnings release
There isn’t a whole lot to state here beyond the obvious mentioned by Andrea Nauen, that it’s full steam ahead across all markets when considering the total addressable market for wind energy. The US is ramping up and extending its support programs to incentivise for renewables, with China and EU continuing and even strengthening their ambitions. It’s a question of whether one has sufficient long-term focus to not shudder when observing the immediate headwinds.
Unfortunately, Vestas delivers a performance somewhat similar to that of Siemens Gamesa. An important difference, however, is that Vestas maintains full-year guidance despite underdelivering on both top- and bottom-line compared to estimates. Q1-2021 revenue came in at €1.962 million compared to €2.235 million in Q1-2020 versus analyst expectations of €2.469, quite a difference. The 12% drop compared to 2020 is explained by lower than expected deliveries and supply chain constraints, which to me seems like a similar story compared to Siemens Gamesa. EBIT for Q1-2021 came in at -€71 million compared to -€112 million for Q1-2020 versus analyst expectations of €41 million. As such, EBIT is seen improving on a percentage basis from -5% to -3.6% due to the increased gross margin compared YoY. Concerning the gross margin development, management states that it was caused by better average project margins, but that supply chain bottlenecks also caused a negative effect. I've typically experienced Q1 tends to be a slow quarter in terms of financial performance, so even though unsatisfactory, it doesn't cause me to sound the alarm.
Considering the operational key figures, the order intake is slower compared YoY but the total order backlog for wind turbine production is 12% higher than one year ago, even better is the order backlog for services being 28% higher than one year ago despite the order intake also being slower in Q1-2021 compared to one year ago.
Vestas also announced acquiring a 25% stake in Copenhagen Infrastructure Partners (CIP) back in December 2020, with the first payment of €180 haven taken place during Q1-2021. CIP is the world's largest dedicated fund within greenfield renewable energy projects, and Vestas stated its stake would increase its exposure across the renewable energy value chain for the future. CIP is however mainly exposed to wind farm projects.
Stock Market Reaction & Valuation
Vestas has had a rough beginning to 2020 being roughly 20% down since 1st of January 2021. Even more so, it has been a rough week for Vestas closing Monday with a 4.3% reduction in its stock price followed by a 6.7% reduction Tuesday as the market turned sour upon Janet Yellen’s comments concerning interest rate outlook. Despite the disappointing Q1-2021, Vestas stock traded 3% higher just a few hours after its earnings release. I believe it must be viewed in the light of Vestas haven taken a serious beating the last couple of days combined with the maintained full year guidance acting as a relief. Had management decided to lower the guidance, we may very well have seen the stock react negatively to the earnings release. Maintaining guidance was explained by management as having begun to raise prices towards its customers, which still makes it possible to end 2021 at the higher end of its guidance. Whether that happens once we close out 2021 remains to be seen.
The “tree” has been shaken quite a bit during the first part of 2021 and with its financials out in the open, the stock might finally get some respite. I still think interest rate scares can be a catalyst for negative stock reactions as it will negatively impact the renewables growth space, but if one can stomach the volatility, it might be a case of ‘buy the dip’ as the runway ahead should be significant.
Vestas has seen its revenue soar by more than 50% measured on a three-year horizon, but at the same time seeing its operating margin reduced all the way down to 5.2% with guidance for 2020 being in the interval 6-8%. Analysts have a consensus 2022 operating margin of 8.25%, and 8.86% for 2023. I’d keep a close eye on that development as I believe a below guidance performance for the full year would be detrimental to the stock price as it would cause concern for future margins and adversely impact the general profit expectations.
In 2016, Vestas delivered operating income of $1.525 million compared to $929 million in 2020. The erosion in operating margin therefore more than makes up for the massive expansion in revenue which during the same period has grown 68%. Conclusion being that growth is great but not at the expense of a collapse in operating margin. As such, that is my key parameter monitoring Vestas going forward. The order backlog is strong, but questions remains whether they can also secure healthy returns.
Vestas has delivered stunning returns compared to S&P 500 during the last 10 years with a particularly strong runup in the last couple of years. As with renewables in general, Vestas has taken a breather and currently see its stock trading 20% lower than the start of 2021, with a 52-week high of $87.3 per share compared to last nights close at $62.7 per share. Vestas has seen its market cap expand despite a deterioration in operating profit as the runway for wind energy is substantial for many years (…decades…) to come. The wind turbine market appears to be struggling in 2021 on the back of supply chain constraints, raw material price increases, and delivery constraints on projects, as can be seen in Q1 releases from both Vestas and one of its main competitors, Siemens Gamesa. With its financials out in the open, the immediate stock market reaction is sending Vestas 3% higher upon having had a rough beginning to the week having seen a combined 10%+ downwards reaction to Janet Yellen's interest rate comments. Vestas underdelivers on both top- and bottom-line but has seen its order backlog strengthen significantly YoY and maintains full year guidance. The recent stock market drawback could provide an opportune entry point for those who want renewables exposure on the long haul as Vestas is the dominant player in its industry. Personally, I think the analyst consensus is on the positive side concerning Vestas’ ability to secure operating margins for the coming years which provides downside risk should the company fail to meet analyst expectations. Lastly, that the company and its industry will remain vulnerable to interest rate scares as we saw in Tuesdays 6.7% stock price reduction. I think this earnings release and market reaction make it difficult to make a clear conclusion in terms of how to respond, but one approach could be to enter Vestas through dollar-cost averaging over the coming months to mitigate some of the volatility. The order backlog and commentary from Siemens Gamesa CEO are clear indications of the renewables being full speed ahead.
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