Wind Power: The Next Way The Government Will Make Investors Rich
Wind turbines near my dad's farm in Kansas.
President Obama’s vision calls for the United States to produce 15-20% of its electricity from renewable sources by 2030.
The U.S. currently produces only 1.25% of its power from wind, which is 100% green, producing no emissions and requiring no fuel inputs.
Leading wind-turbine manufacturers stand to rake in billions as the U.S. and other countries scramble to order thousands of wind turbines to add green power to their grids.
I’ve identified the two strongest players in this category. Keep reading to get both of their names…
Alternative Energy: Obama’s Passion Meets Your Portfolio
President Barack Obama, a few days after being sworn in as president, delivered his first weekly radio address. One of the first things the new 44th president mentioned was wind power. At the cornerstone of his vision is the creation of a “green-collar” economy that attempts to accomplish two goals: The first is the creation of millions of jobs; the second is reducing the nation’s dependence on oil in favor of other, renewable energy options. “To accelerate the creation of a clean-energy economy,” Mr. Obama said, “we will double our capacity to generate alternative sources of energy like wind, solar, and biofuels over the next three years.”
We’ve come a long way. In 1981, our country had only 240 megawatts of wind energy capacity. Ten years later, that had risen seven-fold, to 1,584 megawatts. By 2001, the U.S. had 4,173 megawatts of capacity. In the years since, Americans have embraced the wind, and now our country has wind turbines capable of producing 25,369 megawatts. (Enough to power seven million households.) That amounts to growth of more than +500% in the past seven years. And looking ahead, hundreds of additional wind power projects have already been planned.
The U.S. Department of Energy’s recent “20% Wind Energy by 2030″ report says that reaching the goal is feasible. The goal as currently codified into law foresees 15% of U.S. electricity produced via wind power by 2020.
This is phenomenal news for investors, as only 1.25% of U.S. power came from wind last year. That means we will need tens of thousands of megawatts of new projects — and quickly.
Right now, wind power, even despite its impressive track record of growth, still accounts for a tiny fraction of the world’s energy needs — about 1.3% globally. Washington is not the only government keen on the idea: Governments around the world are providing subsidies, incentives and tax breaks to alternative energy. The European Union is mandating that 20% of energy come from solar, wind and other renewable sources by 2020. China has also set aggressive goals and is home to several key industry players. And Denmark already produces a fifth of its power from wind.
Why does wind work so well? Not only is it plentiful, renewable and inexpensive, it’s also clean. It creates zero water pollution and generates no emissions. No power source is “greener” than wind. That’s great if you’re trying to impress a Greenpeace meeting — but I’m not. The best thing about wind in my view is not environmental but economic: The turbines last for decades and require minimal additional input costs. That makes me want to leap for joy. There’s really no downside to wind. The turbines don’t even make much noise. They just make money. That’s my favorite kind of green, anyway.
But just to tell how great these turbines are, here’s the breakdown: To generate the same amount of juice as the nation’s wind turbines, traditional power plants would need to burn 23 million tons of coal. That’s 160 pounds per U.S. citizen, and enough to fill a line of 10-ton trucks 9,000 miles long. Now I can see that there’s an obvious environmental benefit to conserving all that coal. But the financial side is equally impressive: A ton of good Central Appalachia 12,500 BTU coal costs $70. Not only does wind make money, it saves some $161 million worth of input costs. And the savings aren’t limited to coal — many power plants use (that is, they “burn”) natural gas. The conservation with this fuel is also substantial: During 2007, wind power reduced the amount of natural gas used by power plants by 5%.
The U.S. eclipsed Germany as the international wind power leader in 2008. Nearly 4,000 megawatts’ (MW) worth of projects were commissioned last year and will be brought online during the first half of this year. (Try building coal-fired plants that fast.) The American Wind Energy Association predicts another 5,000 megawatts of capacity will be commissioned in 2009.
But let’s not let these numbers persuade us that this is adequate progress. It isn’t.
The reason lies in basic algebra: If 25,000 MW represents 1.25% of our capacity, then total capacity has to be some 2 million megawatts. A fifth of that, 20%, is 400,000 megawatts. That trip from 25,000 to 400,000 clearly puts the wind industry on a sustainable multiyear growth trajectory.
Additional demand is coming from every corner of the globe. China’s new energy plan, released in late 2007, calls for the nation to generate 10% of its power from wind by 2010 (next year) and 15% by 2015. But China has less than half the wind capacity of the United States. Across Europe, wind turbines will account for roughly one-third of all new generating capacity that will be installed in the next few years and could provide electricity for 90 million people by next year.
