Power: One Thing GE Needs To Get Right

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.

Analyst’s 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.

Comments

[Index Investing Fan]

💰

[wolfe911]

Author is basically saying if a stock goes down 30% then he'll buy. I'll buy any large cap stock for 30% off right now without even knowing the companies name. Big deal!

[13427872]

GE Research Awarded $5.8 MM ARPA-E Project to Develop Super-Fast DC Circuit Breaker that allows Big Urban Cities to Access More Remote Clean, Renewable Energy
February 11, 2019

New circuit breaker essential to supporting next generation Medium Voltage Direct Current (MVDC) distribution grid that more efficiently delivers electricity into major cities from remote wind farms and other clean power installations .

Will expand access to new clean power sources for cities in more congested areas where there is little or no room to install new electrical distribution capacity
The development of MVDC systems could create new T&D market for the grid industry

NISKAYUNA, NY – February 11, 2019 – GE Research today announced it has been awarded $5.8 MM in funding from the U.S. Department of Energy’s Advanced Research Projects Agency - Energy (ARPA-E) for a three-year project to develop and demonstrate a super-fast DC Circuit Breaker that is essential for enabling next generation MVDC grids. This project is part of a broader interest by ARPA-E to upgrade existing alternating current (AC) distribution grids and expand opportunities for congested areas to access remote clean energy sources to meet their future power needs.

“Many big urban cities today are facing higher electricity demands because of growing applications such as electric vehicle charging, with limited options for tapping into new energy sources,” said Timothy Sommerer, Principal Scientist at GE Research and Principal Investigator on the MVDC program. “By upgrading existing AC distributions grids to MVDC grids, it would allow these cities to cast a much wider net in securing new clean renewable energy sources.”

Sommerer continued, “The new super-fast DC circuit breaker we’re developing is an essential component for enabling the distribution grid upgrade from AC to MVDC. Because DC doesn’t inherently contain natural breaks like AC that help manage faults, you need to have a switch with an extremely fast response time that can create these breaks. That’s exactly the challenge GE’s technology will address.”

Sommerer explained the team will leverage GE Research’s innovative gas discharge tube technology to develop the MVDC circuit breaker. Gas discharge tubes switch without mechanical motion by transitioning the internal gas between its ordinary insulating state and a highly conductive gas plasma. This allows for the much faster response times that are required to handle DC currents.

The MVDC distribution lines envisioned will support up to 100,000 volts and more than 100 megawatts of power to meet the needs of large cities. The land area required to power a city by renewable sources like wind, solar, and hydro is 3–10 times larger than the city itself and is usually some distance from the city. At the same time electric urban power demand is increasing as vehicles and other fuel-burning power users go electric. In general, the increasing utilization of DC current in electricity transmission has the potential to greatly expand where utilities can draw power from to meet their energy needs in two important ways. First, electric power can move more efficiently over long distances on high-voltage DC lines vs. AC. And second, an MVDC distribution grid can then take that HVDC power and distribute it more efficiently and effectively into a large urban area.

“The development of DC grid technologies could vastly increase the flexibility utilities have in addressing future power needs,” Sommerer said. “Imagine the day when cities like New York, Chicago, or Los Angeles have the option of accessing electricity from multiple wind installations in the Midwest to meet electric vehicle charging needs.”

www.genewsroom.com/...

[susanthemoron]

You have the wrong info on wabtec deal
So it is hard to take you serious

[Old Wizard]

Anthony, I couldn’t agree more. Anyone who knew anything about the power industry and Alstom knew it was a failing company with a lot of negatives in previous dealings. It was also known by anyone who has dealt with the EU and in particular, France, that it is very difficult to reduce stall and to close facilities. To make promises to hire more people in order to get approval and other concessions like not including train controls and joint ventures in nuclear and networks that can be sold back to GE at Alstom’s option made the deal even less desirable. The latter concessions have had more negative consequences years after the acquisition was made. The Alstom deal and the squandering of over 60B on this, the BhGE, the stock buy backs, the non-focused entry into IofT software and the lack of attention given to the balance sheet would make a great Harvard business case of management incompetence and bad decision making,.

[SouthDakotaSaver]

With no dividend (for an unknown time) I'd rather buy YINN China 3X leveraged ETF. Second largest economy in the world likely to come back when the trade disputes are over. I wonder if retail investors are stubbornly trying to make back their losses on something that was corrupt for decades. Better options must exist until it's more certain this thing is cleaned up which is no guarantee at this point.

