Buy, Sell, Hold: Vestas Wind Systems


Courtesy of Vestas Wind Systems A/S

Vestas Wind Systems (NASDAQOTH: VWDRY  ) is one of the largest manufacturers of wind turbines in the world; therefore, investors who are looking to gain exposure to the renewable energy space (namely wind) should keep Vestas at the top of their watchlists. The company is at the end of a two-year restructuring process, and management believes that the efforts have been worthwhile. Bert Nordberg, Chairman of the Board of Directors, believes that he and the rest of management "have transformed Vestas into a more lean, flexible and scalable company much better prepared for the future challenges of an increasingly dynamic and competitive wind power industry."

Between the company's confidence and shares floating around 52-week highs, is now the time to jump in, or would it better to hold back and wait for a better buying opportunity? Let's take a look:

How successful was the turnaround?
Over the past two years, Vestas enacted some major changes -- changes that were meant to save €400 million. By the end of the turnaround, the company had exceeded this amount, saving €484 million. One way in which it attempted to restructure the company was in employee reductions. Since 2011, the company cut 32% of its staff, reducing the number of employees from 22,721 to 15,497, of which 4,287 were salaried employees.

Also, whereas 2010 and 2011 saw a combined €1.55 billion in capex, the company reduced that to €525 million for 2012 and 2013. Regarding partnerships, the company entered into a joint venture with Mitsubishi Heavy Industries to strengthen its position in the offshore wind market. Looking to optimize capacity utilization, Vestas reduced the number of worldwide factories from 31 to 19.

Clearly, the company undertook some major steps in an effort to get the company back on track, but was it worth it? It seems that it has, for the company's financial performance has improved over the past two years. Regarding income, although revenue dropped in 2013 compared to 2012, the company was able to achieve improvement with EBIT. One way it was able to accomplish this was by improving its gross margin from 11% in 2012 to 14.7% in 2013. This, in part, resulted in EBIT growing from €4 million in 2012 to €211 million in 2013.

The company's cash flow has also greatly improved. Cash flow in working capital improved from €-304 million to €829 million. Cash flow from operating activities improved from €-73 million in 2012 to €1,248 million in 2013. As a result, there was significant improvement in free cash flow -- from €-359 million in 2012 to €1,009 million in 2013. Additionally, management lauds the fact that it has managed to convert from net debt to a net cash position of €86 million.

Looking to the future
It would seem that things are blowing in the right direction for Vestas, but will it continue? Currently, the company does have a strong backlog: €6.8 billion for the wind turbine segment and €6.7 billion for the service segment. The company does not propose a date by which it will be profitable, but it has has said that if it keeps its net debt-to-EBITDA lower than one, and its solvency ratio over 30%, it will begin returning cash to shareholders.



Source: Global Wind Energy Council


Regarding the market opportunity, all indicators point to the continued acceptance of wind power as a viable energy alternative.The Global Wind Energy Council, or GWEC, forecasts total cumulative installed capacity reaching more than 530 GW by the end of 2017 -- an average growth rate of nearly 14%.

Although there will be plenty of opportunity for Vestas to prosper, the company does face threats from some other wind turbine manufactuers. According to GlobalData, Vestas was the global leader in installed wind capacity for 2013 with 13.67% of market share; however, Siemens AG (NASDAQOTH: SIEGY  ) ranked fourth on the list with 7.29% of market share. Siemens does reign supreme on another list, though. It was 2013's top supplier of offshore wind capacity in Europe. Having supplied 1,249 turbines to European waters, Siemens had 60% of total installed capacity. Another reputable threat is GE (NYSE: GE  ) . Although GE only had 0.5% of the European offshore wind market, the company is still an industry leader. In 2012, GE ranked second on the list of top turbine manufacturers, and it dropped to sixth place for 2013. The company continues to innovate; it recently announced the availability of a turbine made specifically for the Indian market -- a turbine which can generate 30% more power than its older model.

Foolish final thoughts...
As strongly as I believe in the growth of the wind industry, and Vestas' role in serving that growth, I'm cautious about picking up shares anytime soon. Although the company's turnaround over the past two years has been successful and worthy or praise, the future performance of the company seems questionable. Were the company to maintain consistently sound financial performance, I'd be inclined to reconsider adding shares to my portfolio. For now, though, I'm happy to just keep an eye on the company and root for its success from the sidelines.

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