Power: One Thing GE Needs To Get Right

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About: General Electric (GE)
by: Gaurav Agnihotri
Summary

GE is going through a restructuring process.

The company needs to strengthen its ailing power business.

New investors must wait as the stock may fall in the coming time.

On January 31, 2019, GE (NYSE:GE) announced its fourth quarter 2018 results and reported a revenue of $33.27 billion compared to $31.6 billion in 2017. Although this looks promising, there is more to this than meets the eye! When we look at the company 's core sector- Power, the business still continues to struggle. If there is one thing that GE needs to get right, it is strengthening its power business. After the latest financial results were announced, GE went up by almost 12% and closed above $10 for the very first time since November 2018.

GE’s Power business continues to struggle

Image Source: GE Press release

It’s a known fact that growing demand for renewable energy is affecting GE Power’s core business of selling turbines to power plants. It then comes as little surprise that GE’s Power segment had another dismal year. With revenues of $27.3 billion in 2018, the power segment witnessed a massive drop of 22% when compared to 2017 and reported a loss of $808 million (refer the above table for more details).

In my opinion, GE needs to effectively tap the complete potential of South Asian markets like India where thermal power still represents more than 70% of the total installed capacity. In fact, GE power has been doing fairly well in India as it has recently secured some key orders from NTPC, which is India’s largest energy conglomerate. But, this is simply not enough for GE Power.

Because of its declining annual revenues and order intake, the overall annual outlook for GE’s Power business seems to be largely on the negative side. This is something that new investors must take note of.

Renewable energy business does well (as expected)

Image Source: GE Press release

With an order booking of 10.9 billion, GE’s Renewable energy business grew by 5% year on year in 2018. This was a positive development, as GE plans to further consolidate its renewable and grid assets into Renewable Energy.

However, the renewable energy business was expected to grow reasonably well as it is relatively small (when compared to Power segment) and still in the developmental phase. Besides, Renewable Energy is a low-margin business, so GE has to depend on other segments for its profits.This means that it is important for the Renewable energy business to focus on operational effectiveness and cost reductions.

Aviation was the best performing sector of 2018 for GE (just like 2017)

Image Source: GE Press release

Just like 2017, Aviation was GE’s best performing segment in 2018. Orders for equipment grew by 20% in 2018, and this was supported by the company’s LEAP engine program. What is impressive is the 21% profit margin reported in 2018 as compared to 19.9% in 2017, along with revenues of $8.45 billion in 4Q18.

Oil and gas business did well, when compared to 2017

Image Source: GE Press release

GE’s oil and gas business did well in 2018, as year on year revenues increased by 33% at $22.8 billion. However, it must be noted that GE is planning to sell off its interest in BHGE in “an orderly manner over time”, and this will reduce the overall revenues of the company by at least $23 billion in near future.

Transportation and Healthcare business present mix numbers

Image Source: GE Press release

GE’s transportation business reported a 17% year on year rise in order intake, but a 1% year on year loss in total revenues. This was not a good trend as it is important for any major business segment to make profits. However, investors must note that GE is planning to combine GE transportation with Wabtec by end of this month. Through this merger, GE and its shareholders will retain 50.1% ownership interest in the combined company while Wabtec will retain 49.9% state.

In my opinion, this merger will help both GE and Wabtec in dealing with cyclical tailwinds of transportation sector. Finally, GE’s Healthcare business reported a 2% year on year increase in order intake and a 4% year on year increase in revenues, which was not very impressive.

Conclusion

It can be seen that under the leadership of CEO Larry Culp, GE is moving towards divesting certain businesses which include BHGE and a $8 billion asset sale for GE Capital during 4Q18. It seems that CEO Larry Culp wants to create a lean-mean organization which focuses on profits and operational excellence. Merger deal with Wabtec is a good example, which will generate around $10 billion cash for GE.

Although it’s good to deleverage the balance sheet and strengthen the business, it is equally important for GE to focus on its ailing power business by taking some smart operational and business decisions.

Investors must also note that the declared EPS of 17 cents per share was less than market expectation of 22 cents per share. As GE’s CEO Larry Culp rightly said during the company’s latest press release, "We have more work to do ,but I'm encouraged by the changes we're making to strengthen GE and create value".

Finally, it must be noted that GE's stock value increased by more than 34% in January 2019. In my opinion, this was mostly because of the positive investor sentiment and 4Q18 earning results that were declared on January 31st . With time, the investor sentiments will shift towards GE's core sectors, and this is when its stock will begin to face downward pressure . In my opinion, new investors must wait and buy this stock at the level of $7, and then hold it for long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.