Opportunities In Wind Power Companies

Posted by Bull Bear Trader | 7/16/2008 07:21:00 PM | , , , , , , , , , , , , , , , , , , | 0 comments »

James Altucher has written about two potential wind power plays in a recent Financial Times article. The two stocks are AeroVironment (AVAV) and Otter Tail (OTTR). Yes, strange names, but Altucher mentions that these stocks interest him in part because his ".... general approach when dealing with “hot topic of the day” type stocks is to look for back doors. Find stocks that have legitimate cash generating businesses, trade at cheap multiples and happen to be making serious moves in whatever the hot field is." AeroVironment and Otter Tail certainly fit this description since they both have other primary businesses that do something other than support the wind power industry. Therefore, if wind power ends up being a passing fad (not likely, but scale could be less or slower than expected), you still have something else to fall back on. Probably not a bad strategy given the recent introduction of numerous companies claiming to be in the wind industry, as well as the number of wind power-based companies that still trade over the counter and on the pink sheets.

AeroVironment was founded in 1971 and headquartered in California. Its primary business is making unmanned aircraft systems and energy technologies for military and weather uses, among others. The company also offers a fast charge system for recharging industrial vehicle batteries while they remain in the vehicle. The market cap of the company is around $600 million. It has a trailing P/E of 29.8, and forward P/E of 22.1. The PEG Ratio is 1.18, with a quarterly revenue growth rate year-over-year of 26.8%.

Source: StockCharts.com

AVAV has moved up recently after announcing that it secured a contract to produce its new Puma AE small UAV for the U.S. Special Operations Command. The indefinite delivery, indefinite quantity contract begins with an initial delivery of $6 million. If the initial one-year contract delivers at 100%, and the four single year follow-on options are exercised, the contract could go as high as $200 million. Management is expecting to grow sales and earnings at 20% to 25% per year. Of course, this says nothing of the wind business, which is currently a very small, shall we say insignificant part of their business. In a sense you are getting the wind business for free, and are buying into to a company that is doing well in the UAV market with the stock reflecting the defense earnings. But there is potential for profits from wind investment. Their Architectural Wind segment builds small modular wind turbines that connect to existing skyscrapers and other tall buildings and structures that are most likely to catch the wind. This allows a company to begin generating energy from the turbines without building a new structure, which is not only expensive and time consuming, but could require permitting and other hassles. Nonetheless, keep in mind that right now the near-term earnings are reflecting the defense business - which is looking pretty good.

The other company mentioned is the Otter Tail Corporation, a utility founded in 1907 and serving 129,000 customers in the U.S. and internationally. In addition to exposure to the utility industry, the company invests its excess cash in other subsidiary business, including those with specialties with polyvinyl chloride and polyethylene pipes, waterfront equipment, material and handling trays, horticultural containers, metal parts stamping and fabrication, diagnostic medical equipment, diagnostic imaging services, food ingredient processing, waste water and HVAC system construction, fiber optics, and electric distribution systems, among others. Yes, I know what you are thinking - kind of like a mini-conglomerate, Berkshire Hathaway-type of stock. The market has not recently been kind to such stocks, but OTTR appears to be an exception. The market cap of the company is around $1.3 billion. It has a trailing P/E of 25.7, and forward P/E of 19.6. The PEG Ratio is 2.82, with a quarterly revenue growth rate year-over-year of 26.8%. Bill Gates is the second largest shareholder in Otter Tail.

Source: StockCharts.com

As for wind exposure, one of OTTR's businesses of interests is DMI Industries, a large maker of wind towers. Demand for wind towers has been strong, with orders stretching into 2012, causing DMI to open new plants. The new plants are expected to give the company the ability to produce and deliver off-shore wind towers, as well as more easily ship to expanding European and South American markets. Company management continues to express how demand is increasing rapidly, and the new plants will allow them to meet existing demand and expand as demand continues to increase, which is expected.

For those interested, other wind plays with varying levels of pure-play exposure also exist. Some common names that appear from time-to-time include Trinity Industries (TRN), making tank containers and tank heads for structural wind towers, Thomas & Betts Corporation (TNB) for electrical and steel structures, Owens Corning (OC) for building materials, Clipper Windpower (CRPWF.PK) for wind turbine manufacturing, Kaydon Corporation (KDN) for custom engineering products, Broadwind Energy (BWEN.OB) for wind farm construction and infrastructure, Woodward Governor (WGOV) for the design and manufacture of energy control and optimization of industrial turbines, and MasTec (MTZ) for building and installation of utility infrastructure.

In addition to the already mention names, the Danish-based Vestas Wind Systems (VWDRY.PK) is a major pure-play company offering wind power solutions for building wind farms, both towers and turbines. The Chinese energy infrastructure specialist company A-Power Energy Generation Systems (APWR) is also expanding into wind turbine manufacturing, providing both wind and China exposure. Other turbine manufacturers include Gamesa Corp Teca SA (GCTAF.PK) and Suzlon Energy Limited (SUZLON.NS). Ameron International Corporation (AMN) is a maker of water pipeline systems, but also is involved in wind-tower manufacturing. General Electric (GE) recently received an order for 667 wind turbines from T. Boone Picken's Mesa Power LLP. In addition to GE, Siemens AG (SI) also manufactures wind turbines. Finally, American Superconductor (AMSC) has a power systems division that supplies electrical systems used in wind turbines, a necessary but often forgotten piece of the wind power industry.

As mention before, many pure plays, and not-so-pure-plays are small caps that trade OTC and on the pink sheets, and subsequently include the risk and rewards of such investments. A number are also international companies. Confused on what to buy? Don't worry. First Trust recently launched the First Trust ISE Global Wind Energy Fund (FAN) for those that don't want to try and pick the winners in the group, but simply want to increase their exposure to wind energy. Good luck in your choices. Hopefully the wind is at your back.