The Answer Is Blowin’ in the Wind

05/29/2008 12:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of the Energy Strategist, says wind power is ready for prime time, and he recommends a stock that could profit from its quiet boom.

You often hear politicians speak of using subsidies for alternative energy as a means to help these technologies achieve “grid parity.” The idea is that over time wind plants become more efficient and solar cell efficiency increases. Eventually, the cost of generating power from these sources will fall in line with the average cost of power from the grid.

Broadly speaking, wind has already achieved grid parity in many markets thanks to improvements in turbine efficiency and construction techniques. But achieving grid parity isn’t the same as replacing traditional fossil-fuel capacity.

According to the US Energy Information Administration, US wind power generation will grow at 6.7% annualized between 2005 and 2030, while solar pholtovoltaic (PV) will grow at close to 20% annually over the same time period. Total US electricity generation is expected to grow at 1.2% between 2005 and 2030.  

There’s plenty of growth to come from the alternatives in coming years. That said, I prefer exposure to wind power over solar power at this time.

A significant amount of solar cell manufacturing capacity has been coming online in recent months, [so] the industry’s capacity to produce cells is growing rapidly. Early projections are that cell manufacturing capacity will grow by roughly 80% to 100% in 2009. There’s potential for this cell supply to overwhelm demand near term, even with demand growing at greater than 40% annualized.

[And] the key raw material in the most widely used type of PV solar cell is polysilicon. Poly has been in extremely short supply lately. As a result of this shortage, the price has risen dramatically. For solar cell firms buying poly outside of long-term contracts, that spells rising costs and tighter margins.

[Yet]  I see little evidence of a slowdown in demand or interest in wind-power generation. Further, this market looks to remain tight over the next few years. The rising costs of natural gas, oil, and even coal make wind more competitive from a strict cost standpoint, encouraging build-out even with relatively small subsidies.

Vestas Wind Systems (VWDRY.PK) reported stronger-than-expected first-quarter results. The company’s net income doubled in the first quarter over the same quarter a year ago. At the same time, the firm’s backlog of unfinished projects rose a further 20%, [indicating] that demand continues to outstrip supply.

Vestas’ management noted that there’s such an acute shortage of components for wind turbines that lead time for those sensitive components has lengthened to as long as 15 months. And Vestas remains a global leader in wind turbines, owning a stake in roughly a third of the market.

I’m also encouraged that Vestas [can] continue to boost profit margins. Management is targeting earnings before interest and taxes (EBIT) profit margins of 10% to 12%, up from 9.1% last year.

I’m upgrading Vestas Wind Systems to a Buy. The company’s first-quarter report suggests there’s further upside in the stock. (The ADRs of the Danish company traded above $43 recently—Editor.)

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