by Will Ashworth | December 17, 2012 7:15 am
The Department of Energy announced this month that it’s proving up to $168 million in funding across six years for the development of offshore wind farms. Land-based wind farms produced one-third of all the new electricity capacity in the U.S., and the DOE believes wind power could quadruple America’s electricity generation.
Most importantly, almost three-quarters of the equipment needed to produce this power was American-made.
Although investing in clean energy does have its pitfalls, some interesting wind-related investments still are worth exploring. Here are several that I find particularly promising over the long haul:
Any discussion about wind power in North America should start with NextEra Energy (NYSE:NEE), whose energy resources division represents one of the largest renewable generation companies anywhere, with almost twice as much capacity as its next-biggest competitor.
NEE currently has 83 wind projects under way in 19 states and three Canadian provinces. The company expects to have added about 1,500 megawatts of wind capacity by year’s end to bring its total portfolio to 10,000. NextEra also expects to spend upward of $4 billion between 2012 and 2016 to develop wind, with almost half that spent in my own backyard in southwestern Ontario in conjunction with the Ontario Power Authority. I’m a big proponent of wind energy, offshore and on land, so it’s great to see so much activity.
From an investment standpoint, NextEra’s energy resources segment actually delivers a reasonable amount of profit. For the nine months ended Sept. 30, the division generated 27% of its $10.9 billion in revenue and 28% of its $2.6 billion in operating income. In 2012, the company expects adjusted earnings of at least $4.35 per share and as much as $5.65 per share by 2014.
Over the last decade, NEE has grown dividends by 7.5% annually, from $1.16 per share in 2002 to $2.40 in 2012. And that’s a secure dividend, paid every quarter for 66 years. However, NextEra’s stock is within 5% of its five-year high of $72.22, so it’s definitely not cheap, and considering it’s up 19% year-to-date compared with a 4% decline for the utilities sector, it’s definitely swimming against the current. Long-term, though, it has been a stellar performer.
With a current yield of 3.5%, NextEra Energy is not as generous as some of its peers, but then again, many of its peers haven’t seen 21% share appreciation in the past year. If you believe in renewable energy, this is a company to own.
General Electric (NYSE:GE) announced in July that it was splitting its energy infrastructure business into three standalone units — GE Power and Water, GE Oil and Gas, and GE Energy Management — in part to eliminate headquarters overhead and to improve decision-making at the operational level.
Its energy business is doing well at the moment, so it was a good time to make the move. In Q3, its energy infrastructure unit — which includes the production of wind turbines — saw revenues increase 12.2% to $12.2 billion, while its segment profit was up 13% to $1.7 billion. In the fourth quarter, GE will present the three units separately; the wind turbines will be part of the Power and Water division.
That’s probably a good thing, because 2013 is not looking like a good year for GE’s wind turbine business. While 2012 set a record for wind installations, revenues in 2013 are expected to drop by 40% as GE booked orders for only 241 turbines in the third quarter compared to 781 in the same quarter in 2011.
Why the big decline in turbine orders? The federal Production Tax Credit is set to expire at the end of 2012, so developers of wind farms have fast-tracked projects to take advantage of the tax credit. CEO Jeff Immelt doesn’t expect the tax credit to be renewed.
For this reason, being part of a bigger entity that can cushion the blow of a weakened industry in the U.S. is a smart way to play the wind game. Eventually, the market will rebound.
Lastly, I’m going to suggest Trinity Industries (NYSE:TRN), a company that manufactures railcars, barges, highway guardrails and many other products.
I first recommended Trinity in a September article about conglomerates. Trinity is a leading manufacturer of wind towers in the U.S. Its wind tower revenues for the first nine months of 2012 were $189.5 million, approximately 8% of its overall manufacturing revenues. It’s a tiny piece of the pie, I’ll grant you, but it’s part of a very strong business — the value of that shouldn’t be discounted.
As I indicated in the previous discussion about GE, the wind turbine business is a tricky one. While Trinity has a wind tower backlog of $754 million, $413 million of which is currently under litigation with a customer that breached a long-term supply contract. As a result, the near-term outlook for this slice of its business continues to be very downbeat.
No worries. Trinity’s overall business in the first nine months of the year did a standup job, with revenues up 38% to $2.9 billion, and with an operating profit of $419.2 million, itself an increase of 46%. This is one beauty of a company.
I’ll leave you with a fourth option: PowerShares’ Global Wind Energy Portfolio (NYSE:PWND).
PWND is a global portfolio of 28 wind-related companies, and — wouldn’t you know it — GE and NextEra Energy are among its holdings. The fund has been trading for more than four years now, and its performance has … well, it’s been awful, off 75% since inception, for a not-exactly-cheap 0.75% in expenses.
However, if you believe in the idea of reversion to the mean, PWND is about ready to blast off.
On the off chance you do go this route, make it a small part of your portfolio. Reversion to the mean is common, but not a certainty.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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