Let’s face it; investing in wind power in any meaningful way is difficult. Everything points to serious growth in the industry over the next few years, not least the fact that, despite falling costs and profitable operations from many in the business, the industry still receives generous treatment and subsidies from most governments around the world. You only have to read one of the many reports such as this from the U.S. Department of Energy or read that three American states now meet over 20 percent of their energy needs from wind to start salivating as an energy investor. That gets you looking around for where to put your money, and that, of course, is when the going gets tough.
The problem is that there are seemingly two types of companies in the space, small ventures that, despite recent advances, are almost entirely dependent upon government largesse for survival and whose stock is offered in illiquid OTC markets, or multinational, giant conglomerates where wind energy would be expected to be a tiny part of overall revenue. That expectation is somewhat justified, but in the case of one market leader at least, wind power may be a more important part of the overall business than you think. Related: The End Of The Beginning For Renewable Energy?
The German company Siemens (ADR: SIEGY) and GE (GE) were one and two in a recent global market share analysis, accounting for nearly 40 percent of the business in the industry. While GE doesn’t disclose separate revenue or profit numbers for wind energy, Siemens does, and the importance of the business within the company is actually quite surprising. In 2013, wind power accounted for 5.2 Billion Euros in revenue at Siemens, or around 25 percent of the total.
If that isn’t enough for you to qualify as a play on wind energy, then you might consider Vestas (VWSYF), the Danish company that finished third in those rankings, but there are problems there too. Most obviously, the fact that Vestas was number one in that same analysis just a couple of years ago and that analysts forecast negative growth and a loss next year suggests that the competition from huge, powerful competitors is taking its toll. It seems a little counterintuitive to invest in a shrinking company in order to capture growth in an industry.
So, we are left with the two giants, and of the two, Siemens looks like the best investment for several reasons. Firstly, while the actual relative importance of wind power to GE isn’t known, it is unlikely to be above the 25 percent at Siemens, making the German company more of a play on the sector. Secondly, the European stock market is just entering a period of support from central bank policies, while the US is just exiting from one. Most analysts expect European stocks to gain significantly over the next few years as a result, and Siemens as a huge multinational, should be no exception. Once again, making money based on central bank actions may offend your ideology, but you shouldn’t ever let politics get in the way of profit.
Last, and by no means least, SIEGY’s proximity to the well established support around the 52 week low at 103.20, which would be a logical place for a stop loss, and a short term target of a return to the end of last year’s high just above 120 makes for a great risk/reward ratio of over 1:5.
No matter how hard you look, there is no obvious, perfect play on the seemingly inexorable rise in the importance of wind power. The evidence, however, suggests that, at current levels, SIEGY is the best there is.
Yes, renewables get subsidies. In the US it is the production tax credit or PTC. Since 1993 to 2015 this has been roughly $50 billion? But I notice you forgot to disclose that "The IMF estimates that governments are providing a $5.3 trillion US "subsidy" to the fossil fuel sector in 2015 by failing to account for its harmful effects on the environment and human health." Why are we subsidizing industrial carbon emissions and destruction?
I very much appreciate this article. We need to invest in renewable energy. How to do it is the question. The author helps us consider government subsidies, the character of the market and the heft and transparency of companies in the industry.
Large-scale renewable energy is an emerging industry. We need to understand it. There are many compelling reasons now for exiting fossil fuel dependency and the many problems around extracting, transporting and burning these fuels -- not to mention that we buy fuel from countries that are bad actors.
I hope to see more articles like this in Oil Price.