GE: Nuclear Growth Galore

Can you name the one company that, for the past five years, has steadily increased its revenue YoY, earnings per share, dividends and per share book value, yet its share price has gone literally nowhere?

That company, of course is General Electric (GE) – the mega-conglomerate with a market cap of $335 billion. As if these reasons were not good enough to love GE, consider that GE's current 3.7% dividend yield is roughly equal to the interest on the richest savings accounts. You'll also be happy to know that in today's volatile market GE is relatively safe, sporting a β of only .8, trading within about 10% of its 4-year low and at a P/E of about 15 - the very low end of its 10 year range.

This stock is obviously a great value, but what makes me think that now is the right time to buy it? Why didn't I buy it a month ago, when it first made its bottom? And how do I know that it will not dip any lower?

Of course, nobody knows the answer to that last question - anything can happen, but several bullish signs are pointing towards a recovery in GE's per share value.

• GE stock is significantly oversold, indicative of a bottom
• GE insiders have started buying shares in the open market
• GE can borrow at decreasing costs, while most competitors have to pay more.
• The writer's strike is finally over and NBC Universal can contribute an increasing share to GE's profitability
• Expect GE's under-appreciated Healthcare segment to improve performance – there is pent-up demand.
• GE will grow foreign revenue, especially in emerging markets – China Olympic Games projects are especially important
• GE Energy has the technology and best products to fulfill the Oval Office's dreams for an oil independent future.

Actually, let me expand a bit on that last bullet point. Most people probably don't know this, but GE Energy has the most advanced design for a safe nuclear power plant and it is the only U.S.-based company that can build a nuclear power plant. It has already built four of these and is in the process of building three more. None of these plants are in the U.S.

In fact, there has not even been an application for a new U.S. nuclear power plant submitted in almost 30 years. But from the end of Q3 2007 through the end of this year, there will be close to 30 such applications filed. Under the Energy Policy Act of 2005, the industry is getting something like $12 billion in subsidies to build new plants. And they will be getting more in federal loan guarantees and risk insurance.

That new nuclear power plants will be built in this country is a near certainty. That GE will be the one entrusted to build them appears inevitable. Now, did I mention that a reactor can easily cost $90 billion to build and that the liability from accidents is limited by law?! Ok then, $90 Billion multiplied by 30 plants and we are talking real money.

Of course, I know that not all of these plants may get built and that GE will have to share these revenues with others and that the money will roll in very gradually and over an extended time period. But the sheer size of the GE growth potential here is absolutely mind-boggling. As large as GE is, it has revenues of less than $50 Billion a quarter and this one single product is destined to boost its revenue by more than 10% by conservative estimates (and that's only one of GE's leading edge energy products).

GE also has leading edge geothermal products – the way of the future for commercial heating in extreme climates, as well as leading edge wind turbines as well as a range of solar products. Granted that the current production solar panels are rather inefficient, capturing only 12% of available energy, but I still remember the 80s, my college days and the federal tax credit-inspired solar boom. Back then I was working at the nonprofit Boulder Energy Conservation Center, designing solar systems using similar looking panels, which were barely 1% efficient. If I was a gambling man, I would surely bet that within 10 years GE will produce panels that are so efficient that they can pay for themselves within 3 years for large commercial installations. Now I am dreaming…

So what's the bottom line? It's that I have a hard time imagining a scenario under which GE's long term earnings growth will be limited to 2% a year – a common expectation among most analysts. What I see is a value priced stock poised for long-term growth. In fact, I couldn't resist picking some up on Friday (02/22) at $33.34.

Disclosure: Long GE

Comments

[Tom B]

I have a lot of GE. It's funny; they are simultaneous a "dirty" (polluting company) and a green one. On the green side, in addition to Nukes and geothermal, I THINK they are doing about 2 B in wind turbines a year. Off-shore wind looks like a winning technology to me-- few downsides (nuclear waste, etc). Cape Wind may have beaten the "NIMBY's" in court (finally), and Texas--Texas!-- is looking at wind, as well. I wish DUK (another holding of mine) would get into the act.

[PAD]

$90 billion to build a new nuke plant???? i don't think so! care to source that one for us? try $3-4 billion.

$90 billion?!?!? puh-leeze!

[JonathanLiss, SAEditor]

agreed - based on a cursory google search, that $90B number seems way off

[User 156190]

The author is off-base on several items. First new reactor cost will be closer to $9-12 billion. Also, the NRC received and accepted several application for new reactor licenses last year. No excuse for research that is this bad - makes you wonder whether the rest of the article is bunk.

