GE: Nuclear Growth Galore 39 comments
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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
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This article has 39 comments:
$90 billion?!?!? puh-leeze!
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.
Thanks for the quality check everyone!
GE has a fabulous power business that is on the cutting edge across a number of technologies, not just nuclear.
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.
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!
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?
Not a bad thesis. GE looks attractive right now on valuation.
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.
"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!
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."
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.
scott
growthportfolio
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.
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.
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...