Vestas stock analysis: wind turbine manufacturer with sufficient wind beneath the wings?

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Vestas stock analysis: wind turbine manufacturer with sufficient wind beneath the wings?

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Matthias Krey

As the climate continues to change, the political and social will is common that climate change must be combated and renewable sources of energy expanded. Vestas is a good example of companies that have been ensuring the drive for renewable energy solutions. Below are reasons why Vestas stock is exciting:

  • High market demand

A significant surge in demand for several renewable power sources is expected to drive the wind energy market growth, governments across the globe are promoting sustainable energy sources which can reduce carbon emission, unlike conventional power sources.

  • Good order situation

Vestas turbines have been installed in 85 countries around the world, operating on every kind of site, from high altitude to extreme weather conditions.

Vestas wind turbines meet these diverse challenges through purpose-driven

product development and extensive testing at the industry’s largest facility. The flurry of turbine orders announced in the final week of 2020 totaled approximately 1,300 MW globally.

  • Established business model

Vestas’ journey from 1945 to a wind industry leader now is an exciting success story. Vestas turbines have been installed in 85 countries around the world so far..

Thus, there are more than enough reasons to take a closer look at the stock and find out whether an investment could currently be worth it. Is Vestas’s share overrated? Or should you buy Vestas shares now? These questions let us get close to them and you will find out how the business model works and how good it is, what the moat is really made of, who the competitors are and whether their share today is attractively valued or not. Have fun!

Table of Contents

Table of Contents

Business Overview

Basics of vestas stock analysis

Vestas Wind Systems A/S, a Danish-based company, had its IPO in 1987, but was founded in 1945 under Peder Hansen who started it as an agricultural machinery business. The company started working on the first wind turbines in 1980 and is since 1987 only focused on wind energy.

Vestas is the energy industry’s global partner in renewable energy solutions. They design, manufacture, install, and service wind turbines across the globe, and with more than 132 GW of wind turbines in 83 countries, they have installed more wind power than anyone else. Through their industry-leading smart data capabilities and unparalleled 113 GW of wind turbines under service, they use data to interpret, forecast, and exploit wind resources and deliver best-in-class wind power solutions.

Business model

Vestas’s business model entails building turbines on both the onshore and offshore categories; onshore refers to wind farms on land, offshore refers to wind farms in the Sea, off the coast. Vestas also offers service business in the maintenance of wind farms and projects.

vestas business model

 

Vestas operating business model supports their commitment to their two main revenue streams – wind turbines and service solutions – and shows their commitment to wind throughout the product life cycle.

The overall ambition for Vestas is to increase profitability and cash flow generation without compromising their leadership position within technology, quality, and service. To support this ambition, they are continuously optimizing their organization and operating business model to best meet the requirements of their stakeholders.

Like most other infrastructure projects, the wind industry is facing various short-term barriers, but the long-term drivers for wind power remain intact. In response to the volatile market for wind energy, Vestas is building an organization that is agile, flexible, scalable, and lean and which can execute efficiently on their operating business model.

Like most other infrastructure projects, the wind industry is facing various short-term barriers, but the long-term drivers for wind power remain intact. In response to the volatile market for wind energy, Vestas is building an organization that is agile, flexible, scalable, and lean and which can execute efficiently on their operating business model.

The business is not easy. It is characterized by long planning cycles from approval to procurement and commissioning as well as high capital costs for pre-financing.

The main focus of the operating business model is to reduce costs and investments while improving the utilization of their capacity.

vestas business model2 e1635317906498

Size and valuation

Vestas by market share and market capitalization is the largest wind turbine manufacturer in the world. It has a market value of $43 billion.

Why is Vestas a Pure Climate Stock?

Renewable electricity, such as from wind power projects, forms the backbone of our transition to a climate friendly economy. The demand for green electricity will significantly increase over the coming decades as a means of reducing fossil fuel consumption in transportation, industry and heating. Vestas is making 100% of its revenues from manufacturing wind turbines and services around wind energy.

Factsheet

Share price development

Until March 2020, the share price of Vestas did not see much movement. But following the Corona crisis and the “build-back-better” plans from governments, in which wind energy was expected to play a key role, the stock surged. After the EU green recovery programme passed and after Biden won the US presidential election, all wind turbine manufacturers stocks saw tremendous growth and peaked in January this year. Since then they all fell by significant margins and Vestas has been trading between 10%-15% below of its all-time-high for the past months.

vestas share price development

Key figures

Unless otherwise stated, all figures are USD and trailing twelve months (TTM). Addition ‘(e)’ = expected in the current year. ‘YoY’ = year-on-year.

