Vestas Wind Systems (VWDRY -1.63%) stock has crushed the market since the beginning of 2013, up some 760%, as the management team has made significant steps to "right-size" its business, and shift some of the manufacturing to third parties in order to reduce fixed costs.
So far, so good, as the business has moved toward profitability, and the market for wind turbines looks strong. Blackrock Inc (BLK -1.03%) has added to its position, and now holds more than 11 million shares, worth just more than 5% of Vestas. Should you follow Blackrock into Vestas, or is industrial conglomerate General Electric (GE 0.70%) a better bet?
V164 8MW turbine. Source: Vestas Wind Systems AS.
A little housekeeping
First, it's worth noting that those 11 million shares held by Blackrock are actual shares as traded on the Copenhagen exchange, and not the ADRs that U.S. investors hold, but the equivalent of 33 million shares of the U.S. listed ADR. This makes Blackrock's total position in Vestas Wind Systems worth more than $550 million. And while that seems like a lot of money -- OK, it is a lot of money -- it's little more than a rounding error for Blackrock's 4.3 trillion in assets under management.
Blackrock has more 100 different investing groups, so it's hard to know exactly what part of Blackrock holds the shares; but either way, this should be viewed as a positive for Vestas Wind Systems.
Vestas turning the page
Vestas is a "pure play" in wind turbines, and this business has shown to be very, very cyclical, leading to very lumpy results.
VWDRY Revenue (TTM) data by YCharts.
Lumpy results aren't necessarily bad, but when the losses in downturns are as heavy as Vestas' were, something has to change. After losing several billion dollars during the past few years, in a slow market cycle, new management came in with the realization that the business model needed to be adjusted to work with the market's dynamics.
In short, Vestas' prior model of doing everything in-house just wasn't functional. In downturns, the fixed costs of maintaining facilities and labor that weren't being used weighed especially heavy on the bottom line, especially with larger, diversified competitors in General Electric and Siemens competing for the same pie.
During the past two years, Vestas has sold off assets that it couldn't fully utilize, which means it will depend on some third-party manufacturing. However, since these third parties are getting higher utilization of their manufacturing facilities, Vestas' cost basis for these outsourced parts isn't expected to be much higher, and its fixed costs are significantly lower now.
The end result should mean Vestas can operate profitably no matter the phase of the business cycle for wind turbines.
Competing against behemoths
Both Siemens and General Electric are fierce competition in the wind turbine industry, and General Electric's other turbine businesses, such as gas turbines for electricity production and jet turbine engines, lend technical expertise to the company that it can deploy across multiple markets. Additionally, General Electric's scale gives it more ability to manage through industry cycles.
Add in GE's pending agreement with French Alstom, a serious player in offshore wind turbines, and it should be clear that Vestas' execution on its new business model is critically important. The growth in demand for wind turbines is not a guarantee of improved results.
Vestas or GE: Which is a better bet?
First, let's consider that these two competitors are two very different businesses, and it might not be best comparing these stocks. Vestas isn't a dividend payer like GE and Blackrock:
VWDRY Dividend data by YCharts
But it's also a much smaller company, with a lot of room to grow its business, versus GE, which is 23 times larger than Vestas.
However, growing the business isn't the only way to increase value for shareholders:
VWDRY Shares Outstanding data by YCharts
As part of its turnaround, Vestas issued more shares this year to improve its capital position. The result was a 10% dilution of existing shareholders. On the other hand, General Electric and Blackrock both execute share repurchase programs. If they can purchase shares back on a regular basis, and at fair prices, long-term shareholders will retain an increasingly larger portion of the company -- meaning increased dividend payments -- and share value growth that exceeds earnings growth.
Final thoughts: Growth or income?
While it's reasonable to expect some share appreciation from both companies, GE, frankly, is more of an income play, while Vestas is an investment in growth, with a little bit of a turnaround in the mix for both.
Vestas seems to have fully turned the corner on its business, and is accelerating sales. GE, on the other hand, still suffers from the effects of the financial crisis on its finance business. Management is working to "de-risk" GE by reducing its exposure to consumer finance and strengthen its industrial business, but that will take time to play out further.
Depending on your situation and needs/objectives, GE and Vestas both are great companies. It's your call which is a better fit for your portfolio.
