Will These 3 Companies Rise as Coal Falls?
I'm sorry Canada. I admit it: When I think of the Great White North, I think of hockey. Please forgive me. It'll never happen again. Not after hearing this.
Ontario, Canada -- of all places -- is leading the charge in the adoption of wind energy as a viable alternative to traditional sources of electricity. In other words: Move over coal. According to the Canadian Wind Energy Association, 2012 marked the first time that wind-generated electricity exceeded electricity generated by coal in Ontario; moreover, "by the end of 2014, Ontario will be the first jurisdiction in North America to eliminate coal as a source of electricity generation."
Don't believe it? Just look at how the Market Vectors Coal ETF and First Trust Global Wind ETF (NYSEMKT: FAN)have performed this year.
Wind turbine manufacturer GE (NYSE: GE) is benefiting from Ontario's commitment to wind energy. It recently announced that it will be providing 24 turbines to the 60MW McLean's Mountain Wind Farm on Manitoulin Island in Ontario. GE will also be providing operations and maintenance services under a 10-year contract.
Shipping only 351 wind turbines compared to the 726 turbines that they sold last year, GE had a disappointing second quarter. During the Q2 earnings call, management seemed optimistic, though. "Again, the wind turbine cycle is a headwind, but we're well positioned for the future with a solid backlog and the balance of our industrial businesses should grow in line with our 5% to 10% organic growth goal."
Although GE is most identifiable with turbines in reference to wind energy, it recently uncovered new software that can greatly enhance the performance of its turbines. The PowerUp system adjusts for environmental conditions and can improve performance by up to 5%. This, in turn, could represent up to a 20% increase in profit per machine in some instances.
This breeze isn't very steady
Recently announcing that it will be supplying hardware to the 150MW Grand Renewable wind farm in southern Ontario, Siemens is another potential winner. In addition to the 67 turbines, Siemens will be providing a three-year service and maintenance deal. Earlier in the year, Siemens had been selected to supply and commission 124 wind turbines for a 270MW project in South Kent, located in southwestern Ontario.
Wind Power has been an inconsistent segment for Siemens. For the third quarter of 2013, Siemens saw an 81% decrease in orders from the previous quarter, which translated into a 67% decrease in profits (from 66 million euros to 21 million euros) compared to the same quarter last year. Profit margins also dropped from 5.1%-1.6%.
Has the wind died down here, too?
With 1,419 turbines equaling 2,396 MW installed in Canada, Vestas is one of the leaders in the global wind space. Having installed over 57GW of wind turbines in over 70 countries, Vestas recently saw a 74% increase in order intakes from 945MW in Q2 2012 to 1,641MW in Q3 2013. This belies the disappointing income numbers. Compared to Q2 2012, Vestas saw a 36% decrease in revenue, a 47% decrease in gross profit, and an increase in net loss from 8 million euros in Q2 2012 to 62 million euros in Q2 2013.
ABB provides power and automation technologies for industrial and utility customers around the world. In terms of the renewable energy (solar and wind) space, ABB believes that it will be profitable by 2015.
It is currently difficult to disaggregate ABB's financials to determine how profitable its products and services are. Perhaps, as it continues to approach its 2015 targets, it will make this information more readily available. In general, though, ABB experienced a 7% decrease in the number of orders in Q2 2013 as compared to Q2 2012. For the same period, though, it recognized a 6% increase in revenue, which translated to a 16% gain in net income and a 16% gain in basic net income per share.
The Foolish takeaway
Are recent developments in Ontario indicative of a renewed push to develop wind-powered electricity? Time will tell. But, even if it is, even if there is a considerable effort to develop these projects, investors must examine how profitable this will be for the companies that are directly involved. GE and Siemens are hardly dependent on their wind segments for overall profitability; however, in time, margins may improve to the point where these segments do recognize more significant profits. Vestas is a pure wind play, and I'd be hesitant to invest until I saw a consistent trend toward profitability-- a trend which at the moment seems non-existent.
ABB seems interesting, and worthy of further investigation, for it can profit handsomely from the industrial and utility customers' continuing interests in obtaining electricity from renewable sources.
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The article Will These 3 Companies Rise as Coal Falls? originally appeared on Fool.com.
Scott Levine has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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