Stock talk for the main street investor.

Blowing In The Wind – Vestas

There are very few ways to play the growing wind market. Big turbine suppliers like GE and Siemens are so large and diverse you would hardly notice if their wind units performed well. Utilities are tied to regulated power prices and power generators usually sign long term power purchase agreements with utilities before building wind turbines effectively turning them into fixed income investments.

But there is one large player in the market, Vestas Wind Systems (VWDRY.PK). Vestas manufactures wind turbines in Europe, China and the US. They have a 23% market share, according to the latest survey. Before the slowdown in 2009 the wind market grew more than 50% in the US during 2008 and at a compound rate over 35% for ten years prior.

Vestas is projecting tripling sales by 2015 and is already on par with natural gas for cost of energy. Higher oil and natural gas prices along with a requirement to capture carbon from coal plants in 2015 will drive demand for wind turbines which provide a constant cost of energy.

New technologies like off-shore wind turbines are a growing section of the market and Vestas has installed 51% of the off-shore turbines as of March 2009. They are working on a new 3MW off-shore turbine for 2011 and a 6MW turbine is in R&D. A turbine that size could power over 1,600 homes. The reason larger turbines are important is they become more efficient as their size grows.

Operationally I’m impressed in Vestas commitment to research projecting 2,000 R&D employees by the end of 2010. They have also committed to the US market by building some of their largest plants in Colorado.

All is not rosy in the wind market though. The credit crisis and low costs for traditional energy sources has hurt demand in 2009. Anticipated government actions to spur “green” development has failed to materialize and has negatively affected Vestas business. These dynamics have caused a dramatic increase in Vestas working capital and effectively hurt their cash position.

While these concerns are real I believe it is also the reason Vestas is currently trading at a reasonable P/E ratio of 12 on their full year 2008 results. When 2010 earnings are announced on Wednesday I expect that ratio to rise slightly at current prices but improving EBIT margins, sales growth and positive future economic and industry trends make this stock undervalued.

Another company to watch in the sector is American Semiconductor. They are a supplier of wind turbine parts and have major contracts in China where wind is growing extremely quickly because of government investment. I’m watching them closely but does not have a valuation as attractive as Vestas.

I have posted a link below to an article the NY Times did on China’s growing wind industry.

Disclosure: I do not own Vestas or AMSC.

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