Tom Konrad CFA
In my recent article on investing in offshore wind, I suggested that the market for offshore wind turbines was too competitive for turbine manufacturers to be a good investment at this time, but that companies which supply the power conversion and connection to the grid might be better. I listed the following companies:
- Prysmian (PRYMF.PK) and General Cable (BGC), which supply power cables.
- ABB Group (ABB), and Alstom (AOMFF.PK) which supply many aspects of the power conversion and interconnection hardware needed to tie wind farms together and to the grid.
- Siemens (SI), which also supplies power conversion and interconnection equipment as well as being the leading supplier of offshore wind turbines.
In order to choose the best of these, I’ve put together the following chart comparing some of my favorite valuation ratios:
Interpreting the Chart
The chart shows earnings, free cash flow (FCF), and dividends as yields (i.e. divided by stock price) so that they can easily be compared to each other and between companies, while the Debt/Equity is a ratio (100%=1) so that I can display it on the same graph.
For dividend, earnings, and FCF yields, higher is better since these are different measures of the company’s ability to generate a return on the stockholder’s investment. In a quality company, free cash flow should also be similar to earnings, and, if not, further investigation is warranted into the quality of the company’s earnings. Both earnings and FCF yields should be significantly higher than dividend yield, since both are needed to maintain the dividend payment over the long term.
Finally, a low debt to equity ratio (leverage) is good, because, all else being equal, a company with low leverage will have less volatile earnings and more financial flexibility.
I was not able to obtain 2012 and 2013 earnings estimates for the German Prysmian Group, but this does not concern me overmuch, since I’m not interested in a company with such a high debt burden and negative free cash flow. Siemens‘ tiny FCF, and Alstom‘s negative FCF also allow me to remove them from consideration quickly.
That leaves ABB and General Cable. At first glance, General Cable is the more attractive of the two because of its predicted rapid earnings growth. However, as a conservative investor, I find ABB’s 3.4% dividend attractive, although the fact that it is barely covered by FCF is a little worrying.
|An ABB transformer. Photo by author.|
Overall, I choose ABB Group (ABB) as my top offshore wind stock. ABB’s very low debt (Debt/Equity = 0.24) means the company is well positioned for today’s troubled economy.
I also like ABB’s focus on building its cleantech businesses: ABB was named Cleantech company of the year in 2011. So in addition to having exposure to offshore wind, ABB pays a decent dividend, has good exposure to cleantech, and is likely to remain profitable through any economic bumps in the road.
Finally, ABB is well placed to catch any favorable breezes that arise as the offshore wind industry takes sail.
DISCLOSURE: No positions
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Fun to read since I already own a tiny bit of ABB, based on previous articles you’ve done on the strong grid and smart grid.
I’ve lost money on paper so far but its a stock I’m comfortable owning and this helps with that.
I’m still not quite ready to buy ABB… it’s something I’d like to buy and hold for the long term, but I’m waiting for a better valuation to get in. The FCF yield is just too low for me to jump in yet.
I wouldn’t be surprised to see the price lower in the near term–the market may stop focusing on central bank intervention in Europe.
Here is an example of ABB equipment being part of a lithium-ion grid storage project in Arizona. http://tinyurl.com/7r8vmb8