Key data
  • Country: Denmark
  • Industry: Wind turbines
  • Market Cap: $43 billion
  • Revenue: $17.3 billion
  • Net income: $1.0 billion
  • Free Cash flow: $0.2 billion
Valuation
  • P/S ratio: 2.4
  • P/E ratio: 38
  • P/CF ratio: 117
  • PEG ratio: 6.9
Growth & debt
  • D/E ratio: 33%
  • Gross margin: 10.6%
  • Revenue growth (last 3 years): 14% p.a.

Summary

Vestas is the leading wind turbine manufacturer with an impressive track record. The Danish company is growing with 14% per year and is generating stable profits. Recently, the margin was under pressure due to cost increases in the value chain. Still, the wind power market is set for growth and Vestas is ideally positioned to serve the onshore and offshore wind power project developers.

5 Facts about Vestas

  1. Vestas is a pioneer in wind energy and is operating in this market since 34 years
  2. Vestas is the largest wind turbine manufacturer by market capitalisation
  3. In terms of total wind power capacity installed worldwide Vestas is also the market leader
  4. Sales have grown 14% over the last three years
  5. Vestas is generating relatively stable profits and free cash flow.

Analysis of business model and strategy

Let’s take a look at what the business model looks like.

How strong is the growth?

Vestas’ sales and EBIT margins over the last few years (in USD):

  • 2016: 11.3 billion, 14%
  • 2017: 11.2 billion, 12%
  • 2018: 12.0 billion, 9%
  • 2019: 14.2 billion, 8%
  • 2020: 17.3 billion, 5%

Sales have therefore increased more rapidly since 2018 than before. However, the profit margin has been declining since 2016. Vestas’ sales in the most recent quarter Q2 2021 were slightly below the previous year. The EBIT margin in the 4 quarters ranged from  -3.6% to 8.6%.

vestas sales growth

Vestas recently incurred direct costs of around 90% of sales, so the gross margin is about 10%.

vestas direct costs

Both operational and free cash flow is positive.

vestas direct costs2

What is the business model and strategy?

Power Solutions & Service Business

Vestas divides its own business into two segments:

  1. Power Solutions (approx. 80% share of sales):

This includes the up’s and downs in sales of onshore and offshore wind turbines, i.e., wind power on the land and the sea. They do over 80% of the segmenting onshore plants.

  1. Service business (approx. 20% share of sales):

This includes the maintenance of wind turbines. Year on year, onshore orders increased by 10%, and offshore sales were down 32%.

The “order backlog”, that is, the scope of projects still to be implemented is in place currently at an all-time high of 21.2 billion EUR.

vestas business model and strategy1

A closer look at the development shows: The margins are between -7.6% and 7.5%. The realized sales are mainly based on onshore plants.

vestas business model and strategy2

The service business has an order backlog of 26.9 billion EUR, of which again the majority planned for onshore plants. The average contract has a term of 10 years, which means that the business is plannable.

vestas business model and strategy3

Sales are much more constant than in the Power Solutions segment and achieve significantly higher EBIT margins of 22-29%.

vestas business model and strategy4

Strategy

In its annual report 2021, Vestas named three pillars of strategic action:

  1. Enable electrification through renewable energy at low cost
  2. Promote the use of renewable energies
  3. Develop new solutions for indirect electrification

Along these pillars, Vestas achieved some important initial milestones in 2020 that express the future strategic direction. Firstly, Vestas acquired from Mitsubishi Heavy Industries all remaining shares in the Joint Venture MHI Vestas Offshore Wind (MVOW) in order to get ahead in the race to become the number one player in the offshore wind market. Secondly, Vestas is diversifying its activities along the supply-chain by becoming a wind project developer and investor. In 2019, it had acquired a majority stake in a 700 MW wind farm project in Australia and has recently bought a stake in Copenhagen Infrastructure Partners, a Danish market leading invest firm specialized in wind power. Vestas is expecting in this field to yield higher margins compared to its core business of manufacturing wind turbines. Thirdly, Vestas aims to get into the business of green hydrogen generation and is planning to strengthen activities with Mitsubishi heavy industries to this end.

Vestas is planning sales of EUR 15.5 – 16.5 billion for 2021. It’s a little below the previous outlook, but still around 8% above 2020. The EBIT margin is also targeted to be slightly lower at 5 – 7 percent.

vestas business model and strategy5

Vestas has not yet been satisfied with its profitability and said that an EBIT margin of 10% is to be achieved in the long term.

Evaluation of the business model

Are there network effects accelerating the sales of Vestas?

