Friday, December 05, 2008

Tilting at Windmills

The so-called bailout package to ailing banks (a euphemism for poorly managed banks) included a variety of extraneous provisions, including extension of tax credits and considerations for alternative energy. One of the new provisions was a wind energy tax credit for consumers who install windmills on personal property. Wa La! There was the impetus for what could be a miniature boom for producers of small windmills intended for residential, farm or business installations.

Sadly for investors, the small windmill space is populated mostly by private companies. If you are in the market and have a few dollars to invest, All Small Wind Turbines offers information on over 200 small wind turbine products from over 90 manufacturers. The American Wind Energy Association narrows down the field to a few U.S. equipment providers.

Investors are thus largely limited to the producers of large turbine destined for the power generation market. The field is getting fairly well populated and a recent order cancellation by a U.S. utility suggests there may be a bit of turbulence in the air for at least one of the “big blade” guys.

Vestas Wind Systems, A/S (VWS: CO) of Denmark and General Electric (GE: NYSE) in the U.S. dominate the large wind turbine market place. Vestas claims a 23% market share with 35,500 wind turbines installed. GE’s installed base of 10,000 turbines put it a distant second to Vestas.

It should not be a surprise that a company based in the home country of the master “windmill tilter” Don Quixote - Gemesa (GAM: MC) - runs a close third. Gemesa claims 15% share of the world market with an installed based of 13,000 MW on four continents.

Acciona Energy (ANA: MC) is also based in Spain and claims 5,300 MW installed to date, most of which are owned by Acciona itself.

India’s Suzlon Energy Ltd. (SUZL: BO) is an up and coming competitor, but has suffered some setbacks in recent months from order cancellations. In June 2008, Edison Mission Energy, a subsidiary of Edison International (EIX: NYSE) in the U.S. cancelled half of a major order for 300 turbine units. Blades of Suzlon turbines already installed at three of Edison’s wind farms had been cracked.

Germany with its strong interest in alternative energy has helped support the development of Enercon GmbH (private). Enercon is distinguished as a gearless or direct drive wind turbine. Enercon claims more than 13,000 wind turbines with a total power out put of 15.5 gigawatts in its installed base. Enercon has had protracted legal difficulties in the U.S. market pursuant to a patent dispute with Kenetech. Subsequently, GE made a cross patent agreement with Enercon.

Also based in German, are market leaders Nordex AG (NDX1: DUS) and Siemens AG (SI: NYSE) . Nordex has produced over 3,500 turbines with a capacity of 4,300 megawatts. Most of its sales have been outside Germany. Siemens is an integrated producer of power generation systems and industrial solutions. Accordingly, it serves a number industries and its stock trades more on its conventional products than on renewable energy factors.

Sinovel Wind Company Ltd. in China has also made considerable progress in penetrating China’s power generation market.

AeroVironment, Inc. (AVAV: Nasdaq) stands out as a profitable, fast growing producers of unmanned aircraft that it produces for the Department of Defense. The company’s expertise in lightweight aerostructures and propulsion has taken it into electric energy systems as well. AeroVironment turned a tidy profit of $26.3 million on $232.2 million in sales in the most recent twelve months. Even in today’s depressed valuation environment, the stock trades at a forward price-earnings ratio of 25 times. Tilt at that windmill!

It is a big crowd and some could get squeezed out of the race if the recent wave of caution on wind energy extends for a very long period. Last month Gemesa reportedly revealed plans to temporarily shutter some of its factories as one of its primary customers, FPL Group, announced a cut back in wind projects in 2009. T. Boone Pickens group also announced delay of a much touted wind project in northern Texas, ostensibly for lack of capital. Washington utility, Avista Corp. (AVA: NYSE), reportedly also announced earlier this month that its new $200 million line of credit would be used to retrofit existing wind turbines rather than buying new units for a planned $125 million wind park near Reardan, WA. Avista management says the company has simply delayed plans to build a new wind project by two years and that its new credit line is not related to a wind project. The company has been in the process of retrofitting hydroelectric turbines and not wind turbines.

All that gloomy news aside, we note that Vestas recently announced a string of new orders in the U.K. and Ireland. GE’s last turbine shipment in November 2008 was to the largest U.S. generator of wind power, Ashtabula Wind Energy Center in North Dakota.

It is also vital to take positions in the wind turbine sector only after some smart analysis. For example, AeroVironment turned a tidy profit of $26.3 million on $232.2 million in sales in the most recent twelve months. Even in today’s depressed valuation environment, the stock trades at a forward price-earnings ratio of 25 times. Tilt at that windmill!


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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