[sf123]

>GE will grow foreign revenue, especially in emerging markets – China Olympic Games projects are especially important

Constructions for this year's Beijing Olympics are mostly completed. I don't think GE will get any contracts relating to Olympics this year. Besides, GE's business really has nothing to do with the constructions of stadiums or mass transits in China.

[outback]

Actually, Texas is the world leader in current wind generation (all onshore at present time) with plans to expand wind production dramatically in the future.

[jbonefish]

It gives me a lot of confidence in the advice dispensed on this site that everyone was quick to catch these, er, 'oversights'.

Thanks for the quality check everyone!

[ED K]

THE ONE THING I HAVE TAKEN FROM THIS ARTICLE IS THAT GE IS IN THE WALL STREET DOGHOUSE.WAKE UP AND SMELL THE ROSES WALL STREET!!!!!!

[internalcombustion]

Whatever the cause, nothing should be accepted at face value. I beleive GE needs to get beyond itself and challenge the different entities within to harminize. I haven't read of any GE facilities using renewable energy as their primary source of supply for production. Please share any news you might be aware of and bring that news to light, (Testing plants and or labs are not production). This question: why are renewable source appliances one dimentional? Example: why doesn't a wind turbine have solar cells? Why doesn't a wind turbine incorporate geothermal as well? Why once the wind passes thru the wind turbine, the air might be harnessed and amplified using the venturi effect to further capture more energy? Speaking of geothermal, when temperature is known to be different, could the sterling effect be used in a scale large enough to be viable? I look forward to reading your comments. Novice Investor

[moneygardener]

I agree with most of what you have indicated here with respect to GE. This is the type of stock that eventually will go up regardless of what wall street thinks. It all comes down to earnings growth, and GE is producing and has no doubts about 2008 despite the slowdown in the economy.

[User 157023]

The author is way off on his estimates of nuclear power plant costs. They're lower by a factor of anywhere between 8 and 10. One other thing the author didn't mention is that GE has actually been designing, selling and installing successively more advanced generations of nuclear reactors primarily in Asia over the past few decades. That speaks well to those who wonder whether or not there is a real future for nuclear power in the U.S.

GE has a fabulous power business that is on the cutting edge across a number of technologies, not just nuclear.

[MarineCorpsVet]

Thomas Barta is showing his arrogance by looking down his nose at Texas---Texas.
For his information the hills in West Texas---Texas---have been covered with wind generators for years already. My alma mater here in Texas---Texas---is one of the first institutions in the country to go total wind powered. Us poor, dumb rednecks down here in Texas---Texas---don't have the wind that you have up North but we've been using what we have for a long time already. Welcome back from outer space, Mr. Barta.

[Jake Berzon]

First of all, I would like to thank all of my critics for keeping me on my tows. Perhaps a more careful reading of my original text would have alleviated most of your questions, but it can't hurt to clarify a few issues.

1) The $90 Billion figure for building a reactor came from an article in the Christian Science Monitor www.csmonitor.com/2007... . My local utility, IREA published similar numbers. I believe them because 20 years ago it cost $3 billion to construct 1,000 MW reactors like the Limerick 2 query.nytimes.com/gst/... and final costs on these projects often were 10 times the original estimates. New plants will be larger and will cost more. In any case, my point was only to point out that analysts are not counting on this and other near certain upsides coming from GE Energy.

2) From the Q3 of last year to the end of this year The Nuclear Regulatory Commission expects applications for 29 units www.nrc.gov/reactors/n...

3) GE’s 300 or so projects around the Beijing Olympics are a done deal and they have been fully factored in by the analysts. I was alluding to the fact that the relationships GE has surely built in the process will serve it well in the future.

I hope, all is clearer now!

[Tom B]

"Thomas Barta is showing his arrogance by looking down his nose at Texas---Texas."

No disrespect to Texas intended, in spite of the fact you adopted W some years back. I was pleased to see TX getting into wind in a big way because it was just about 2 years ago when TXU was planning 20-ish coal plants, a pretty environmentally evil proposition. I haven't followed the status on that-- wasn't TXU getting bought by hedge funds?

[Igorisky]

A reactor cost $90 billion? Your source is wrong.Try $9 billion and you are in the ball park, and that is for a whole power plant not just a reactor. Just to be clear, a power plant includes the reactor, generator, the buildings, etc., ready to produce electricity.

[george c.]

Interesting that none of the recent comments on GE and their activity in the nuclear area mention their arrangement last year with Silex Systems, which has the patent on a radically different - and cheaper technology for refining uranium.

