Introduction to Investing in Wind Power Stocks

Wind power is a high-growth industry with a glowing future. Investors can expect to find many jewels. Some companies are already well recognised, but others are just embarking on a path that could see exceptional rates of expansion and the chance of great rewards for investors.

Because Europe has been ahead of the United States in promoting wind power, this is a truly global industry, with excellent opportunities in many countries. Some of the best investments could be in Europe or Asia, although many international stocks are also listed on US exchanges. And, having said that, right now some of the best growth in the industry is being seen in North America.

According to the Global Wind Energy Council, 2007 saw the installation of 20GW of new wind energy capacity, which was 30 per cent more than in 2006. The three biggest markets were the US (5.2GW), Spain (3.5GW) and China (3.4GW). The Council said $36 billion was now being spent annually in new wind power generating equipment. The World Wind Energy Association expects growth of at leat 20 per cent annually through to 2010.

Wind energy companies can essentially be divided into three groups (with a certain degree of overlap between them) –

wind turbine manufacturers
wind farm developers, owners and operators
support companies – mainly small – that supply components, technology or various services

Wind turbine manufacturers - 10 large companies dominate, with an estimated total global market share of around 95 per cent. Here they are, ranked according to 2006 market share (Merrill Lynch and BTM Consult figures) and the country where they have their headquarters:

Vestas (Denmark)
Gamesa (Spain)
General Electric (US)
Enercon (Germany)
Suzlon (India)
Siemens (Germany)
Nordex (Germany)
Repower (Germany, now acquired by Suzlon)
Acciona (Spain)
Goldwind (China)

Wind farm developers, owners and operators – these can range in size from giant utilities to tiny specialised companies, although the top 20 global owners hold about one third of total capacity. The Spanish utility Iberdrola is the world’s leading wind farm operator, followed by FPL of the US and Acciona of Spain.

Support companies – these are numerous, small and large, in many countries. Here are three examples, from the US: American Superconductor (technology for connecting wind farms to power grids), Kaydon Corporation (custom bearing assemblies) and Tower Tech Holdings (tower support structures, as well as operations and maintenance services).

Investing Tips

If you wish to invest in the shares of a wind power company, here are some points to consider:

Carry out the normal checks you would before making any investment – look at the company’s profitability and debt (some wind power companies have little of the former, a lot of the latter); how liquid is the stock (some of the companies do not trade much); and which markets do they trade in (many foreign wind power companies have their shares listed in the US, but not all).

Check just how much exposure the company has to wind power. Some stocks are pure wind power plays. But for others it is just a small part of their total business. For example, General Electric is a major wind power turbine manufacturer, with $4 billion in revenues in 2007, yet this is a tiny part of its total turnover.

Such has been the rapid demand recently for wind power facilities that some components – examples are bearings and gearboxes – have been in short supply. Some companies, such as Enercon and Suzlon, produce most key components in-house. But others must rely on outside suppliers, and could face shortages if demand continues to grow quickly.

Some of the Northern European companies are locked into relatively high cost structures, especially as this is a labour-intensive business. As they are forced increasingly to look to Asia and North America for their growth, and thus to compete with lower-cost rivals, they may find themselves facing pricing pressures. Rising steel prices are also an issue.

“Green investing” has at times become something of a theme in the market – especially when oil prices have been soaring – and some stocks have been bid up in price very rapidly. There is a parallel here with the dot.com boom or with the way some biotech shares are bought. Use discretion.

This is a relatively new industry, and there can be a scarcity of information and/or analysis on many of the companies, compounded by the fact that so many of the stocks are small and/or foreign.

January 29th, 2008

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