Description

Vestas makes new wind turbines (the Power Solutions segment) and takes care of some already spinning (Service segment). In the trailing twelve months 85% of their revenue and 56% of their EBIT have come from Power Solutions with the remainder from the service business.

Making turbines has been a tough business the last few years. Several smaller OEMs have gone bankrupt. There are four left outside of China (which is functionally a separate market): Vestas, GE, Siemens Gamesa, and Nordex.  In onshore wind, Vestas is the largest by far with ~half the combined group’s TTM orders. Vestas has a TTM EBIT margin of 6.7%. The other three all have negative operating margins and are burning cash.

This is unsustainable. Either Vestas takes market share or margins go up. Management thinks short term margins go up as they deliver on newer generation turbines and as they lap some unexpected costs driven by fluctuating trade policy last year. The bigger reason I expect better pricing right away is that GE and Siemens Gamesa are openly shifting away from a volume focus to profitability.

 Here’s my base case through 2023:

 My Product Revenue assumptions are probably a little above consensus, but the bigger assumption by far is the EBIT margin for that segment. Today they appear to have a ~8% cost advantage over the rest of the industry. I think that’ll expand a little as they spend massively more than anyone else on R&D, and think it’s fair to then add ~3% for whatever it takes to keep the weakest player in business.

The service business has a ~17yr backlog and is growing mid-teens. Give it a 15x EV multiple, 12x for the Power Solutions segment, and ~1.5bn EUR for their Offshore JV, and you have a ~190eur stock price (18% implied 3yr CAGR). 

I see two risks. The first is that the Dems materially underperform this fall (US is ~1/3rd of deliveries). If that were a certainty it wouldn’t move my assumptions much, but I think the stock would be down.  The second is weak capital allocation. They have a ton of gross cash and no good ideas for what to do with it. They’ve never done anything clearly value destructive; but it is possible they’ll never use it, in which case it should get discounted and my EV multiple is overstated.

Catalyst

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