Wind Energy Demand Will Drive Future Opportunities In Onshore And Offshore Projects

Key Takeaways

• Strong project pipeline and demand for wind energy indicate potential revenue growth, bolstered by manufacturing capacity and operational leverage in key markets.
  
• Ongoing service optimization, cost stability, and shareholder initiatives imply improved margins, earnings, and potential upward valuation adjustments.
  
• Rising costs, geopolitical uncertainty, and operational inefficiencies threaten margins and profitability, while significant investment in offshore and supply chain issues may delay growth.

Catalysts

Engages in the design, manufacture, installation, and services of wind turbines the United States, Denmark, and internationally.

• Vestas has a significant pipeline of both onshore and offshore projects, especially in the U.S. and Europe, which could lead to increased revenues as these projects are executed. The ramp-up in these regions addresses manufacturing capacity and operational leverage, contributing positively to future revenue growth and net margins.
  
• The ongoing optimization and recovery in the Service segment, with a detailed recovery plan in place, aim to reduce costs, improve operational efficiency, and elevate the EBIT margin in Services towards a target of 25%. This is expected to positively impact overall earnings and net margins in the medium term.
  
• The strong demand for wind energy, driven by geopolitical factors and the competitiveness of wind on the levelized cost of energy, supports a robust backlog of €31.6 billion, suggesting future revenue stability and growth opportunities. The economic and strategic factors favoring wind energy could lead to higher order intakes and sustained revenue growth.
  
• Vestas is benefiting from favorable wage inflation and cost stability in some of its key markets, which are expected to lower operational costs and enhance net margins. This stable cost environment is critical as Vestas navigates through its ambitious growth plan.
  
• Initiatives such as the share buyback program and proposed dividends signal confidence in future cash flow generation and may lead to improved earnings per share. These actions imply positive forward-looking financial health and suggest that current valuation perceptions could be adjusted upward.

Vestas Wind Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vestas Wind Systems's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 6.0% in 3 years time.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €1.35) by about April 2028, up from €499.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.8 billion in earnings, and the most bearish expecting €1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, down from 23.6x today. This future PE is lower than the current PE for the GB Electrical industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

Vestas Wind Systems Future Earnings Per Share Growth

Risks

• Rising costs and manufacturing ramp-up challenges, especially in the U.S. onshore and offshore, could impact net margins and profitability.
  
• Ongoing geopolitical uncertainty and trade volatility may affect raw materials and transport costs, potentially impacting net earnings.
  
• The Service business experienced a challenging year with rising unit costs, operational inefficiencies, and quality-related issues, which could affect EBIT margins if not resolved.
  
• The offshore segment requires significant investment and currently depresses margins with amortization and depreciation costs, potentially delaying profitability.
  
• Complexities around permitting, contractual realignments, and supply chain disruptions may hinder revenue growth and margin improvement efforts.

Valuation

• The analysts have a consensus price target of DKK146.13 for Vestas Wind Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK220.3, and the most bearish reporting a price target of just DKK75.09.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €22.5 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of DKK88.1, the analyst price target of DKK146.13 is 39.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.