Vestas Breaks U.S. Wind Market Lull

On July 22, 2010, in Alternative Energy Stocks, Green Stocks, Wind, by Andreas Schreyer
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Finally, a sleeping giant awakens! After many months of eerie calm, or even headwinds for some of the companies involved in wind energy, there are some promising developments. The same day Google (GOOG) entered the wholesale renewable electricity markets with a major wind power purchase agreement (see announcement here), the world’s leading wind turbine manufacturer Vestas Wind (VWDRY.PK) announced a record-setting order for 570 MW, or 190 3 MW turbines, for Terra-Gen’s Alta Wind Energy Center near Tehachapi, California, USA. Read the full Press Release.

In 2009, Vestas was the largest wind turbine manufacturer in the world and third largest in the U.S., after GE Wind (GE) and Siemens (SI).

After a record breaking year for the U.S. wind industry in 2009, this year was always going to be a challenge and, sure enough, most wind energy-related stocks have struggled so far in 2010. The chart below shows Year-To-Date stock price performance of representative wind companies: American Superconductor (AMSC), A-Power Energy Generation Systems (APWR), Trinity Industries (TRN), Vestas Wind and Zoltek (ZOLT). For a more complete review of wind-related companies, read Opportunities in the Wind Energy Value Chain.

2010 YTD Wind Energy Stocks Performance

In the best of times, wind energy gets little coverage from the media in general and the financial press in particular. Compared to the solar market, which is broadly followed and reported on, wind gets short shrift. This is rather puzzling when you consider that wind energy has the lowest initial capital costs of any alternative energy technologies, and that the so-called levelized cost of wind energy (which includes all the costs of producing the energy over the plant lifetime) already compare favorably with conventional generation technologies like coal and gas.

The wind sector underperformance can be traced directly to the weakness in the U.S. economy (the largest world market for wind in 2009) to which most companies in the chart above have a high exposure, and the ongoing lack of a U.S. energy policy. Companies and investors are understandably hesitant to commit the capital costs for new projects and installations in such an uncertain environment.

If nothing else, the recent announcements indicate the U.S. wind market is not dead, and they might even mark a turnaround point for the wind industry.

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The Green Investor Update – February 18, 2010

On February 18, 2010, in Market Trends, TGI Updates, by Andreas Schreyer
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In this update:

  • The stock market takes a breather
  • The China factor
  • Texas two-step
  • A tale of two halves
  • The Green Portfolio update and recommendations

The stock market takes a breather

The long awaited stock market correction has arrived, although it does not yet fully qualify as a correction for all market indexes when using the strict definition of a drop of at least 10%. Poor economic news caused investors to reconsider how fast the recovery will unfold, or if instead a recessionary relapse is in the cards. Disappointing economic news were many, with declining retail sales and consumer sentiment, rising unemployment, and record budget deficits and trade imbalance leading the pack.

Further weaknesses in the world financial system were exposed as debt ridden southern European countries like Portugal, Italy, Greece and Spain, the so-called PIGS, are nearing critical stage with some threatening to default. Unless financial assistance can rapidly be organized by stronger members of the European Union, the future looks bleak for countries like Greece. With all the fear and uncertainty, investors flocked back to the U.S. dollar as their safe haven of choice, which also helped to knock stocks lower.

In the month since our last update the S&P 500 index dropped 4.81%, having recovered some of its losses over the last few sessions. The technical market picture we reviewed in the February issue of the newsletter highlights the main support areas and what we can expect from this correction. Considering the nearly uninterrupted gains of 70% since March 2009, the market would be justified in correcting a little deeper and a little longer, but it seldom does the logical thing.

The China factor

China, with its double-digit growth last year, and Asia in general, have been the drivers behind the world economic recovery. When the People’s Bank of China, for the second time in less than one month, said it will increase commercial lenders’ reserve requirements, stock markets around the world got caught by surprise and proceeded to break their six month up trends. China is one of the largest economies to begin shifting from stimulus policies to tightening monetary policies, and other central banks are taking notice. By attempting to curb bank lending, the Chinese central bank is hoping to slow an economy in danger of overheating and to delay actions to raise interest rates.

The Chinese stock market took the biggest hit but in fact it had already started correcting back in November 2009. Economists and stock market analysts are now watching the Chinese markets in the hope they will continue to lead and signal the end of the current slump.