And the movement isn’t limited to large countries like China or to rich countries like the United States. North Africa and the Middle East increased wind energy installations by +42% in 2007. A recent study showed Egypt, which has strong wind in the Suez Gulf, could host 20,000 megawatts of wind farms. Brazilian policymakers have begun to embrace wind too: 14 projects totaling 107 megawatts are expected to be completed this year, with more than 900 megawatts slated for next year. The point is that these turbines are going to be selling like hotcakes for years, and the companies that make them are going to be raking in significant profits.
And which companies will benefit? These two…
General Electric (NYSE: GE)
An American Wind Energy Association compendium of the projects built in the United States in 2008 lists each project, its location, owner and capacity. But we’ve heard enough about turbine capacity. Let’s hear about who’s making money building wind turbines. T his was, after all, a $17 billion chunk of business last year. And it turns out that General Electric had 43% of the U.S. market.
GE has 18% of the global wind-turbine market and has installed more than 10,000 turbines. It has production facilities in Germany, Sweden, Spain, China, Canada and the United States. The Fairfield, Conn.-based conglomerate focuses on the larger end of the market, building turbines from 1.5 to 3.6 megawatts.
Though the company doesn’t break down its financial results, Windustry, an industry trade group, pegs the cost per megawatt at $1.2 million to $2.6 million. Say it’s in the middle, at $1.9 million per megawatt. That means GE’s 3,657 megawatt’s worth of projects in 2008 were worth $6.9 billion. Assuming wind systems have a margin roughly the same as the rest of GE, then the turbine-manufacturing business — not including monitoring services or maintenance — accounted for some $694 million in profits in 2008, or 4% of the company’s total.
This will grow substantially in the years to come. Mr. Obama, after all, said we would double our wind capacity, bringing our 25,000 MW total to 50,000 MW. Assuming GE holds onto its market share, that’s $20.4 billion in revenue. That’s a large chunk of change, even to a behemoth like GE. Its shares are very attractively priced at about 7 times earnings (a fire sale, really, given that 17.8 is its average earnings multiple).
GE shares are a strong buy under $18, and I’d keep buying them up to $24. This is a long-term play. Don’t be hasty with GE’s shares: There’s no reason to take a short-term gain. The long term is where the money is.
Vestas Wind Systems (PINK: VWDRY)
Vestas came in a distant second in terms of U.S. market stare, though it commands 19% of the global market, slightly ahead of GE. The company, based in Denmark, traces its roots to 1899. It has manufactured such diverse products as industrial steel-frame windows, appliances and agricultural equipment. The company built its first wind turbine in 1979, marking the birth of the modern wind industry. Vestas is now the world’s largest supplier of wind energy solutions and has installed more than 35,500 wind turbines in 63 countries.
Vestas employs 15,000 people to keep up with the strong international demand for its turbines, one of which is installed somewhere on earth every four hours. In addition to its size, longevity and worldwide presence, Vestas has two strong competitive advantages. First, its manufacturing process is protected by a high degree of vertical integration — that is, it makes most of the parts it needs. This independence from suppliers not only guarantees the highest levels of quality, it also protects the company’s productivity from supply-chain disruptions and safeguards its margins from unforeseen price increases.
Vestas’ product mix also gives it an edge against its competitors. It produces seven wind-turbine models, from a relatively small 850-kilowatt unit to a massive 3.0 megawatt behemoth. In addition to varying generation capacity, Vestas’ products also have other critical features, such as highly efficient turbines that can generate power in relatively low-wind regions and specially designed quiet turbines that can be deployed in urban environments covered by noise restrictions. During the past 25 years, Vestas has improved the efficiency of its turbines by a factor of 100 — and is striving to do even better.
One of the nice features of this company is its strong balance sheet. It has almost no long-term debt, and its short-term liabilities are less than its current assets. The income statement is every bit as compelling. Vestas had 2008 revenues of 6.035 billion euros and net earnings of 511 million euros. Revenue has grown +56.5% since 2006, but profit took off like a dervish, gaining +364.5% over that time span.
Vestas shares require some explanation: Its common shares trade in Copenhagen under the symbol VWS. These shares are priced in krone, even though the company reports its results in euros. U.S. investors can buy the Copenhagen shares through an international broker. Click here for more information on how to do that.
The company’s shares also trade in the United States on the pink sheets under the ticker symbol VWDRY. Each of these shares — an American Depositary Receipt or “ADR” — represents ownership of 1/3 a common share. There’s nothing wrong with buying these shares.
Vestas has tremendous upside: the shares have been trading at an average P/E ratio of about 40 for the past three years, but today they can be had at less than 20 times earnings. Not only do I see earnings posting major gains — EPS growth of +50% a year is not just probable, it’s likely — I also think the market will bid these shares back up to their previous valuation.
I think U.S.-listed Vestas shares are an immediate strong buy. Their current low valuation will not last — my research tells me these shares are headed up and quickly. Hang on to them. Do not sell these shares for a cent less than $70.
