Sector Watch: Wind energy
Propelling forward the idea of alternative energy sources are wind turbines—machines that produce electricity from converted kinetic energy in wind.
Wind energy is the world’s fastest-growing energy sector and is already well-established in Europe, where it accounts for over 40,000 megawatts of generating capacity. Although most of the large wind turbine providers are European companies, a few American companies also participate. Two in particular, American Superconductor Corporation (Nasdaq: AMSC) and Composite Technology Corporation (OTC: CPTC), have been benefiting from rapid growth in this alternative energy sector.
In 2005, wind energy installed globally reached nearly 60,000 megawatts, up nearly 12,000 megawatts from the prior year. By 2020, it has been estimated that as much as 1,250 gigawatts of wind power could be installed worldwide, a more than 20-fold increase compared to 2005. Wind turbines typically cost between $900,000 and $1,300,000 per megawatt; the turbine market in 2005 was valued at approximately $12 billion.
In the United States today, the renewable energy in wind provides enough electricity for approximately 2.4 million American households. A major growth driver for U.S. wind turbine installations results from the Federal Production Tax Credit, which guarantees a tax credit of 1.9 cents per kilowatt hour for U.S. wind projects over the first ten years of their life. At the state level, an additional incentive is provided by state tax credits similar to the Federal Production Tax Credit. Wind energy tax credits are available in 18 states, including the three most populated—California, Texas and New York.
Composite Technology manufactures and markets 1.25 megawatt and 2 megawatt wind energy turbines worldwide through its Dewind segment, which it acquired in July 2006.
In August 2007, the company announced firm orders for $53 million in turbine and turbine parts; most of these turbines are scheduled for delivery in 2008. The company shipped its first large 2 megawatt turbine in September 2007.
Composite Technology markets its products worldwide but is focusing U.S. marketing efforts on the new 2 megawatt turbine to improve U.S. sales opportunities. During 2005, more than 2,400 megawatts of wind capacity were added in the U.S. market. The American Wind Energy Association estimates that the United States could reach 15,000 megawatts of capacity by year-end 2009 and 10 gigawatts of capacity by 2020.
In addition to wind turbines, which account for approximately 65% of current sales, Composite Technology also manufactures and markets composite reinforced conductor cable that it sells to utilities and grid operators. The advantages of the company’s composite cable compared to existing transmission lines include twice the carrying capacity, the ability to operate at higher temperatures and reduced line sag, which allows greater distances to be used between transmission towers.
During the nine months ended June 30, 2007, Composite Technology’s revenues increased nine-fold year-over-year to $34.3 million, from $3.4 million. Net losses were higher at $26.1 million this year versus $18 million in the same period last year, due to significantly higher sales and marketing and general and administrative costs. Per-share net losses for the nine-month period were flat at $0.14 this year and last year because of a higher share count resulting from an equity private placement that raised $25 million.
On Tuesday, Composite Technology (CPTC) stocks closed at $1.85. Over the last 52 weeks, shares have ranged between $0.82 and $2.22. Analysts expect this company to produce 50% growth next year and I look for growth averaging more than 25% annually over the next five years. My $3 price target for Composite Technology Corp is 60% above the current price.
Like Composite Technology, American Superconductor Corporation has also seen a dramatic increase in growth.
American Superconductor manufactures and markets wind turbine electrical systems that connect electric grids to domestic and international wind farms. The company’s order backlog stood at approximately $140 million at the end of July, not including awards of $24 million and $21.7 million from the Department of Homeland Security and the Department of Energy, respectively, expected to finalize before year-end 2007.
In September, American Superconductor announced a second order from China for approximately $20 million in wind turbine electrical systems, following an initial $70 million order received from the same customer in July. American Superconductor has three large customers in China and expects to sign a fourth customer before year-end.
China is one of the largest wind energy markets. The Global Wind Energy Council estimates some 1,347 megawatts of wind generated electricity was added in China in 2006 and expects 8,000 megawatts to be added between 2007 and 2010.
American Superconductor’s revenues grew 41% year-over-year to $19.8 million from $14 million during its first quarter ended July 31, 2007 and the company anticipates full-year 2008 revenues between $85 and $90 million. However, American Superconductor’s first-quarter net loss increased year-over-year to $9.7 million, or $0.27 per share, from $6.7 million, or $0.20 per share, because of one-time charges relating to write-offs, restructuring and the revaluation of outstanding warrants. During the July quarter, the company raised $94 million from an equity offering; the proceeds will be used to grow the business.
On Tuesday, shares of American Superconductor (AMSC) closed at $24.19. Over the last 52 weeks, shares have ranged between $9.03 and 27.59. Analysts forecast 40% growth for the company this year and longer-term growth averaging 30% annually. My $32 price target for American Superconductor is 20% above the recent price.
