Stock market performance from the Windicator

It was another quarter of out-performance for the listed wind turbine manufacturers. While every company posted a positive gain in share price performance July to September, some of which were quite spectacular, Suzlon is emerging as the belle of the ball. Suzlon's shares were up nearly 33% over the period and it remains the largest listed wind manufacturer by market capitalisation. Its quarterly results came in above expectations and it had positive news flow, including its debut European orders. Equity analysts are flocking to the company, with more than three Wall Street banks initiating coverage on Suzlon over a six week period.

Suzlon was also flattered by comparison over the quarter, as some analysts focused on the benefits of a vertically-integrated strategy in an era of component shortages. These benefits, namely control of most or all of the production chain, had particular resonance during the last quarter when the other manufacturers, notably Vestas, pointed to component shortages as a key area of current disruption and uncertainty in the market.

American Clipper's share price rocketed further upwards during the quarter, very clearly on the back of the various agreements with BP which were announced mid-July. These were seen as both validating the company and its technology as well as for providing a large forward calendar of turbine sales. In a word, the company was viewed as "transformational," and the share price increase of 51% during the quarter, most of it just after the announcement, reflects this change in sentiment.

German Repower also posted a quarter of out-performance, with its shares rising 31% over the period. The company's quarterly results were in line with expectations and full year guidance was maintained. Repower had a positive news flow in relation to new orders and announced a production deal in China, to which the stock market favourably responded.

At least in terms of clear share price out-performance over the last quarter, Suzlon, Clipper and Repower can be put into one group and Vestas, Gamesa and Nordex into another. The latter group might also be characterised as the "planners," companies at varying stages of articulating, executing or concluding their strategic plans.

Nordex posted impressive first half year results, leaving no doubt that it has successfully completed its restructuring plan. While favourable market conditions have helped, the Nordex plan appears to be quite a compelling example of how companies can transform and rebuild themselves. The market has appreciated these developments for some time now, with the share price rising significantly during 2006. Nordex's modest 5.5% gain for the last quarter must be viewed in that light.

While Nordex was concluding its plan, Vestas is still busy executing. Vestas' quarterly results presentation began with the headline in bold that "Vestas is making money, and we are on track for the goals of The Will to Win." The first of those statements can be verified quantitatively. And while it is true that Vestas is making money, analysts felt the company did not make enough of it during the second quarter. All attention is now focused on Vestas' November announcement of its third quarter results. Much appears to ride on those numbers, both in terms of whether Vestas will make its 2006 financial targets, but also in terms of further clarity in relation to component supply and warranty exposure.

The second of Vestas' statements, that "The Will to Win' is on track, seems to defy quantification -- and yet it is the real question. Certain of the analysts felt there was not enough yet quantifiable about this progress. Given the scope and multiple facets of the plan, some of which do not lend themselves to quantification, their view is somewhat understandable. Yet it highlights a key challenge facing Vestas, on top of having to implement a long term comprehensive program of change. Vestas must achieve this against a backdrop of short term attention spans, particularly from the stock market, and expectations of immediate, tangible results. It is a critical consideration for Vestas to carefully manage. Improving its overall communication with the market, such as through its recent, inaugural capital markets day, is essential. But in the wind sector Vestas is on new ground with such initiatives. Pioneers often reap rewards, but, as the saying goes, more often they end up with arrows in their back. For the moment, the jury remains out on Vestas. Other companies looking to push through programs of change have the luxury of watching and learning.

Gamesa was busy during the quarter articulating a new strategic vision and plan and targets for growth. This plan, like that of Vestas, is wide ranging and multi-facetted and has the feel of requiring expert control to execute. Certain aspects are clear, such as financial discipline, notably in the form of improving the return on capital employed, and the focus on key clients to better optimise production. The turbine making business is presented as the engine for growth, with wind farm sales providing a baseline of cash flow.

As with Vestas and some of the other manufacturers, on the turbine supply front it is increasingly becoming a race to see which company can most effectively seize the opportunities in Asia-Pacific. Gamesa also makes a case for the importance of balance among the regions, with the US prominent across both of its key business lines. Analysts were broadly positive on the Gamesa plan and the company's half year results, with comments on the company, or changing of rating, due to the broad movement of stock price levels.

As a whole, Windpower Monthly's Equity Index of European listed companies outperformed the broad stock market 14.7% to 8.6%. Suzlon's gain of 32.8% similarly outpaced the Bombay Stock Exchange Index gain of 21.1%. Analyst coverage of the wind sector increased, with most of that gain coming for additional coverage of Suzlon.

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