President Barack Obama, a few days after being sworn in as president, delivered his first weekly radio address. One of the first things the new 44th president mentioned was wind power. At the cornerstone of his vision is the creation of a “green-collar” economy that attempts to accomplish two goals: The first is the creation of millions of jobs; the second is reducing the nation’s dependence on oil in favor of other, renewable energy options. “To accelerate the creation of a clean-energy economy,” Mr. Obama said, “we will double our capacity to generate alternative sources of energy like wind, solar, and biofuels over the next three years.”
We’ve come a long way. In 1981, our country had only 240 megawatts of wind energy capacity. Ten years later, that had risen seven-fold, to 1,584 megawatts. By 2001, the U.S. had 4,173 megawatts of capacity. In the years since, Americans have embraced the wind, and now our country has wind turbines capable of producing 25,369 megawatts. (Enough to power seven million households.) That amounts to growth of more than +500% in the past seven years. And looking ahead, hundreds of additional wind power projects have already been planned.
Right now, wind power, even despite its impressive track record of growth, still accounts for a tiny fraction of the world’s energy needs – about 1.3% globally. Washington is not the only government keen on the idea: Governments around the world are providing subsidies, incentives and tax breaks to alternative energy. The European Union is mandating that 20% of energy come from solar, wind and other renewable sources by 2020. China has also set aggressive goals and is home to several key industry players. And Denmark already produces a fifth of its power from wind.
Why does wind work so well? Not only is it plentiful, renewable and inexpensive, it’s also clean. It creates zero water pollution and generates no emissions. No power source is “greener” than wind. That’s great if you’re trying to impress a Greenpeace meeting — but I’m not. The best thing about wind in my view is not environmental but economic: The turbines last for decades and require minimal additional input costs. That makes me want to leap for joy. There’s really no downside to wind. The turbines don’t even make much noise. They just make money. That’s my favorite kind of green, anyway.
But just to tell how great these turbines are, here’s the breakdown: To generate the same amount of juice as the nation’s wind turbines, traditional power plants would need to burn 23 million tons of coal. That’s 160 pounds per U.S. citizen, and enough to fill a line of 10-ton trucks 9,000 miles long. Now I can see that there’s an obvious environmental benefit to conserving all that coal. But the financial side is equally impressive: A ton of good Central Appalachia 12,500 BTU coal costs $70. Not only does wind make money, it saves some $161 million worth of input costs. And the savings aren’t limited to coal — many power plants use (that is, they “burn”) natural gas. The conservation with this fuel is also substantial: During 2007, wind power reduced the amount of natural gas used by power plants by 5%.
The U.S. eclipsed Germany as the international wind power leader in 2008. Nearly 4,000 megawatts’ (MW) worth of projects were commissioned last year and will be brought online during the first half of this year. (Try building coal-fired plants that fast.) The American Wind Energy Association predicts another 5,000 megawatts of capacity will be commissioned in 2009.
But let’s not let these numbers persuade us that this is adequate progress. It isn’t.
The reason lies in basic algebra: If 25,000 MW represents 1.25% of our capacity, then total capacity has to be some 2 million megawatts. A fifth of that, 20%, is 400,000 megawatts. That trip from 25,000 to 400,000 clearly puts the wind industry on a sustainable multiyear growth trajectory.
Additional demand is coming from every corner of the globe. China’s new energy plan, released in late 2007, calls for the nation to generate 10% of its power from wind by 2010 (next year) and 15% by 2015. But China has less than half the wind capacity of the United States. Across Europe, wind turbines will account for roughly one-third of all new generating capacity that will be installed in the next few years and could provide electricity for 90 million people by next year.
And the movement isn’t limited to large countries like China or to rich countries like the United States. North Africa and the Middle East increased wind energy installations by +42% in 2007. A recent study showed Egypt, which has strong wind in the Suez Gulf, could host 20,000 megawatts of wind farms. Brazilian policymakers have begun to embrace wind too: 14 projects totaling 107 megawatts are expected to be completed this year, with more than 900 megawatts slated for next year. The point is that these turbines are going to be selling like hotcakes for years, and the companies that make them are going to be raking in significant profits.
And which companies will benefit? These two…
General Electric (NYSE: GE)
An American Wind Energy Association compendium of the projects built in the United States in 2008 lists each project, its location, owner and capacity. But we’ve heard enough about turbine capacity. Let’s hear about who’s making money building wind turbines. T his was, after all, a $17 billion chunk of business last year. And it turns out that General Electric had 43% of the U.S. market.
GE has 18% of the global wind-turbine market and has installed more than 10,000 turbines. It has production facilities in Germany, Sweden, Spain, China, Canada and the United States. The Fairfield, Conn.-based conglomerate focuses on the larger end of the market, building turbines from 1.5 to 3.6 megawatts.
