TPI Composites – A Wind Energy Stock
Solar energy seems to dominate the headlines as the “clean energy source” which investors stand to benefit the most from. While solar has taken a hit lately, clean energy promises to be the way forward and arguably may be contributing to the utter demise of the coal industry lately. While solar continues to sound promising, we’ve often wondered about wind energy.
According to the Global Wind Energy Council, the record number of wind power installations in 2015 brought the total installed global capacity of wind energy to 433 GW at the end of 2015 surpassing nuclear energy for the first time. Wind energy has seen +25% CAGR growth over the past 15 years as seen below:
Isn’t that incredible growth? We had no idea the wind energy market was taking off like that. So how does this number compare to solar energy? In 2015, solar energy capacity was estimated to be around 200 GW or just half that of wind power. With wind power looking to be the dominant clean energy source, where’s all the money to be had for investors?
As we noted in a past article on the IPO of wind energy company Northern Power Systems, there aren’t many pure-play opportunities for retail investors to get exposure to wind power. In fact, the “IPO” of NPS turned out to be a royal flop having lost investors around -90% of their investment so far. NPS was actually already performing poorly on the Canadian exchange before they decided to share some of that poor performance with their neighbors down south with a listing on the NASDAQ. The Company now has a market cap of just $5 million underscoring how important it is for investors to avoid over-the-counter (OTC) companies or any companies that throw off big red flags.
Just recently, one wind energy company has filed for an IPO that may present a great “picks and shovels” play for retail investors to get some pure-play exposure to wind energy.
TPI Composites is the largest U.S.-based independent manufacturer of composite wind blades having produced over 26,000 wind blades since 2001. When you see a wind turbine out in the wild, you’ll notice that it has three aerodynamic blades that catch the wind and spin, which in turn produce electricity from a generator, enough to power about 200-300 households. These wind blades are constructed with high-strength, lightweight and durable composite materials. What’s interesting about these blades is that the bigger they are, the more efficient they become and the cheaper wind energy becomes relative to other sources of electricity. Now when we refer to “bigger wind blades”, we’re talking about objects of a massive size as depicted in the below picture:
That’s just one blade. Your typical wind turbine will have 3 blades which together make up 15% of the total cost to build a turbine, the second largest cost component. Now traditionally, wind energy companies have produced their blades in-house but there is a move towards outsourcing this function. Given the increasing sophistication of wind blades, the size, quality and performance of wind blades have become highly strategic to wind energy producers. As a result, TPS has become a key supplier of wind blades and related precision molding and assembly systems. They have entered into long-term supply agreements pursuant to which they dedicate production capacity at their facilities in exchange for a commitment to purchase minimum annual volumes of wind blade sets, which consist of three wind blades.
Adoption seems to be moving very quickly. Over the past 3 years, revenues have showed very strong growth with losses narrowing such that 2015 almost saw them break even on revenues of over $500 million:
Prior to 2013, TPI had just one customer which represented 10% of the global wind energy market. Fast forward to today and 93% of their revenues come from 4 customers with the revenue breakdown seen below:
- GE Wind – 54.6%
- Vestas – 17%
- Nordex – 11.1%
- Gamesa – 10.3%
These 4 companies are some of the top players in wind energy representing around 32% of the total wind energy market:
When you’re looking at investing in the wind energy industry, it doesn’t get any more “picks and shovels” than investing in the blades that are used in the wind turbines. With long term purchasing commitments, it seems that TPI can just ride the coattails of the strong growth in wind energy and keep growing revenues for the foreseeable future. If they could go from one customer 3 years ago to four customers today, what’s to stop them from capturing the remaining 6 major players in the industry? The bigger they get, the better they get at producing blades. If you’re a wind energy company that’s manufacturing blades and you can get better blades from TPI at a lower cost due to economies of scale, you’ll probably outsource that part of your operation.
Terms of the IPO haven’t been announced yet. We’d like to get in on some of these shares pre-IPO and since the IPO is being led by J.P. Morgan, there might be a way to do that.
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