Wind Energy Long Term Growth Firmly in Place - Our Take

Nov 04, 2008
Author: SCP Editor

November 4, 2008 – The global wind industry installed almost 20,000MW of new capacity in 2007, bringing the worldwide total to 93,864MW. The global wind market added 19,813MW from 2006 to 2007, a 26% increase. From an economic perspective the global wind market in 2007 was worth about $37 billion in equipment and it garnered about $50.2 billion of total investment.

Top Five Countries in Terms of Installed Capacity in 2007

1.     Germany (22.3GW) – the Germany Wind Energy Association says that by 2020 the overall German onshore capacity could be at 45,000MW with an additional 10,000MW offshore;

2.     U.S. (16.8GW) – as of the Q3, 2008, the U.S. had 21GW installed capacity with another 8.3GW under construction, and the U.S. is expected to overtake Germany as the leading wind energy country by the end of 2009;

3.     Spain (15.1GW) – The Spanish Wind Energy Association estimates that 40,000MW of onshore and 5,000MW of offshore capacity could be operating by 2020;

4.     India (7.8GW) – as of the Q3, 2008, India had about 9.7GW installed capacity and has targeted 11,000MW of capacity by 2012; and

5.     China (5.9GW) – China’s target capacity for 2010 is 10,000MW, but it is estimated to be on track to reach this target by early 2009, and it may reach 20,000MW by 2010 instead. Its installed base of wind power may reach a total of 100MW.

With growth like this, it is surprising to see that wind energy companies have posted an average 59% decline year-to-date in the stock markets. As of Friday’s close, A-Power (Nasdaq:APWR) was down 57%, American Superconductor (Nasdaq:AMSC) was down 54%, Acciona (ANA.MC) was down 66%, Broadwind Energy (BWEN.OB) was down 34%, Composite Technology (CPTC.OB) was down 79%, Gamesa (GTQ1.BE) was down 60%, Keewatin Windpower (KWPW.OB) was down 42%, Nordex (NDX1.F) was down 66%, Otter Tail (Nasdaq:OTTR) was down 32%, Suzlon (SUZLON.NS) was down 89%, Vestas (VWS.DE) was down 56% and Zoltek (Nasdaq:ZOLT) was down 72%.

We would attribute the weakness in the wind energy sector to several factors including broad-based market weakness in the face of the global recession, and on a related basis, to the impact the credit crisis is having on financing for wind farms – and more so, to the expected impact the credit crisis will have. To be sure, the current global economic headwinds will have some, as of yet undetermined impact on expectations for wind energy growth in the next year, or maybe two years.

On the other hand there are several factors that will continue to support growth wind energy:

·         Climate change

·         Rising energy demand

·         Legislation – Kyoto-led target for 22% of electricity supply from renewables by 2010, a target for 20% of final energy consumption in the EU to be renewable by 2020, the ‘feed-in-tariff’ in a number of European states, and state/country goals set for renewable energy consumption, the federal production tax credit (PTC) in the U.S., and

·         An Obama presidency – sure, McCain would be more supportive of renewable energy than Bush was, but McCain’s loyalties and focus clearly are to nuclear, oil and coal. Obama’s are to clean, renewable energy and to setting goals that are in line with clean energy targets being set by countries around the world.

So we are bullish on wind and we are bullish on wind energy companies at current levels. We think that the challenging economic and credit environment has been priced into companies, and we think that increasingly efficient wind energy technologies will also soften the negative impact of higher spending and borrowing costs in the near to mid-term. Longer term, the growth is undeniable, and the recent pullback for wind energy company stocks has, in our opinion, priced almost all of that growth out.

Our top stock pick in this sector is:

·         A-Power (Nasdaq:APWR) – the stock closed at $6.01 yesterday. In our opinion, the stock could pull back to $4.30 if the markets retest their lows, but even at $6, the stock is trading at 4.9x this year’s projected earnings and 2.8x 2009’s projected earnings. The company does not have any debt, it is trading 2.17x cash, and it has a backlog over $1 billion. At 15x this year’s earnings (this historical average for the S&P) the stock would be trading at $17.64, a 194% premium to the current stock price.

Important Disclosure Note: SCPEditor is LONG APWR. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.