Though the company doesn’t break down its financial results, Windustry, an industry trade group, pegs the cost per megawatt at $1.2 million to $2.6 million. Say it’s in the middle, at $1.9 million per megawatt. That means GE’s 3,657 megawatt’s worth of projects in 2008 were worth $6.9 billion. Assuming wind systems have a margin roughly the same as the rest of GE, then the turbine-manufacturing business — not including monitoring services or maintenance — accounted for some $694 million in profits in 2008, or 4% of the company’s total.
This will grow substantially in the years to come. Mr. Obama, after all, said we would double our wind capacity, bringing our 25,000 MW total to 50,000 MW. Assuming GE holds onto its market share, that’s $20.4 billion in revenue. That’s a large chunk of change, even to a behemoth like GE. Its shares are very attractively priced at about 7 times earnings (a fire sale, really, given that 17.8 is its average earnings multiple).
GE shares are a strong buy under $18, and I’d keep buying them up to $24. This is a long-term play. Don’t be hasty with GE’s shares: There’s no reason to take a short-term gain. The long term is where the money is.
Vestas Wind Systems (PINK: VWDRY)
Vestas came in a distant second in terms of U.S. market stare, though it commands 19% of the global market, slightly ahead of GE. The company, based in Denmark, traces its roots to 1899. It has manufactured such diverse products as industrial steel-frame windows, appliances and agricultural equipment. The company built its first wind turbine in 1979, marking the birth of the modern wind industry. Vestas is now the world’s largest supplier of wind energy solutions and has installed more than 35,500 wind turbines in 63 countries.
Vestas employs 15,000 people to keep up with the strong international demand for its turbines, one of which is installed somewhere on earth every four hours. In addition to its size, longevity and worldwide presence, Vestas has two strong competitive advantages. First, its manufacturing process is protected by a high degree of vertical integration — that is, it makes most of the parts it needs. This independence from suppliers not only guarantees the highest levels of quality, it also protects the company’s productivity from supply-chain disruptions and safeguards its margins from unforeseen price increases.
Vestas’ product mix also gives it an edge against its competitors. It produces seven wind-turbine models, from a relatively small 850-kilowatt unit to a massive 3.0 megawatt behemoth. In addition to varying generation capacity, Vestas’ products also have other critical features, such as highly efficient turbines that can generate power in relatively low-wind regions and specially designed quiet turbines that can be deployed in urban environments covered by noise restrictions. During the past 25 years, Vestas has improved the efficiency of its turbines by a factor of 100 — and is striving to do even better.
One of the nice features of this company is its strong balance sheet. It has almost no long-term debt, and its short-term liabilities are less than its current assets. The income statement is every bit as compelling. Vestas had 2008 revenues of 6.035 billion euros and net earnings of 511 million euros. Revenue has grown +56.5% since 2006, but profit took off like a dervish, gaining +364.5% over that time span.
Vestas shares require some explanation: Its common shares trade in Copenhagen under the symbol VWS. These shares are priced in krone, even though the company reports its results in euros. U.S. investors can buy the Copenhagen shares through an international broker. Click here for more information on how to do that.
The company’s shares also trade in the United States on the pink sheets under the ticker symbol VWDRY. Each of these shares — an American Depositary Receipt or “ADR” — represents ownership of 1/3 a common share. There’s nothing wrong with buying these shares.
Vestas has tremendous upside: the shares have been trading at an average P/E ratio of about 40 for the past three years, but today they can be had at less than 20 times earnings. Not only do I see earnings posting major gains — EPS growth of +50% a year is not just probable, it’s likely — I also think the market will bid these shares back up to their previous valuation.
U.S. listed Vestas shares are an immediate strong buy. Their current low valuation will not last — my research tells me these shares are headed up and quickly. Hang on to them. Do not sell these shares for a cent less than $70.
PowerShares Global Wind Energy Portfolio (Nasdaq: PWND)
This exchange-traded fund is based on the Nasdaq OMX Clean Edge Global Wind Energy Index. It’s an efficient way to add most of the world’s far-flung wind industry players to your portfolio without requiring a special international broker. Vestas is its largest holding (10.7% of assets), and PWND also gives you a stake in companies such as Spanish wind-energy heavyweight Gamesa (10.4%), as well as the Asian leader China High Speed and Mitsubishi Heavy Industries. PWND also owns some power companies, such as Xcel Energy, that have a significant wind portfolio. This is truly a global investment, with 58% of its assets based in Spain, Germany or Denmark, and roughly 12% in the United States.
Patient investors seeking diversity can expect good things from PWND at its current price, and I think the ETF is a buy under $17.50. These shares, which trade on the Nasdaq, are easy to buy and worth holding for the long term.
