Wind Turbines: The New Renewable Bull Market
By Nick Hodge | Tuesday, August 5th, 2008
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.
And they're not doing it because they feel all warm and fuzzy inside. They're doing it to turn a profit. And you 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.
You see, 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 (CPH: VWS) (Pink: VWDRY) 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 (MCE: GAM) (Pink: GCTAF) 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.
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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 diverging 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.
Green Chip International
Much of the information in the latter half of this article is the type of information we normally reserve for our paid subscribers.
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