[Jake Berzon]

Most of you still appear to be missing my point. Analysts are not currently including any of the tremendous GE Energy potentials in their GE growth projections. On the other hand, small alternative energy companies are all about growth that is far less certain. In my quest to seek alpha, I am better of buying GE, which is dirt cheap and has very solid alternative energy growth prospects, among other things.

[huangjin]

The article in the CSM wasn't worded clearly, but I think they mean 28 nuclear power plants will cost $90 billion total.

[captbobr]

i agree with the author, GE is a money making company. the stock however is a dog . the last 6 years the stock has gone nowhere. how long do shareholders have to wait? everyone recommends the stock but it has been a very disapointng investment so far

[WinstonKotzan]

I think the $90 billion figure meant about $3.2 each for the 28 reactors. Plus... I don't think the Christian Science Monitor is a reliable source of journalism or science (but that's another story).

Not a bad thesis. GE looks attractive right now on valuation.

[Socialismcannotcompete!]

Jim Cramer (CNBC "Mad Money" show) has for a while been recommending a look at Shaw Group for the nuclear power build-up. I don't believe GE will be the only beneficiary of this. So what matters is whether you want a "pure play" or not...Shaw Group would be more of a pure play - you may get a better reward for the nuclear build-out, with perhaps a little more risk since it is not the huge diversified company that GE is.

[Jake Berzon]

GE is a safe bet with huge upside potential, but has only recently become a true value stock. I have never considered purchasing it before.

Jim Cramer is fun to watch, but I don't trust his advice. I remember too vividly him recommending NCR after the TDC spin off last year, talking about it as if it had not yet happened. I had just sold NCR at the top and couldn't believe what I was hearing! It quickly dropped from $28 to $24 after that. He seems to like momentum stocks, in general and I don't. You know the old adage, "what goes up, must come down?"

Those of you who are still discussing construction costs, my thesis would have not changed even if plant constructions costs would have not changed increased over the past 20-30 years. (Now, keep in mind that many of those projects were originally estimated at 1/10th there final cost.) The only thing that would have changed is the magnitude of the dramatic effect I was trying to achieve and that, my friends, will not make a difference on the price of GE stock.

[Jeez]

The author is being really touchy! Of course the cost of building a nuclear power plant is NOT 90 billion - not even close.
"GE's long term earnings growth will be limited to 2% a year – a common expectation among most analysts" - hey which site did you get this from?

Sure a well written (let us call it smooth pitch) piece though!

[Bob Freudy]

PLEASE! Read power Magazine and note that I have not seen one appliocation for a GE Nuclear Power Plant in the USA They appear to love the Westinghouse/Mitsubish... plants and a French Design plant. I must assume that GE's plant, while [popular oveseas, is cost prohibitive here in the USA.

[WPA]

Jakie- You need to check your facts better. There is a business in PA that is the world leader in nuclear that is owned by Toshiba. There technology accounts for the majority of the world's plants

[tenureme]

If you want to have a thorough discussion on the future of nuclear, check out "pebble bed reactors"... wikipedia is a good place to start. THEY, not traditional nuke plants, are where we are headed. I am a "green" guy, had a longstanding objection to traditional nukes despite technological improvements, namely the remote yet prohibitively high risks of disaster/proliferation... I had to be dragged kicking and screaming to the topic of pebble bed reactors. Now I, along with a surprising number of prominent environmentalists and scientists, see nukes (pebble beds!) as a promising piece of our green, sustainable energy mix. They are "walk away" safe... a term meaning that if everything went wrong at a pebble bed, you could walk away, get a pizza, come back and calmly figure it out. The fuel is low grade, not weapons grade. The used fuel can be recycled and reused. No possibility of meltdown... their core doesn't even require coolant. They can be small or large to accommodate local grid demands, are exponentially cheaper to build (modular design and construction... no big "one-of-a-kind&qu... engineering behemoths). Worth a peek. There are currently two or three prototypes being built/tested on the planet, one in S. Africa. Check it out.

[JFF]

From everything I have read Westinghouse and their NRC certified AP1000 reactor seem to be well ahead of GE in sales. They have a contract for four reactors in China (Areva also has a conract, but not GE), along with several US commitments. I assume the comment calling GE "the only U.S.-based company that can build a nuclear power plant" aludes to the fact that Westinghouse is owned by Toshiba. However, it is an autonomous US-based business unit that is hiring thousands of people in the US because of demand for its new US built nuclear power plants. A little broader perspective would have helped.

[Jake Berzon]

I am not a nuclear engineer and can't judge advantages of the various reactor types. So, separating hype from fact in this area is rather tough. I know that GE is getting design wins with their ABWR
reactors. I know that others are also winning with their designs. The point is that GE will certainly participate in alternative energy (including nuclear) future and their stock is dirt cheap and very accessible. Which is not the case for Toshiba, Mitsubishi and Areva.

