Forget Solar, Let's Talk about Wind!

By Stephen Benz - May 10, 2012 | Tickers: AMSC, GE, KDN, SI, ZOLT | 0 Comments

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I like to think I’m an investor with a conscience.  I’ll stay away from owning cigarette companies, even knowing that if I had invested in Altria Group back when I became old enough to buy their products I’d be a rich man. 

Then there are companies I’d like to own because I want to be a part of achieving what I consider moral imperatives.  To this end, about a year ago I started looking at companies focused on solar energy.  The only problem was I couldn’t find any I felt comfortable putting my hard-earned money behind.  The combined factors of a weakened European economy, strong competition from Chinese companies, and political headwinds fueled by a few high-profile bankruptcies created a very volatile market for the solar industry.  I was scared away from solar panel makers and settled on a company that makes power inverters for both solar cells and wind turbines.  Wind turbines!?  With all the solar talk going on I practically forgot about wind energy.  I decided to dig a little deeper.

In the United States, from 1999 to 2011, wind power capacity has grown at an annual rate of 27.2%, and the worldwide capacity has grown at an annual rate of 25.7% over the same decade.  In the last two years, China has double its capacity to become the world’s leader and plans to double capacity again by 2015, according to the World Wind Energy Association's latest quarterly bulletin.  The Energy Information Association projects that wind energy generation in the United States will roughly treble from 2010 levels by 2035.  Even more telling, this projection does not indicate solar power is going to take off as a significant contributor to overall renewable energy generation.  See the graph I pulled from the U.S. Energy Information Association website below.

So here’s the challenge when it comes to wind energy.  Energy consumption projections in the United States and worldwide are not substantial enough to overwhelm conventional energy sources, and as a result renewable energy is not strictly necessary to supplement these conventional sources.  It’s going to require social and political will for renewable energy to gain market share in energy generation.  I find some hope in the following data. 

The below map is from the Department of Energy’s Wind Powering America website.

I can see the best locations in the U.S. for wind turbines are in the Midwest.  This may initially cause worry, as these are traditionally “Red States,” and presumably are hesitant to adopt renewable energy solutions.  All the wind power is generated in California, right?  What if I told you Texas has 2.5x the wind power capacity of California?  Texas, Oklahoma, Kansas, Iowa, Nebraska, and the Dakotas have collectively increased their wind capacity at an annual rate of 29.6% over the last decade.  They now account for nearly half of our wind capacity.  This gives me hope that the success of wind power in these states will provide the support on both sides of the aisle to support further development of wind generation in the U.S., especially off-shore. 

To conclude, I’d like to touch on some companies I believe would benefit from a stronger demand of wind energy.  The largest wind turbine manufacturers trading on American markets include General Electric (NYSE: GE) and Siemens (NYSE: SI).  I believe both stand to benefit from increased wind energy demand, however, for the purpose of this article I want to focus on less industrially diversified companies with greater relative exposure to wind energy.     

American Superconductor Corp. (NASDAQ: AMSC) licenses turbine designs and supplies electronics and control systems for wind turbines.  Their grid business segment provides interconnection services for wind farms and other forms of renewable energy generation.  The company has yet to consistently put up positive earnings and was hit hard in 2011 when their largest customer, Sinovel Wind Group, refused to accept shipments, resulting in the restating of their financials.  Things were looking dire, but hope was renewed when an unidentified investor put in $25 million in convertible notes, and the company is taking Sinovel to court in China for $1.2 billion.  The crystal ball on this one is certainly cloudy. 

Kaydon Corp. (NYSE: KDN) manufactures large-diameter turntable bearings used in wind turbines.  From 2006 to 2009 they invested over $80 million in support of a wind energy growth initiative.  Annual sales to wind customers increased from 7% of total sales in 2007 to 21% of total sales in 2010.  Wind customer sales dropped nearly 50% in 2011, and the stock has felt the pinch.  Management anticipates increased demand in 2012 due to the potential expiration of the Production Tax Credit.  The stock yields 3.4% and seems attractive based on some value metrics.  In early 2012 they announced a special dividend of $10.50 per share!  That's the kind of board I could get behind.

Zoltek Companies (NASDAQ: ZOLT) makes carbon fiber commonly used in the production of turbine blades.  In 2011, 28.1% of their revenues came from sales to Vestas Wind Systems, the world's largest turbine manufacturer by market share.  The company has not shown an annual profit since 2008, however the first two quarters of 2012 have been very strong.  They opened a new 135,000 square-foot facility in St. Louis in late 2011, and raw materials inventory has increased 55% over the year.  These are some bullish signals on management's part to me.

A lot of these companies have been beaten down lately by the market.  Do you think they offer great opportunities or are they falling knives?  Tell me what you think by leaving a comment.

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