Wind turbines: market sees through a stormy period

Strategists use earnings surprises as market weather vanes. They may therefore worry the climate has changed for Europe’s renewable energy specialists. Turbine makers Vestas and Siemens Gamesa have both reported tricky quarters. Each had unique reasons, some of which markets had already priced in. There is no reason to see underlying profit growth as challenged.

A lot of optimism was priced into renewable stocks in a hurry last year. Shares prices have been treading water recently while companies catch up with expectations. Multiples of enterprise value to ebitda have pulled back from the twenties into the teens.

Problems with supply bottlenecks and delays due to the pandemic figured prominently for the turbine makers during the last quarter. Siemens Gamesa of Spain noted delays to its onshore wind turbine deliveries and pared its revenue outlook accordingly. Denmark’s Vestas did even worse, chalking up operating losses of €71m compared with expected €46m gains. Yet shares rallied on Wednesday.

What gives? Traders have decided to look through the bad news. Vestas noted sharp rises in steel prices, up by more than half year on year. Its highly profitable aftersales service unit, with margins in excess of 20 per cent, also suffered. But importantly, both turbine makers held to their profitability outlooks. That reaffirmed the market’s confidence in their prospects, thinks Bernstein. Vestas still expects operating margins to end the year between 6 per cent to 8 per cent, punchy given it is already in the red.

The optimism of turbine makers is justified. Wind power, especially offshore, still has a rosy future. Offshore turbine demand should grow at more than 15 per cent annually for the next decade, thinks Vestas. That will provide an important boost. Almost all of its revenue currently comes from onshore turbines which should grow at a low single-digit pace.

A secular rise in renewable energy demand shows no signs of flagging. That means these two turbine makers will benefit. Investors should exploit any weakness as buying opportunities.

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