No, there are not. Buyers of wind turbines do not profit, if others buy Vestas or Nordex wind turbines.

Does Vestas generate recurring sales with lock-in effects?

Recurring revenue is the portion of a company’s revenue that is expected to continue in the future. The 20% of sales that are attributable to the service segment are predictable, stable, and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty. In addition, the service area has EBIT margins about three times as high as the Power Solutions business. So one part is recurring and on the other hand, they can account for the size of their gains.

What methods of economies of scale do Vestas apply?

The overall ambition for Vestas is to increase profitability and cash flow generation without compromising their leadership position within technology, quality, and service. The main focus of the operating business model is to reduce costs and investments while improving the utilization of their capacity. Vestas has successfully demonstrated to lead cost degeression and seem capable of continuing so in the future.

Has Vestas embraced proprietary technology mechanisms?

No, accordingly to my research Vestas does not own any kind of technology that only Vestas owns and not their competitors as well.

What are Vestas Market Branding strategies?

While brands are largely intangible, they can be one of the most valuable assets a company owns, particularly in the consumer business. As the market leader Vestas enjoys special attention. Denmark as the main location also ensures trust from its customers. However, brand value is not a critical differentiator in the wind turbine industry.

Market analysis

In the last years the new installations grew on average at a rate of 9% per annum. Offshore now captures a market share of 9% in the new build segment.

Picture1

Source: Global Wind Energy Council (2020)

Vestas often emphasizes the growing market for renewable energy. Before we go straight into the SWOT analysis, let’s look into the future. How is the competitive situation and what are the prospects for its growth?

The 5 largest growing markets are China, USA, UK, India and Spain.

Picture2

Source: Global Wind Energy Council (2020)

The leading stock-listed wind turbine original equipment manufacturers (OEMs) in terms of total wind power capacity installed (GW) are Vestas, Siemens Gamesa (SGRE), General Electric (GE), Goldwind and Nordex.

Picture3

Source: Wood Mackenzie (2021)

All market participants differ very little in their product offering. For the most part, identical or slightly different products are sold. The main differences lies in the size and capacity of the wind turbines that the companies can offer their clients. Although Vestas is the market leader in total new build capacity in 2020, Siemens Gamesa is the leader in total offshore new build.

The main competitors of Vestas are therefore Siemens Gamesa, Nordex, GE, and Goldwind.

Picture4

Source: Wood Mackenzie (2021)

Vestas in 2020 did well in participating in all regions and in the largest growing countries including growth in China.

Below you find a comparison of Vesta’s with its main competitors in Europe.

 

Vestas

Siemens Gamesa

Nordex

Country

Denmark

Spain

Germany

Global market share total installed capacity

20%

13%

5%

Revenue projection 2021 (in million EUR)

15,994

10,239

5,046

Net income projection 2021 (in million EUR)

639

-540

3

Operating margin (2020, in million EUR)

5%

-2.5%

-1.3

In addition to Vestas being the market leader, the company has also faired well through the Covid crisis and despite the recent surge in material prices is expected to end the year 2021 with a substantial net income. Its European competitors Siemens Gamesa and Nordex are struggling considerably more with a strong pressure on their margins.

Asset 4

SWOT analysis: strengths, weaknesses, opportunities, and threats analyzed

Let us now look at the strengths, weaknesses, opportunities, and threats.

Strengths

Let’s summarize the strengths that we identify for Vestas:

  • Long service contracts:

Vestas company has a good track record and being one of the best wind turbines manufacturers makes them a reliable source for their clients making it easy for them to secure long-term contracts. Being early entrants in the market makes them capture new markets.

The service contracts are running over 10 years on average, which means that the Business segment has great future potential.

  • High order backlog:

Vestas has a great order record from their loyal and trustable business establishment. Vestas has almost 50 across both divisions billions of EUR as an order backlog. So, the demand is there and the bottleneck is more about processing and completion of the orders.

  • Established business model:

Vestas has been around for over 30 years, so it is an established company in the world market. 

Weaknesses

Where there is light, there is usually also shadow. Let’s summarize the weak points of the Company and understand the oncoming expectations.

  • Fluctuating Power Solutions Business:

The Power Solutions Business is based on a few orders with a large volume, some of the setbacks arereduction of orders to execute. Even as they hold a strong market position there are times when there are low order seasons

  • Low-profit margins:

Vestas’ net margin is in the middle single-digit range, the EBIT margin only slightly above the gross margin at approx. 10%. So, Vestas does not have a large buffer.

  • Capital-intensive business:

Wind turbines have to come with a lot of money;thus, the company will opt to acquire loans and financing to sustain its running for projects developments, and research and development.