[falconetti aanthony]

BHGE is making GE money.. I wouldn't be too quick to sell out of that business, same with Healthcare.. spin off some but keep the majority..

asfor GE Power, the real mess in GE Power is Alstom..and either fix it or sell it to Seimens or back to the French..but do something..reduce the headcount...the Alstom acquisition was the biggest blunder of all of jeff Immwit's blunderous career...and fool could have seen that Alstom had strings attached ,, many strings..should have joint ventured with Seimens.. let them run it.. or better yet, just walk away.. of course jeff and his coke nose thought it was a bargain..

[SouthDakotaSaver]

So many uncertainties. How many times do you touch a hot stove? So many people have been burned who is willing to come back into this thing long term? Investors are rightfully skittish and Culp's report was not good news. A huge dose of skepticism is still required imo. Back down in the 9s should be no surprise.

[Old Wizard]

Mike, you picked up that the authir’s Articulation of the Wabtec deal did not reflect the latest modification. I would add that the modification also allows for monetization of the
Wabtec shares held by the GE company quicker. ( I believe after 30 days). I also seem to recall that sales and revenue of gas turbines were pulled forward in the fourth quarter of 2017, to make the year look better. Does this make the fourth quarter year over year comparisons ( 2018 to 2017) look more negative?
I believe that the turn around in power is the principle driver in GE’s future. The reorganization announced by Culp is a positive first step. He seems to also be paying more attention to the operational details than his predecessor which I believe is absolutely necessary. Seperating most of the poison pill Alstom businesses from the gas turbine business and placing an experienced leader at the head of the newly combined equipment and maintenance gas turbine business was long overdue. Seperating much of the rest of the business pieces under separate leaders with p&L responsibility is also constructive. A reversal of the negative trend in power in 2019 would certainly increase the possibility of a higher stock price. We shall see.

[Mike Slattery]

@Old Wizard

"Does this make the fourth quarter YoY comparisons (2018 to 2017) look more negative?"
............................ .......................... ..........................

I've posted before that GE "forever" has "gamed" the system by pulling into every 4th quarter sales, orders, cash flows, FCF. etc. from the following 1st quarter.

In (4Q18) gas turbine orders were 11 units....down YoY by -55% from the 24 units ordered in (4Q17). Yes, the 24 units was a "gamed" number since the following quarter (1Q18) had only 4 (FOUR!!...think of it FOUR!!) units ordered.

We will not know if this -55% decrease is "real" or if Culp/Miller have stopped the "gaming". I hope this short-term, mis-leading process has been stopped. We will need the (1Q19) data next April-19 in order to make a conclusion.

[Old Gamer]

Good article. The power segment is the biggest eye sore. Concentrating on expanding markets is easier said then done due to competition. Also, besides a long market decline (which I believe will end in just <7 years) the big problem is poor quality control and high product failure on the turbines. That is not normal compared to the rest of GE products. That is where they can make things better much more easily and that will lead to less product return and more sales all by itself.

[13427872]

www.envisioninteligence.com/

Copied from article in Turbomachinery showing its current Gas Turbine forecasted sales for the top three Gas Turbine OEMs...……………….