I have read about pebble bed reactors in the past and you are right to say that they sound safer than others. But isn't Germany phasing out their nuclear power plants because of an accident that happened in such a reactor?

Jees is correct and the sentence about 2% growth should have read as follows: "It's that I have a hard time imagining a scenario under which GE's long term earnings growth will be limited to 2% a year, which would justify current stock price. Over 10% is a common expectation among most analysts."

[RichA]

I have been doing some reading about pebble bed reactors and it is apparently true that Germany did have a problem with cracking one of the graphite coated pebbles which exposed a small amount of fuel. Presuming that this problem can be resolved to provide a safe fuel, how does one invest to take advantage of this technology?

[Jake Berzon]

RichA, The only way I know to invest in pebble bed reactors is by buying stock in a Chinese utility company Huaneng Power International, Inc. It is available in ADR form, HNP. Or, you could hope and wait for Eskom to spin off PBMR... However, I would not count on pebble beds getting traction in the US.

[starboard]

Jake,

The South African company that developed the SA version of the PBMR has actually been acquired by Westinghouse Nuclear which is now majority owned by Toshiba of Japan. However, Shaw Group of Baton Rouge is a 20% owner of Westinghouse. Their stock is traded on the NYSE (ticker SGR) which may be the only practical way to play the bright future of the AP1000. Another 10% or so of Westinghouse Nuclear was recently purchased from Toshiba by Kazatomprom -- an entity of the Kazakhstan government. Toshiba apparently pursued this deal to gain access to the very significant uranium reserves of Kazakhstan. I know of no current plans by Westinghouse to implement commercialization of the PBMR design although I hope they are feverishly pursuing this great concept. Maybe one of the other contributors can help on this.

[tessant]

it stuns me that GE isnt mentioned with energy more- whether its any type of next-gen energy

scott
growthportfolio

[northman]

what about GE Capital?

[Jake Berzon]

What about GE Capital?

[User 159329]

For the nuclear industry, to me, GE appears to be in a stronger position domestically than Toshiba (Westinghouse) and AREVA because if you look who has chose what technology, the large nuclear utilities have gone with GE's ESBWR design. Westinghouse doesn't have a single order for long lead component items where GE has 4 (I think) and AREVA has 1 in the USA. That said, AREVA and Westinghouse are building plants in China and GE isn't.

However, I don't think that the nuclear industry is that competitive and every vendor will get its share of business. If one of them every "dominates" it will because the other have really messed up. If even one vendor screws up then all 3 vendors are in big trouble because the media will smear the industry.

Shaw Group (SGR) is the best pure play on the infrastructure build up that includes nuclear plants, but watch out if the AP1000s in China have delays or cost overruns. I would not recommend Toshiba. I believe Washington Group is part of United Technologies and I think Fluor has a nuclear unit. The new congress will pass carbon cap-and-trade laws which should provide GE with huge growth in services (plant efficiency upgrades), gas turbines (because every utility will build nat gas plants to replace some coal), and nuclear for the same reason. GE stock should do well as infrastructure is about 25% of earnings.

[User 159329]

Oh and this PBMR isn't going to happen anytime soon. A more likely new reactor would be the Westinghouse IRIS. I believe one of the major problems with the pebble bed reactor is that the fuel is hard to break down for waste management.

Also if the US government sponsored GNEP program continues, there will be a "fast" reactor program in the United States.

Again for stocks, I don't like any nuclear stocks for their nuclear business alone. You want to play the infrastructure industry as a whole like GE and SGR. I hope none of you owned USEC which got absolutely hammered last week. Stay aware from Uranium mining as well. As tempting as it is to get in these stocks, the risk outweighs the reward and uranium prices won't jump like natural gas and oil will.

[BobL]

Agreed! $90 billion for a nuke plant is a laugh riot! What else in this analysis is total fiction? And how big is NBC relative to GE? Come on! Just silly.

[sf123]

acording to a recent WSJ aritcle, the new figure for a nuclear plant is 5 to 12 billion.

[Jake Berzon]

SF123,

Thank you for your price update on the cost of Nuclear Power Plants. Unfortunately, the article does not mention how these costs break down and it is not clear whether these costs include real estate, regulatory process, time value of money and etc. It is also unclear what portion of the FPL Group's $12 billion estimate for a GE power plant would go to GE. My article assumed that GE can benefit to the tune of $5 billion a quarter in revenue over the long term from new nuclear power plant design ins. This still appears to be a valid assumption, based on this article. Here is a link: online.wsj.com/article...