By Geoffrey Smith
Investing.com -- Few European stocks embody the way Europe likes to think of itself like Vestas Wind Systems A/S (CSE:VWS), the world’s largest maker of wind turbines: green, high-tech and still profitable, even after the ravages of the Covid-19 pandemic.
That profile has made it the default stock of choice for the growing hordes of ESG fund managers who are receiving investment mandates faster than they can find suitable companies to invest in (Boohoo, anyone?).
The wall of ESG-themed money hitting green energy stocks has inevitably raised expectations of the renewable energy sector – which has depended for most of its young life on heavy government subsidy – to deliver. As such, there was a lot riding on the Danish company’s second-quarter numbers, which it released on Tuesday.
The reaction has been sighs of relief all round. The company stayed profitable but the best news was in its forward-looking information. The company reintroduced its guidance for the year at a level that was above analyst expectations, after posting a healthy rise in order backlogs. Vestas’ reinstated revenue guidance at the same level as before the pandemic, at between 14 and 15 billion euros. Expectations of an EBIT margin between 5% and 7% are only down slightly from beforehand.
Even better, the order backlog hit an all-time high of 35.1 billion euros, up 11% from a year earlier.
Like Airbus (PA:AIR) and Boeing (NYSE:BA), Vestas works in a world of long lead times. Wind farms take years to progress from the planning stage to commissioning. That makes the size and reliability of the order book more important than current profitability, especially when uncertainty is high, like at present.
Over half of the backlog – some 18.9 billion euros – is revenue expected from servicing existing installations, rather than from deliveries of new ones. That's important because it shows how the company is insulating itself almost naturally from the volatile business of manufacturing. As wind power spreads across the world, the stock of existing installations becomes more economically important than incremental ones.
Investors reacted by pushing Vestas’ stock price up 8.6% to a new all-time high. It’s now up 37% for 2020.
Like that of its Danish customer Oersted A/S (CSE:ORSTED), the world’s largest wind farm operator, Vestas’ stock now commands a painfully high premium for the economic and environmental sustainability of its business model. According to Investing.com data, it trades at 37 times trailing earnings (Oersted is at at 43x). A dividend yield of 1% is nothing to shout about, and there is no chance of it being raised in the near term.
But as long as the ESG boom continues – global assets under management doubled to $40.5 trillion in the last four years, according to research firm Opimas – all Vestas' winds are tailwinds.