26 August 2014 at 12:22 GMT
By Peter Garnry
Vestas Wind Systems shares are down 5% on heavy volume after the stock was downgraded to underperform by a sell-side firm with key drivers being uncertainty over US production tax credits, revenue headwinds and high valuations. The current view among sell-side analysts is divided almost equally among buy, hold and sell.
So what is going on here with the share price down 16% in five trading sessions? Below is our view in very condensed form:
- The price action is mixed and tilted towards positive long-term... as the stock's 6-month momentum is still ranked high among European equities signalling an upward bias in the future share price. However, short-term the stock has been under severe pressure but has come off this sessions' intraday lows. The 235 level is crucial in the short term but if the share price does not break this level then the worst is likely over.
- PTC in the US is a known unknown in our view... and not something that changes the entire picture. The production tax credit for wind ended in 2013 but projects that finish construction by the end of 2015 are still eligible and the US market is thus stable for the next two years. What happens after that is unknown at this point, but with the US accounting for just 28% of Vestas' entire 2013 revenue it is not a total disaster. Also, in our view, the US government will continue to support renewable energy in one way or another.
- Valuation is getting attractive and service is a key driver... with the 12-month forward EV/EBITDA multiple at 7.9x the stock is not aggressively priced against the average European industrial stock. In addition, expectations are currently discounting revenue growth close to 10% per year over the coming years which combined with more efficient operations should increase operating margins further and thus be a catalyst for a higher share price. The service segment, which continues to grow, is going to be key in improving the margin and create stability in the operating profit.
- Our quant model could add Vestas to its conviction list next week... as the stock had a 12-month return forecast of 10% based on yesterday's close. If the declines continue over the week there is a good chance that our quant model will upgrade the stock to a conviction buy next week.
Vestas Wind Systems share price the past year
Source: Saxo Bank
-- Edited by Clare MacCarthy