"Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1."
--Warren Buffett
Warren Buffett is famous for both his legendary investing acumen, and his simple, straightforward investing advice. For years, alternative energy has been viewed as non-competitive with traditional energy production from coal and other fossil fuels, making them money-losers for most investors.
Buffett's own Berkshire Hathaway (NYSE: BRK-B) subsidiary MidAmerican Energy is heavily investing in alternative energy sources, including both wind and solar. And considering that MidAmerican produces more than $1.2 billion in annual "ammo" for Buffett's "elephant gun," the story on renewables is clearly changing.
Should investors follow the Oracle into "green energy" to make more greenbacks? Let's take a look.
Wind energy central to MidAmerican
Source: Steve Wilson via Wikipedia
MidAmerican has been investing in wind energy for a decade, and is easily the largest producer of wind energy in North America; wind actually accounts for more than 30% of the company's total energy generation capacity. Current projects will move the total to almost 40%.
MidAmerican has relied on both General Electric (GE +6.68%) and Vestas (VWDRY +0.30%) for wind turbines for different projects. A large project in California, which deployed more than 300 megawatts of power generating capacity, featured 100 Vestas wind turbines. GE's turbines, on the other hand, are the most commonly used in MidAmerican's fleet.
GE's wind business was a bright spot in 2012, but has been soft in 2013, as the company told us to expect in the 2012 annual report. It can be a cyclical business due to the scale of many utility-sized wind projects. However, $5.9 billion in orders for the Power and Water segment, per the Q3 earnings release, point to a solid start to next year.
Vestas, on the other hand, doesn't have the benefit of being a diversified industrial like GE, and the soft 2013 and cyclical nature of the wind business has made for tough going. Vestas has been losing money for the past two years, with net losses over the past four quarters more than $1.2 billion. As a result, management is working to focus the company, recently announcing a partnership with Mitsubishi Heavy Industries to develop offshore wind technologies. While Vestas is contributing much of the technical expertise and 300 employees, Mitsubishi is contributing as much as 300 million Euros to fund the joint venture.
Additionally, Vestas recently sold a large part of its manufacturing capacity -- taking more than 1,000 employees off the payroll in the process -- in an effort to smooth the impact "lumpiness" in its business. The company will now rely more heavily on contractors to manufacture its products. Even if it does increase direct manufacturing costs, this step will remove massive fixed overhead costs, and help the company be much more nimble.
It's more than just wind
Source: Nick Schweitzer via Wikipedia
MidAmerican is also working with SunPower (SPWR +0.00%) to build a massive, 3,200 acre solar project in southern California that is expected to produce 579 megawatts of power -- the largest of its kind in the world -- when it is completed in 2015. SunPower isn't just limited to North America, either.
With its partnership with Total (TOT +0.00%), the French utility and energy company (and majority shareholder in SunPower), the company was recently awarded the contract for an 86 megawatt solar system in South Africa, enough power, according to the release, to support "the electricity consumption of approximately 45,000 South Africans." After having a challenging past couple of years, SunPower, largely through Total's significant investment, has turned the corner as the solar market has strongly rebounded. This has been made possibly by both aggressive efforts to expand and grow and investment in R&D to continue developing industry-leading efficiency-rated solar panels while also driving the cost per watt down to competitive levels.
The best number for SunPower right now is manufacturing utilization. The company has been running at nearly full capacity for the past year, and was at 100% utilization in the third quarter. While this is great on the bottom line, it leaves little room for growth. With this in mind, the company is adding to its manufacturing capacity, increasing it by 25% next year.
Final thoughts
Wind and solar are still tough businesses, but renewables are gaining more and more market share. This growth has helped the companies involved when figuring out how to be profitable while competing with fossil fuels on a cost basis. SunPower, even after a strong performance over the past year, has tremendous growth in front of it. Vestas still has a lot of work to do, but if management can make the changes needed to address the impact of the cyclicality of its business, it could make for a strong investment. For now, it's worth watching, but seeing improvement on the bottom line first is probably worth waiting for.
How does Buffett beat the market?
