StockBeat: Iberdrola Navigates Bumpy Path to Green Future

By Geoffrey Smith 

Investing.com -- One of the most popular bets in Europe's stock markets this year has been to buy into a Green future. However, Spain's Iberdrola (OTC:IBDRY) showed on Wednesday that there may still be plenty of bumps on the way there.

The renewables specialist, Europe's second-biggest utility after Enel (MI:ENEI), did produce a 12% increase in net profit in the first half, but revenue fell and operating margins were compressed as demand in its four key markets slumped, with foreign exchange factors in markets such as the U.K. and Brazil not helping. On the plus side, it was able to cushion falls in wholesale prices with its extensive Spanish distribution business, and with cheaper purchasing from third parties.

The company said it's still on track to invest 10 billion euros this year in growing a worldwide business of renewables, but the rise in renewable energy asset prices across the world means that that 10 billion isn't going to buy as much as once seemed possible. Iberdrola is engaged in a bidding war for Infigen (ASX:IFN), a wind specialist that would bolster its position in Australia, and had to raise its offer by some 4% to A$893 million on Wednesday.

The good news is that the company - and the sector in general - can hardly keep track of all the tailwinds now being whipped up. The sector is poised to be a huge beneficiary of the European Union's 750 billion euro recovery plan, and can also count on the support of the European Central Bank, whose President Christine Lagarde has hinted heavily at wanting to skew the regulatory framework for financing so as to improve the competitive position of renewables. To add to that, the fast-expanding universe of ESG-themed funds ensures that more and more private money is chasing a pool of assets that is not growing as fast. 

Just as importantly, Iberdrola appears to be coping well with the execution risks that its ambitious expansion strategy holds.  The company added 790 megawatts of onshore wind in the U.S. market alone in the first half, and another 225 megawatts in Spain. Overall output from renewables was up almost 19%. While that was helped by a weather-related 51% rise in Spanish hydro output, the company's track record gives reasonable confidence that it can deliver on a massive pipeline of future projects, which includes 12,000 megawatts in offshore wind under development, and options on a further 9,000 MW in Sweden.

No surprise then, that, Iberdrola stock - which a decade ago would have risen and fallen in line with its stodgy Spanish utility business - has risen 25% this year. Its Portuguese neighbor EDP Renovaveis (OTC:EDRVF) has risen 35%, while Danish-based wind farm operator Oersted (CSE:ORSTED) is up 31% and trading at forward multiples that wouldn't seem out of place in Silicon Valley.

Iberdrola (MC:IBE) stock nonetheless took a breather on Wednesday, falling 1.3% in line with the IBEX 35, having hit an all-time high on Tuesday.