Opportunities

What are the opportunities for the company to grow and To increase company value?

  • Climate change:

More and more electricity should be regenerated i.e., via wind, water, or solar as the globe is turning to renewable power sources. Vestas is the shovel here enabling wind power to be developed and operated permanently. The rise in the share of wind power also benefits Vestas. In the last 20 years is According to the IEA, the supply of wind power has increased by approx. 22% annually.

  • Diversification across the supply-chain:

Entering the business of wind power project development can pay off, if it leads to profitable growth and to higher margins than the traditional business of wind turbine manufacturing. The acquisition of shares in Copenhagen Infrastructure Partners seems a good basis to integrate this part of the supply-chain into Vestas.

Threats

There are risks in every company like a flagging economy, wrong operational decisions, political interventions, and others. Here goes much more about it: What could the business model shown here specifically be endangered too? or which factors would inhibit growth?

  • Lower prices from China:

The solar industry in Europe already had once to suffer severely from Chinese competition. Chinese companies could produce PV panels with siginificantly lower costs than their competitors in Europe. Vestas also faces this threat. Goldwind from China has in terms of new build wind capacity in 2020 overtaken Vestas for the first time. Should China want to conquer the market on a more massive scale, they are likely going to offer cheaper prices or even state subsidies.

  • Pressure on margins:

As soon as a segment promises a lot of growth, many companies also want to enter this market due to its promising future. That increases the cost of construction materials, qualified employees’ salaries and lowers the profit margin. The declining EBIT margins of the past 5 years illustrate that there is already significant pressure on the profitability of Vestas.

  • Politics:

The political will can fuel demand for wind power. But industries can also be seen as strategically so important that every country wants to claim the market for themselves. So far China still allows imports of non-Chinese manufacturers and nearly every turbine maker is now selling turbines into China. For Vestas China is by now the second largest market. If China should impose bans or grant subsidies to domestic manufacturers, Vestas growth would come to an end.

Scenario analysis: Is Vesta's trading at its fair value?

Calculating the fair value of any business is not as easy as it may seem. However, we now have a comprehensive overview of the company. So, let’s take a look at the stock, compare quality and valuation and then draw a conclusion.

The fair value of the share

For determination of the fair value I made the following assumptions of a period of 10 years:

1. Sales growth

The sales growth approaches in the calculation of the short-term gradually to long-term growth over 10 years.

  • Revenue growth recently: revenue likely stagnated from 2016 to 2018 and then increased annually by approx. 20%.
  • Current analyst expectation: + 5.8% in 2021 and + 6.4% in 2022. Vestas itself targets an increase of 7 – 9% for 2021 which is in the same range. Last year wind market growth were 9% per year and the projected latest market growth rate until 2027 is 9%.  
  • My short-term assumption for Vestas: I am assuming 7% growth;
  • My long-term assumption for Vestas: 6% sales growth per year. Climate change remains a long-term issue, in addition to the long-term Vestas contracts and order backlogs.
2. Net margin

The net margin averaged at 7% over the past 5 years, however, the trend is slightly declining. In the long term, the EBIT margin should be 10%, but it is currently closer to a maximum of 7%. Therefore, I assume it to be at 6% in the long-term net margin off.

3. Evaluation level

Today the stock is valued at a P / E of 40. I assume that the share, based on the other assumptions, will be valued at an average P / E ratio of 18.

vestas 2 table

Vestas 1 table

My return expectation

According to the yield calculator, the stock looks overvalued at the moment. Especially the strong (and in my opinion quite justified) decline in the valuation level; significantly lowers the return.

Conclusion: Buy Vestas? Pros and Cons

Pro

  • Tailwind from climate change and the need for regenerative energy
  • Good and long-planned order situation
  • Long-term established business model

Contra

  • Low-profit margins which in my perspective tend not to be as a result of high competition
  • The market is threatened by political influence
  • Capital intensive business
  • Apart from the size, Vestas has minimal differentiation features

My opinion

Vestas is a crucial company to help curbing climate change and is consistently generating profits. Nevertheless, Vestas is not a long-term investment option for me. Yes, the company will achieve good results in the long run and will continue to hold a strong position in the wind power industry. But it does not own any moat and is operating on very thin profit margins. An investment strategy could be to buy them after a potential stock price dip, but I currently find an over-valuation instead of an under-valuation.
Therefore, I do not consider Vestas as an investment for the time being due to the high valuation. However, I expect the company to continue to demonstrate its leadership in the market in a very successful way, albeit a non-linear growth pattern.

Table 4 02

In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.