Global wind production could grow sevenfold over the next three decades. Source: General Electric.
Renewable energy makes up a tiny fraction of both U.S. and global energy production, despite years of growth. And while solar energy gets a lot of the headlines, wind produces substantially more American electricity than its sun-powered counterpart -- more than 11-times as much last year, at 181.8 million megawatt hours, versus 15.9 million for photovoltaic solar, according to the U.S. Energy Information Administration.
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And wind still has plenty of room to grow. According to the International Energy Agency, wind is on track to increase from 2013's 2.6% of global energy production, to 18% in 2050. Since 2009 the IEA has increased its projections for wind power, citing improved technology and falling costs as well as increased costs for fossil fuels.
Unlike solar and its dozens of companies you can invest in, wind is dominated by a handful of companies. Let's look at the three best stocks for investing in wind energy.
The industrial stalwart with a major energy focusGeneral Electric Companyisof the world's largest consolidated industrial manufacturers, with a substantial presence in power generation and distribution worldwide.
Over the past year, GE has significantly strengthened its global position in energy over the past year, including major investments in its gas turbine business, as well as the $13.5 billion acquisition of Alstom's power business, expected to close in mid-2015.
Further, GE management has been committed to largely exiting finance operations that aren't directly related to its industrial segments, making a big step in this direction when it announced on April 10 it's selling off nearly $30 billion in finance and real estate assets. GE should also be able to free itself of onerous regulation and oversight related to its finance arm, which the U.S. government had deemed a "Systemically Important Financial Institution" because of its size. The market clearly loved this step, which sent the stock up 10% the day of the announcement.
GE's wind business is a relatively small part of the company's total, but the company sold more than 2,800 wind turbines in 2014, making it a major global player. The company's Power and Water segment is critically important to GE, with its $27 billion in 2014 sales and $5.3 billion in profits making it by far the company's largest industrial business unit.
The pure play
V164 8 MW turbine currently in joint development with Mitsubishi. Source: Vestas Wind Systems.
Vestas Wind Systems competes head-to-head with GE and German industrial giantSiemens. But while its two largest competitors are fully integrated behemoths with operations in dozens of industries and product categories, Vestas is 100% committed to wind.
The reality with the wind business is that despite its strong growth prospects, it has proved to be very cyclical. Wind turbines are typically installed in large "farms," which cost tens of millions of dollars or more and take years of planning. This approach has led to big struggles for the company in recent years, as the company's high fixed costs resulted in major losses in years when demand was down in a given year:
However, free cash flow and income look to be stabilizing, largely because of major restructuring at the company. Last year, Vestas sold off part of its manufacturing business to lower its fixed expense. While it might seem counterintuitive to sell off manufacturing capability you'll eventually need, management says that because of its low utilization rates at these facilities, it will be able to use third-party manufacturing at prices that will be competitive to what it could get in-house, only without all the fixed costs it still accrued when it wasn't utilizing its manufacturing capacity.
It's worth noting that the company continues to make its proprietary turbine blades in-house, which it typically manufactures in the country they will be used in, because of their size.
A Buffett-sized lesson in maximizing asset value
One Berkshire subsidiary hauling turbine blades for another. Source: Siemens.
While -- like GE -- wind energy is only a small part of one of its business units,Berkshire Hathaway, Inc. is one of the largest producers of wind energy in the U.S. and is aggressively adding to its capacity at subsidiary Berkshire Hathaway Energy -- formerly MidAmerican Energy.
From 2013 to 2015, the company will have installed more than 1,000 new gigawatts of wind energy generation in Iowa alone, and by the end of 2015 it will generate almost 40% of its total power production from wind energy.
Tying it all together in context to the whole of Berkshire Hathaway, Berkshire Hathaway Energy generated $1.9 billion in profits for its corporate parent in 2014, good for 10% of the company's total earnings. Furthermore, as Berkshire CEO Warren Buffett described in his annual letter to shareholders, Berkshire's profits in its other operating segments make it uniquely positioned to benefit from tax credits for wind generation that other utilities can't benefit from as greatly. In other words, adding wind capacity adds incrementally to the company's profits in other segments, by reducing its taxes.
This may not be the kind of thing you build an investment thesis around, but it's another example of how Buffett is able to use all the tools at his disposal to strengthen the company's earnings power.
Long-term thinkingWind energy projects are big and long-term, and as you can see from Vestas' results, the industry can cycle from a strong year to a weak one quickly. But looking at the bigger picture, wind will continue to become a more and more important part of meeting the world's energy needs. All of these three companies have varied degrees of exposure to wind, but all are set to benefit from it.
Which one is a fit for your portfolio? Share in the comments below.
The article 3 Best Stocks for Investing in Wind Energy originally appeared on Fool.com.
Jason Hall owns shares of Berkshire Hathaway and Vestas Wind Systems ADR. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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