Stock price performance from the Windicator

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Vestas, provider of more than its fair share of disappointments in the past, has reminded us that not all surprises have to be nasty. While the company's announcement of its third quarter results initially seemed like the Vestas of old, with earnings below analyst expectations, this time there was an important difference. What captivated the market's attention was Vestas' statement, presented with some flair, that it expected to outperform its Will to Win targets. Since the Will to Win plan is predicated on improving the company's profitability, the key measure was the Earnings Before Interest and Tax (EBIT) margin. Vestas raised its target EBIT to 10-12%, up from "at least 10%" previously.

While to the non-finance world this may not seem an important distinction, the implications are significant for investors. On the qualitative side, the target increase is a clear sign of management confidence, with the implication that real progress is being made on its plan, with plenty of focus on the bottom line. On the quantitative side, for analysts and most professional investors a long term forecast is often the essential basis for an investment decision or recommendation. These financial models are sensitive to certain assumptions, EBIT among them. Even a small change, when forecast to be for a sustained period, will have a material impact on what the company should be worth. One analyst estimates that Vestas improved EBIT target could impact the company's price target by 50%. It was not surprising that Vestas' share price rocketed upwards.

Vestas was the star performer among its peers this last quarter, up 42%. Together, the Windpower Monthly Equity Index of wind power companies listed in Europe rose 22.7%, outperforming the 5.2% increase of the FTSE 300 Eurotop Index, with all companies except Clipper (which, after a large rise last quarter, was essentially flat) individually outperforming as well. While there was a certain near euphoria around the wind market during this period, with some analysts nearly doubling their price targets for Vestas, not all analysts were so enthusiastic. Some reserved their positions on Vestas, pointing out the risk associated with execution of the Will to Win plan, not to mention tough competitors and the question of whether and when the supply-demand balance, currently so advantageous to wind turbine producers, might tip the other way. More than anything, some analysts make the point that just as increases in EBIT margin assumptions drive huge increases in share price valuations, as soon as those assumptions are shifted downwards, the share price valuation drops faster than a lead balloon.

Gamesa, the other listed European player in the midst of a program of change, also had a strong third quarter, with its share price up just over 20%. The Spanish company's results were seen as being broadly in line with expectations and like Vestas it announced progress on its plan. Focus on key accounts remains an important part of its strategy. Gamesa points to large turbine sales agreements with Iberdrola in the US and elsewhere over the 2007-2009 period.

The share price performance of German Repower was even stronger than that of Gamesa, rising 26.2% over the period. While Repower's third quarter results were viewed as being a bit light, like Vestas the focus, excitement and subsequent jump in share price was driven by its outlook for the future -- the company raised its 2008 revenue target. Analysts were also impressed that company guidance seemed to be supported by the current order backlog and its joint ventures in India and China. Repower's domestic rival, Nordex, was up just over 10% for the period with a relatively solid performance.

American Clipper was the relative underperformer of the group with its shares ending the period slightly below where it began. In mid-November the company announced delays to wind turbine deliveries. Its share price, which appeared to have begun a run a week earlier alongside its peers, fell sharply on the news. Analyst sentiment seemed to be that the delays were in effect growing pains, but as with all fast growing companies there are questions about the ability to execute ambitious growth programs. As with the other wind companies, the second question raised was the optimal level of vertical integration versus outsourcing.

Despite the increase in Vestas' share price, Suzlon retained its spot as the largest listed wind-only manufacturing company. Suzlon traded almost exactly in line with the Bombay Stock Exchange (BSE) Sensex, the index The Windicator tracks Suzlon's performance against, posting a 16.8% increase compared to the BSE's 16.5%. Commensurate with its market capitalisation, Suzlon attracted the most analyst coverage, with banks large and small continuing to initiate coverage of its stock. Opinion was divided in relation to the company's second quarter results, with many analysts recognizing the seasonal nature of the wind business, particularly this time of year, and others expressing concern about pressure on profit margins. Divided opinion is what makes a market, so there is nothing novel here.

In fact, there is far more that the listed companies share in common than separates them at the moment. All are beneficiaries of the current cocktail of strong demand, favourable green energy sentiment, high conventional oil prices and the virtuous cycle of being able to support future earnings guidance with a steady flow of new orders and corporate expansion. The stock market is essentially giving all the companies the benefit of the doubt about their ability to deliver the profits and the growth demanded by current share prices. As some of the analysts who have begun to hedge their bets by reducing purchase recommendations on shares from "buy" to "hold" might testify, few things are as fragile as the benefit of the doubt. While fourth quarter, full year results will be critical, it is likely that the market will continue to be almost more interested in what companies have to say about the future.

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