Energy

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

People tend to think of renewable energy companies as the new kids on the block but Vestas Wind Systems A/S, the world’s biggest wind turbine manufacturer, is no pimply teenager. The Danish group entered the turbine business almost 40 years ago and went public in 1998, one year after Amazon.com Inc. Today, it generates more than 10 billion euros ($11.7 billion) in annual sales.

Although Vestas stock hasn't attained Amazon's stratospheric heights, it has still returned about 2,300 percent since the IPO, a breezy enough performance.  On Thursday, though, the shares dropped 7 percent after quarterly sales and profit fell short of market estimates.

True, the wind industry is consolidating -- Siemens merged its wind business with Gamesa in April -- and competition is intensifying. This puts pressure on margins and makes it more difficult to lift revenue: Vestas sales might fall a fraction this year. Still, investors are in danger of overlooking the wood for the trees.

Winds of Change
Three companies now dominate the wind turbine business
Source: HSBC, MAKE Consulting

Let's dismiss one bogeyman off the bat. Donald Trump, no fan of wind power, hasn't done much about it so far. The U.S. production tax credit remains in place and the Vestas order intake in the Americas expanded by two-thirds in the first half.

A bigger concern is that more countries are adopting auction-based contract awards. These promote projects that deliver the cheapest electricity as opposed to feed-in tariffs, which guaranteed a fixed electricity price. So life’s getting a little tougher for Vestas.

Even so, there’s no reason it shouldn’t keep winning business from project developers. The key to auction success is keeping cost down. So being big like Vestas helps, because of the economies of scale. It also has the balance sheet to pay for research into more efficient wind turbines, again helping drive down the cost of electricity production.

Besides, there are other ways to make money. High-margin maintenance contracts are an increasing share of business. There are opportunities too to upgrade the installed base with those newer, better turbines.

So, despite an underwhelming quarter, Vestas still announced a 600-million euro buyback. If dividends and a previous buyback are included, the company will return about 1 billion euros to shareholders in 2017, more than the total free cash flow expected by analysts this year.

Tower of Strength
Vestas has a large net cash position and can afford to return some to investors
Source: Bloomberg

Vestas can afford it. The company had 2.9 billion euros of cash and equivalents at the end of June and less than 500 million in debt. Its turbine order book has swelled to more than 9 billion euros, more than double that if you include contracted service fees. Even after four decades, the wind is still set fair.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That's with dividends reinvested.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net