Vestas on crest of alternative energy wave
RICHARD BLACKWELL
Canadian investors looking for exposure to the booming alternative energy sector have a handful of domestic players to choose from, but the local pickings are pretty slim and most of the companies are small. So why not look overseas, to one of the green behemoths that has sprung up on the international scene?
Danish turbine maker Vestas Wind Systems AS is among the biggest companies in the worldwide wind energy business and its stock has been white hot lately.
The company controls close to 30 per cent of the worldwide market for wind turbines and generates more than $5-billion in revenue each year. It has manufacturing operations in a dozen countries. And it is growing quickly thanks to the growing interest in – and government support of – alternative energy sources.
The global wind business is expected to grow by an average of 19 per cent a year over the next half-decade, according to forecasts from the Global Wind Energy Council.
The fast-growing U.S. wind power industry, driven by favourable government tax policy, is Vestas' largest current market. But it also has a huge presence in the wind-intense Danish and German energy markets, and a strong foothold in energy-hungry China.
In Canada, Vestas is the biggest turbine seller, with an installed base of about 700 units that generate half of all the wind power in this country.
Vestas shares, which trade on the Copenhagen stock exchange, more than quadrupled in price over the past 20 months, as the company cemented its No. 1 spot in the industry.
“They're in a very strong position because they have a large backlog of orders, said Philippe de Weck, a senior fund manager at Pictet Asset Management SA, a Swiss company that manages the Criterion Global Clean Energy Fund for Toronto's VenGrowth Asset Management Inc.
Vestas is the largest holding in the Criterion fund, making up about 5 per cent of its value.
Vestas' margins have risen because the worldwide shortage of wind turbines has given manufacturers the power to control prices, Mr. de Weck said. And those margins will likely continue to move up next year, so there is room for more growth in the stock price, he said.
Vestas is also the biggest single stock in the Templeton International Stock Fund run by Don Reed, chief executive officer of Franklin Templeton Investments Corp.
“Vestas is in the right spot right now, especially as we see the price of oil rising, Mr. Reed said.
He also likes Vestas because it is a rare pure play in the wind business – many of the other big turbine makers, such as General Electric and Siemens AG, are diversified conglomerates. It's also big enough to form a substantial part of an investment portfolio.
But the stock has appreciated so much that Mr. Reid is considering whether to trim back his position and take some profits. “We're watching very closely. It's certainly a heck of a lot more expensive today than it was when we bought it.
Some analysts are also urging caution over Vestas' high price.
“We find the shares are fundamentally overvalued, said analyst Christian Nagstrup of Jyske Bank, a Danish financial institution.
Mr. Nagstrup recently downgraded the stock to “accumulate from “buy, mainly because of recent sharp increases in the share price.
Still, he thinks the stock can show some modest gains from current levels, because of the strong orders it is getting from the United States and China.
The biggest risk he sees at Vestas is a bottleneck in getting parts to build the turbines. Subcontractors have been slow in delivering key components, and that could slow delivery of complete turbines, Mr. Nagstrup said in a recent report.
*****
QUICK FACTS
• Vestas was founded in the late 19th century by a Danish blacksmith. In its first 80 years it made products ranging from window frames to appliances to agricultural equipment.
• It began to make wind turbines in the late 1970s, starting with the old egg-beater style, then shifting to a more efficient three-blade model, similar to what is seen around the world today. After 1987, it concentrates solely on wind energy.
• As of mid-2007, the company had installed 33,700 turbines in 64 countries. Its biggest individual market is the United States, where it has 9,000 turbines in place. • Revenue in Vestas' second quarter was about $1.3-billion, and pretax profit about $120-million.
• Vestas trades at a price-to-earnings multiple of 64 times trailing earnings and 36 times estimated earnings. It also trades at 8.8 times price-to-book value and 2.7 times price to sales.
Richard Blackwell
*****
Investing in Europe
Most Canadian investors interested in a European investment such as Vestas Wind Systems try to get exposure through mutual funds that hold a big chunk of the stock.
But there's no reason sophisticated investors can't buy individual shares, said Lex Kerkovius, an analyst with Calgary-based McLean & Partners Wealth Management.
While Vestas stock is listed only on the Copenhagen Stock Exchange, buying shares “can be easily accomplished, he said. “Just call your broker and they can execute the trade.
It's a little more complex to perform due diligence on a Danish company than on a domestic one, Mr. Kerkovius said, but investors can now get comprehensive details about any company through the Internet.
Still, potential buyers should be careful about financial reporting in other countries, which may follow different rules than in Canada, he said. And there are also some cultural and regulatory differences in European countries.
But over all, “Canadians would be well advised to look further afield, to find potential investments, he said, especially when many sectors of the domestic market – such as alternative energy – are limited to micro-cap or small-cap stocks.
Aside from Vestas, other large wind power equipment companies that can be purchased on international exchanges include Spain's Gamesa Corp. and India's Suzlong Energy Ltd.
“You have to do your homework, but it's not overly difficult to go overseas, Mr. Kerkovius said.
Richard Blackwell