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Msg  139669 of 140620  at  11/12/2022 6:25:15 AM  by


These Turbine Maker Stocks Can Now Compete With China's Big Beasts

Author: Clark, Adam

Barron's (Online) ; New York (Nov 11, 2022).

As world leaders gather at COP27, there is a scramble for alternative energy and the adage goes, "During a gold rush, sell shovels." While wind turbine manufacturers have struggled in recent years, a new focus on profitability makes them an intriguing option ahead of an expected recovery,

An inflationary shock in the wake of the Covid-19 pandemic and Russia's invasion of Ukraine caused multibillion-dollar losses that dragged down stocks by more than 30% from their 2021 peaks.

But this painful period might have positive longer-term implications as manufacturers have been forced to give priority to profits over grabbing market share.

Endri Lico, senior research analyst at Wood Mackenzie, told Barron's wind turbine manufacturers have lost about $6 billion in value over the past two years but now a "massive transformation" of their business model is under way.

Steel prices and transportation costs are falling , which should lessen the inflationary pressure on margins, while turbine makers are pushing through percentage price increases in the double digits.

Another positive is demand, which should be strong for the rest of the decade, spurred by Western governments' clean energy policies. In the U.S. the Biden administration's Inflation Reduction Act (IRA) has added incentives for more renewable energy. Research company Rystad Energy estimates the IRA will trigger additional installation of onshore wind power facilities capable of delivering 85 gigawatts of energy, or an extra $160 billion in investment, putting total onshore wind capacity close to 280 gigawatts by 2030.

European demand should also increase. The European Union's RepowerEU plan targets 480 gigawatts of installed wind power by 2030, from 189 gigawatts at the end of 2021.

The COP27 conference has delivered additional wind power commitments from elsewhere, including a pledge to develop one of the world's largest onshore wind projects in Egypt, and nine countries including Japan joining an alliance to develop more offshore wind energy.

The expected boom in wind energy could provide a stronger tailwind if turbine manufacturers can negotiate a more equitable split of costs and profit with wind farm developers.

"We do see a softening of developer positions on contracts, seeking to find more shared value, rather than simply squashing the pain downward. Developers need the supply, and it will need holistic work throughout the supply chain to nurse it through these radical times," said Bruce Valpy, managing director of BVG Associates, a consulting firm specializing in renewable energy.

Of the Western companies that dominate the wind turbine industry outside China, two are good candidates for investment. They should be well placed to benefit as domestic supply chains and wind power become more essential to U.S. and European governments , although they are likely to face Chinese competition.

The first is Denmark 's Vestas Wind Systems (ticker: VWS.Denmark). Its shares have fallen 23% over the past 12 months but are primed for a turnaround. Vestas was the world's number one turbine supplier in 2021, with 17.7% of total new installations, according to figures from the Global Wind Energy Council. Analysts have an average target price of 184.16 Danish kroner ($25.09) on the stock, according to FactSet. Shares are currently trading at around DKK180.

Analysts at Citi have a DKK360 target price for Vestas, arguing its stronger recent pricing bodes well for gross margins.

"Right now the best placed [manufacturer] to return to positive margins earlier is Vestas. 2022 is more or less a lost year for profitability for OEMs [original equipment manufacturers]. Vestas has been very good at increasing their price. Not everyone is achieving the desired agreements," Lico said.

Vestas said in third-quarter results it had secured a 30% increase from the prior year on the average selling price per megawatt of onshore wind turbines. Analysts at Jefferies project Vestas will rebound to a 3.3% adjusted earnings before interest and taxes margin in 2023 and 6.6% in 2024, against its current 2022 outlook of minus 5%.

"Progress should remain timid in 2022 but more visible over 2023," Jefferies analysts said.

Among Western manufacturers, the next biggest pure-play wind turbines stock is Germany's Nordex (NDX1.Germany). It was the eighth largest global supplier in 2021, with a 6.3% share. It should benefit from high demand in its home country as the German government races to reduce the nation's reliance on Russian gas while contending with opposition to new nuclear power projects. Nordex also has a guaranteed customer and source of funding in its major shareholder Acciona (ANA.Spain), a Spanish infrastructure and renewable energy company.

The German turbine maker's shares are down 25% in the past 12 months. The stock has fallen from more than EUR25 in early 2021 to EUR10.30 currently.

Analysts at Jefferies have a Buy rating and EUR13 target price on Nordex, saying it is likely to continue to gain market share, driven by its Delta4000 series—one of the most efficient and cost-effective wind turbines on the market. Analysts have an average target price of EUR12.70 on the stock according to FactSet.

Nordex recently said its third-quarter average selling price was up 30%. The company projected a 2022 margin on earnings before interest, tax depreciation and amortization of minus 4%-0% but has confirmed a medium-term margin goal of 8%.

American investors looking for a homegrown champion of wind-turbine manufacturing will have to wait until General Electric (GE) spins off its energy businesses into a separate company in 2024. Even then it might be a relatively small part of the new business. GE is currently laying off 20% of its U.S. onshore wind workforce and was recently barred from making and selling its Haliade-X wind turbines as part of a patent dispute with Siemens Gamesa (SGRE.Spain).

GE told Barron's it has filed two redesign proposals for the Haliade-X and has a path forward in the U.S. court to work toward approval and remains committed to the U.S. offshore wind market.

Valuations for wind turbine manufacturers still aren't cheap—Vestas trades at almost 32 times its expected 2024 earnings according to FactSet, and Nordex at 36 times—but 2022 could mark a low point for the industry and therefore a good moment to consider the stocks.

Investing in wind turbine manufacturers now is for investors with an appetite for risk and a long-term view. Growth depends on Western governments honoring their green power and energy security pledges, made in the heat of the moment after Russia's invasion of Ukraine, while also defending domestic manufacturers from Chinese competition .

Investors also have to trust that manufacturers have learned their lesson from the inflationary shock and won't fall back into the bad habit of chasing market share. But the chance to buy into a consolidated industry at a low point, especially one with guaranteed demand for a decade and a new focus on profitability, is enticing.

Write to Adam Clark at

These Turbine Maker Stocks Can Now Compete With China's Big Beasts

Credit: By Adam Clark

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