It may not possess the lustre of technology or provoke intense media focus quite like crude oil, but as an industry, wind energy is quietly making waves and progress within the renewable universe.
Google (GOOG) bought 236 megawatts from wind farms in Norway and Sweden to power its European operations. An International Renewable Energy Agency (IRENA) report claimed a potential 59% drop in wind energy cost in the next decade. And legendary investor Warren Buffett's wind energy firm placed one of the largest onshore wind turbine orders in the world. All of these developments happened in the last two weeks of June.
The U.S. Department of Energy's Wind Vision report states the United States may be able to meet 10% of its electricity demand through wind power by 2020, 20% by 2030 and 35% by 2050. Another report from the International Energy Agency (IEA) forecasts that wind could be generating 18% of the world's electricity by 2050, compared with 2% today. Of the US$286 billion invested in renewable energy in 2015, wind accounted for a staggering US$107 billion, a 9% annual growth, noted a UN study. Wind, claims the Global Wind Energy Council, is now the most installed form of low-carbon power generation.
Falling prices, growing adoption and newer technologies are expected to continue to fan the industry's growth. Select wind energy producers are well-positioned to benefit from the trend and are poised for long-term growth both at home and away, according to Morningstar equity research.
| General Electric Co. | ||
| Ticker | GE | |
| Current yield | 2.85% | |
| Forward P/E | 18.9 | |
| Price | US$32.26 | |
| Fair value | US$30 | |
| Data as of July 12, 2016 | ||
General Electric (GE) is a diversified manufacturer whose business mix includes power and water, oil and gas, energy management, aviation, healthcare, transportation and lighting.
One of the world's leading wind turbine suppliers with over 30,000 onshore and offshore turbines globally, GE is ramping up supply to emerging markets like Turkey and Vietnam. Its turbines already make up 40% of Brazil's installed capacity. The company is also in talks to acquire wind energy assets in France to strengthen its market position in Europe.
"Expansion of GE's established product categories, such as turbines, aircraft engines, locomotives and medical imaging, is likely to continue to follow the overall pace of economic growth," said Morningstar equity analyst Barbara Noverini in a report.
The aviation, healthcare and power segments continue to lead the portfolio in organic revenue growth as new product cycles drive sales, Noverini said. "With services generating attractive 30%-plus margins on average, upselling customers with long-term maintenance agreements is another key driver of future profitability growth."
GE's strong competitive advantage is built on patents, customer relationships, brand and switching costs, which help generate profit consistently. The company's diverse portfolio mix will help offset any near-term headwinds in one segment, said Noverini, who projected a 5% compound annual growth rate for core industrial business, reaching nearly US$140 billion in sales by 2020.
GE repositioned its portfolio back toward its industrial businesses in 2015, greatly improving returns on invested capital (ROIC), noted Noverini, who put the stock's fair value at US$30.
| Siemens AG ADR | ||
| Ticker | SIEGY | |
| Current yield | 3.64% | |
| Forward P/E | 14.9 | |
| Price | US$103.06 | |
| Fair value | US$113 | |
| Data as of July 12, 2016 | ||
German engineering and manufacturing giant Siemens (SIEGY) offers electrification, automation and digitisation solutions globally. The firm operates in diverse sectors including power and gas (17% of 2015 sales); wind power and renewables (7%); energy management (15%); mobility (10%); digital factory (13%) and healthcare (17%).
Siemens recently bought a 59% stake in the wind business of Spain's Gamesa Corp. Tecnologica SA as part of a deal to combine the companies' wind businesses. The move would create one of the world's largest wind farm makers. The company is also expanding its wind business in Japan, a market it already dominates.
"Siemens will benefit from demand for new power-generation capacity in emerging markets and a push for more renewable sources in the U.S. and Europe," said Morningstar equity analyst Jeffrey Vonk in a report, noting the firm has strengthened its portfolio through several acquisitions and mergers -- a key part of its operational strategy.
The company is a market leader in offshore wind turbine equipment and services whose renewables division generated 7% of total sales, mainly through wind power, in 2015.
"Siemens has strong positions in renewable energy [and is] the only major company to offer deep-sea wind turbine solutions," said Vonk, who recently raised the stock's fair value from US$103 to US$113 per American Depositary Receipt (ADR).
Vonk projected operating margins of 10.3% in 2016, expanding to 11.2% in 2020, and ROIC of 15.8% for the same period, attributed to management's focus on fixing underperforming segments.
| Enbridge Inc. | ||
| Ticker | ENB | |
| Current yield | 3.59% | |
| Forward P/E | 22.3 | |
| Price | $55.48 | |
| Fair value | $55 | |
| Data as of July 12, 2016 | ||
Along with operating a network of assets that transport and store oil and natural gas in North America, Canadian energy behemoth Enbridge (ENB) also owns several green energy assets.
The company, which has an approximately $5 billion portfolio of renewable projects, made big strides in 2015 as it continues its shift to low-carbon green energy. With the acquisition of the New Creek Wind Project in West Virginia and about 25% stake in the Rampion Offshore Wind Project in England last year, Enbridge's wind energy portfolio now has 15 North American wind assets, and one UK offshore wind facility.
As well, Enbridge recently announced its plans for acquiring a 50% stake, for $282 million, in French offshore wind development company Eolien Maritime France SAS, says a Morningstar report. The move will bolster its presence in Europe, considered one of the most attractive markets for renewable energy projects.
"[Enbridge] has one of the more robust growth profiles of its peers, with $40 billion of [energy] projects in various phases of development," said Morningstar sector director Stephen Simko, who put the stock's worth at $55. "This includes projects with 'tilted return' profiles that will generate single-digit but increasing returns in the first few years of operations before ramping up to low-double-digit returns."
More than 75% of the firm's earnings are tied to fee-based contracts, which will provide steady cash flow and support dividends over the next five to 10 years, he added.
| NextEra Energy Inc. | ||
| Ticker | NEE | |
| Current yield | 2.58% | |
| Forward P/E | 19.5 | |
| Price | US$127.33 | |
| Fair value | US$103 | |
| Data as of July 12, 2016 | ||
A leading name in renewable energy, NextEra (NEE) generates power through wind, solar and natural gas, and distributes through its regulated utility, Florida Power & Light (FP&L), to 4.5 million customers in Florida. FP&L contributes over 60% of the group's operating earnings.
"NextEra is the largest wind power producer in the United States," said Morningstar equity analyst Andrew Bischof in a report. "The company is well-positioned to benefit from additional environmental restrictions on fossil-fuel generation."
The firm's 2017-18 renewable energy development program provides a long runway of growth opportunities, Bischof said, noting that "Wind Production Tax Credit, state renewable portfolio standards, continued cost efficiencies and environmental regulations" will continue to propel wind energy growth.
NextEra owns 110 wind farms in the United States and Canada, and is currently pursuing an estimated US$2.6 billion deal to acquire Honolulu-based Hawaiian Electric Industries, which serves 95% of the state's population.
Investors may find NextEra's dividend growth potential particularly attractive. "Management plans to increase its dividend payout to 65% from the current 55%, supporting 12% to 14% dividend growth through 2018," said Bischof, who appraised the stock to be worth US$103. "NextEra will be able to maintain strong credit metrics even with this higher payout, given its industry-leading cash flow profile."
The power generator, which also operates nuclear and fossil-fuel power plants throughout the U.S., may find additional pipeline growth potential through Canadian development.
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