Texas two-step

As green investors we know Texas as the state with the largest wind energy capacity in the United States, and if it were a country, it would rank sixth in the world. In 2009, in the midst of the recession, it has added the most, some 2,292 megawatts of new wind power, for a total installed capacity of 9,410 megawatts (Total U.S. installed capacity: 35,159 megawatts).

On the other side of the coin, the most recent data from U.S. Energy Information Administration shows the state of Texas being the largest emitter of carbon dioxide in the country, over 60% higher than California which ranks second in emissions but has a population nearly 50% higher than Texas. With such a record, it is no surprise that Texas Governor Rick Perry rejects the scientific evidence linking greenhouse gas emissions and climate change and, just this week, sued the Environmental Protection Agency in federal court to prevent regulation of greenhouse gases. One step forward, two steps back.

While we all celebrate being the best and the biggest, China has doubled its installed wind capacity each of the last five years and is expected to have surpassed the United States with over 10 gigawatts of new capacity installed during 2009. At such growth rates China is projected to reach wind power supremacy in the next couple of years.

In spite of the local state government, progress continues in Texas wind energy as another 600 megawatt West Texas project has moved closer to reality this week. Ironically, the $1.5 billion project for a 36,000 acre wind farm will be supplied with wind turbines from China-based A-Power Energy Generation Systems Ltd. (Nasdaq: APWR).

A tale of two halves

According to Thomson Reuters, of the companies that have reported quarterly earnings so far, 78% have beaten Street expectations. After the recession expectations are understandably very low, but revenue and earnings growth have been the norm and management guidance has been increasing as well.

Despite these positive signs some of the more capital intensive segments of our renewable energy sectors report various delays and push outs affecting the first half of the year. Some of the reasons cited involve longer and tougher financing cycles as well as temporary project postponements. Project pipelines, in utility-scale wind farms for example, are growing nicely but some of the short-term building, orders, and deliveries are being postponed. Several manufacturers in our portfolio indicated that their customers are implementing just-in-time delivery policies which effectively force them to build and hold an inventory. For now the consensus seems to point to a small slow down during the first half of the year followed by a second half which looks stronger than previously forecasted.

The Green Portfolio update and recommendations

Over the last month, the weakest market segments have been China stocks, energy storage and battery technology stocks, closely followed by solar and geothermal stocks. These sectors lost around 13% in the 30-day period. With this combination of market conditions it comes as little surprise that our portfolio gave back some of the paper gains we had accumulated before the correction hit.

In the month since our last Update, as of the close on February 16, 2010, our Green Portfolio lost 9.26% compared to 4.81% for the S&P 500. Since inception last summer the aggregate portfolio return is 14.76% versus 9.20% for the broad market.

Despite some of our holdings announcing very impressive quarterly results and reaffirming their outlook for 2010, the vast majority of our green stocks followed the broad markets down. Surprisingly, the best performance came from our solar photovoltaic high-flyer Trina Solar, Ltd. (TSL) which somehow managed to buck the market trends to gain 4.28% during the period.

*** Green Portfolio recommendation updates ***
(Only active subscribers of The Green Investor newsletter receive
updated recommendations for Green Portfolio positions.)

Our upcoming March newsletter issue should help us stay warm for the rest of the winter by focusing on heat, from the sun and from the earth. These little known alternative energy sectors offer hot investment opportunities we plan to add to the Green Portfolio.

Best regards,

Andreas Schreyer
Editor
The Green Investor
 http://www.thegreeninvestor.com/

_____________________________________________________________

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Opportunities in the Wind Energy Value Chain

On November 11, 2009, in Alternative Energy Stocks, Green ETFs, Green Stocks, Wind, by Andreas Schreyer
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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 (FAN) and (PWND) to the targeted method of focusing on top wind turbine manufacturers such as Vestas (VWDRY.PK) 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
E.ON AG EONGY.PK Germany
FPL Group Inc. FPL USA
Iberdrola Renovables IBDRY.PK Spain
Nacel Energy NCEN.OB USA
Naikun Wind Energy Group NKWFF.PK Canada
Otter Tail Corporation OTTR USA
Western Wind Energy Corporation WNDEF.PK 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 USA
Broadwind Energy, Inc. BWEN USA
Hexcel Corp. HXL USA
Trinity Industries Inc. TRN USA
Timken Co. TKR USA
SKF SKFRY.PK Sweden
Toho Tenax TINLY.PK Japan
Toray Industries TRYIY.PK Japan
Xantrex SBGSY.PK 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 (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.

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