Revenue was up 28% in GE's renewables division as the acquisition of Alstom's power business in November 2015 came onto the books. The increased revenue resulted from major growth in GE's wind turbine business with the incorporation of the Alstom wind business.
Most things I see about the current reporting indicates good times ahead.
It has been noted that big companies aren't guaranteed longevity. Over a period of 59 years (1955 to 2014), only 12% of 1955 Fortune 500 companies were still on the list in 2014. In times of rapid change, survival is even more under threat.
Simply put, if a company doesn't have a strategy for the future, it will stay in the present, which soon becomes the past. One doesn't need to look further than the fate of US coal industry majors, which by trying to stay with what they did best has consigned them to bankruptcy.
Former Chairman of GE Jack Welch summarized the issue as follows: "If there is more change happening outside your business than inside your business, the end is near."
Virtual power stations
As an example of the kind of world we are entering, consider German company Next Kraftwerke, which has no physical assets but instead has a business that optimizes load and generation of 3,600 distributed power producers, making money by buying and selling power. The business model is largely based on renewable energy and expansion from these initial partners is underway to include biogas, hydropower, CHP plants and commercial and industrial customers who can be flexible about power generation and consumption.
The company operates by getting its members to use more power when there is excess renewable (wind, solar PV) power, or ramp up generation when there is a power shortage. In this way, the company says it already has ramp-up/down capacity equivalent to two big coal plants… virtual power plants.
The above is what GE is seeing as a major new opportunity, but being GE, it is pushing this concept throughout its business into understanding, logging and increasing efficiency of everything it makes and operates.
GE reinventing itself as a (the?) digital industrial company
There has been a lot written about GE's exit from its financial services business GE Capital, but at the time, the commentary has mostly been about GE becoming a pure industrial company. The exit from financial services is now largely achieved.
It is important to recognize that GE hasn't become just an industrial company, the "digital" in the way it describes itself is transforming.
GE claims it has built the world's first industrial operating system "Predix" which will process 1 million terabytes of data daily by 2020. Predix provides a platform for connecting industrial assets, collecting and analyzing data in real time. While this system has been built to connect GE assets, it also enables integration of non-GE assets.
We live in an information-intensive world, but much of commerce is still structured without having real-time information. This is crucial in optimizing industrial processes and GE is investing across the board in this area. Jeff Immelt, Chairman and CEO of GE, made the following observation: "If you went to bed last night as an industrial company, you're going to wake up this morning as a software and analytics company."
There is a lot of evidence to indicate that GE has confronted its present and sketched out a path to the future, which is radical and dramatic. It takes time to implement bold strategies, especially when the future path involves a business structure that barely exists today.
As indicated above, this is nowhere better seen than in the area of power generation. For example information can be used to maximise the utility of distributed power by mapping locations for renewable energy (solar and wind), and combining with use patterns, defining optimized locations for battery storage.
This is dramatically changing the old view of centralized power supply. While at first sight it isn't obvious how this will be monetized, it doesn't take much effort to understand where this is leading. GE is the company which is building the enablement.
And it isn't just limited to being smart about how energy is generated and used. Consider 3-D printing as another disruptor. GE calls these "additive technologies" as component parts that are made not by machining a piece of metal or plastic but instead building up the part by printing material in the shape required. GE gives a couple of examples in the link above to indicate how revolutionary this is.
One is in the operating theatre where 3D printing of a kidney allows better surgery to be performed. The second involves 3D printing jet engine fuel nozzles. It is pointed out that very small improvements in fuel economy (1%) represent billions of dollars of savings to the airline industry.
It is all about new materials and software to make them, plus enhanced designs and bigger printers, all controlled in the cloud by GE's Predix platform.
The benefits to this new way of thinking and approach to manufacture and efficiency are available to the companies that set out to harvest them. GE plans to be at the forefront of this. I find it surprising that this isn't more acknowledged in analyzing the prospects for GE, as the company is clear about where it is heading on its website.
Apple moving in the digital direction too
Apple (NASDAQ:AAPL), the company that is almost synonymous with quality products, has sold a billion iPhones since their release 9 years ago. The iPhone transformed Apple, but its importance is falling as it made up 56% of Q3 sales compared with 63% in Q3 last year. Revenue fell 15% over the past year, with China being its most problematic market.
While product sales have fallen, digital services (Apple Music, App Store, Apple Pay, iCloud storage) revenues have grown 19% over the past year. To put this in context, digital services are now bigger than the Apple iPad and Mac computer businesses.
This is another statement about the growth of the digital universe.
Alcoa, another big company articulating a different future
I've written previously about Alcoa (NYSE:AA), another elderly company, with my take being that to identify it as an old fashioned aluminum resources company misses the point of the new directions in smart alloys and carbon fiber. I'm not sure how the upcoming split will work out, but I'm encouraged by the direction and my investment is going OK.
I see GE in the same light, and contrast it with some other big companies that are not only holding on to the present, but denying where things are heading in the future. In the energy space, this means an exit from fossil fuels, but analysis of most of the oil and gas majors, for example Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) and BP (NYSE:BP), indicates that they hope not much is going to change. Total (NYSE:TOT) is the exception, with a major intention to be a big player in the solar space.
GE is one among a small group of companies that one acquires for his/her retirement portfolio. It is too big to be able to grow rapidly, but it is so dominant that if it plays in the right spaces, then dividends and share price growth will follow.
I'm encouraged by the current strategy with a strong emphasis on digital industrial development, and if the share price suffers a bit from a lackluster Q2 earnings report (today closing at $31.25, down from year high of $33), perhaps it is worth a close look to acquire some shares for the bottom drawer. Of course, you need to look at the financials and make your own judgment, but do so in the context of where they are heading.
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Disclosure: I am/we are long AA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.