OEM overview
The three leading companies in this market sector have been ranked by value of sales (ranking by power output gives the same answer). They account for just over 90% of the world’s projected capacity increase over the next ten years. Note that subsidiaries and licensees are included in the overall total.
GE
2018-2027 Production % of Total
1,608 units 37.27
2018-2027 Production Value % of Total
$49.88 billion 46.43
2018-2027 Power Capacity (GW) % of Total
232.6 49.66
General Electric is one of the most diversified gas turbine engine and machine manufacturers in the world. In the gas turbine-powered electrical generation marketplace, its product line spans the power range of 2–750 MW in simple-cycle mode.
GE is enhancing its product range to exploit developing technology. The LM6000 has been continually improved in efficiency and emissions levels, especially with use of the steam injection process. GE’s Frame series are also being improved, through technology injection from the CF6 and GE90 airline turbofan programs.
Yet for all its market strength, GE has been hit hard by the economic forces. It has been forced into major restructuring, reductions in staffing levels, and the divestiture of subsidiaries. But the company’s established business, licensee, and packaging agreements with more than 30 firms worldwide, have broadened the geographic appeal of GE units.
And the harsh market conditions facing its traditional large-frame gas turbines are being offset by the manufacture of GE LM500, LM2500, LM6000 and LM9000 gas turbines. Almost half of the world’s projected increase in energy production will be supplied by GE gas turbines.
Siemens
2018-2027 Production % of Total
1,034 units 24.0
2018-2027 Production Value % of Total
$29.21 billion 427.19
2018-2027 Power Capacity (GW) % of Total
122.2 26.13
Despite the company’s acquisition of the Rolls Royce industrial turbine range, Siemen’s sales and market share have both declined. Siemens has been restructuring its operations aggressively. It shrunk from 18 divisions in 2013 to five. It raised more than 9 billion euros in merging, selling, or spinning off businesses. It is now investing a substantial proportion of this money in new technologies. Aeroderivatives acquired from Rolls-Royce offer Siemens an opportunity to compete more broadly in power generation.
MHI
2018-2027 Production % of Total
443 units 10.3
2018-2027 Production Value % of Total
$16.65 billion 15.49
2018-2027 Power Capacity (GW) % of Total
69.4 14.84
Mitsubishi Hitachi Power Systems (MHPS) holds third place and has also been hit by declining sales, excess capacity and unsold inventory. It also announced restructuring. It is predicted to account for 10% of unit production, 15% of production value, and 15% of capacity for the forecast period.
Despite the vicissitudes of the last year, the top three companies in the electrical generation gas turbines hold 90.63% by value of the market. In both critical market projection parameters, total unit numbers, and total capacity, it is clear that the market is highly concentrated and becoming more so. Other participants in the sector are limited to niche applications.
Subdivision of the market shows the dominance of the 250 to 500 MW turbine capacity segment. The 500 to 750 MW segment is growing slowly but has a long way to go before it challenges the 250 to 500 MW segment in capacity terms. It is hard to avoid the impression that the 250 to 500 MW sector represents a sweet spot in electricity generation terms, one where considerations of capital cost, efficiency, environmental protection, and return on investment coincide.

[Mike Slattery]

@13427872

Thanks for posting a very useful article on GE's place among the top 3 OEM gas turbine manufacturers for the next 10 years (2018 - 2027).

Based on estimated production value manufactured, GE at 46% ranks in 1st place. But a metric that is not presented is "Expected Revenue (Sales + Services)"

1) Is this metric available for the 10-year period??

2) Is this metric available for recent years.....2017??.....2018??

3) It is known that GE Power total revenues in 2018 were at $27.3 Billion....down -22% from $34.9 Billion in 2017. These revenues include more than just gas turbines.

Would you have data on where GE ranked (among the top 3) in total revenues in 2017 and/or in 2018??

[Mike Slattery]

@13427872

I've re-read your post more closely and now see that my question (1) has been answered by the statement "Value of sales = Power output capacity".

I wold still appreciate any useful data for questions (2) gas turbines, and (3) total revenues.

[13427872]

Mike,

Sorry for the delay.

Here is a good article that talks about gas turbine demand going forward. Hope it helps.

Its part of the Turbomachinery Magazine website which is a mother lode of turbine data.

www.turbomachinerymag.com/...

[Mike Slattery]

@Gaurav Agnihotri

"Through this merger, GE and its shareholders will retain 50.1% ownership interest in the combined company while Wabtec will retain 49.9% stake............Merger deal with Wabtec is a good example, which will generate around $10 Billion cash for GE.."
............................. .............................. ...................................

All three (3) of the above numbers are in error. The merger terms were updated in Jan 25th and are now -

1) Wabtec will now have majority ownership at 50.8%.......not 49.9%.

2) GE (at 24.9%) and GE shareholders (at 24.3%) will have total of 49.2% ownership.

3) Cash generated for GE is $2.9 Billion.....not the $10 billion in the article.

4) The added value for GE comes from the 24.9% ownership of the new, merged company (value about $16 Billion) which then is $16B * 0.249 = $4.0 Billion.....value in stock, not cash.

[User 21793061]

The title says Power needs to be fixed. But when we get into the article, only discussion of Power is extremely high level. And ore than 50% of text is on other divisions.

[James Coleman]

@217....

it's strictly click bait.

Sorta like me making a title an article of mine "GE undervalued by
$987,654,321,000, 000" which for the record will not happen.

[GoLongOnAmerica]

The demand for electricity will surge when electric cars sales take off. The grid infrastructure will also need to expand. I see a bright future for GE power in the cards. The GE short squeeze will continue for a while. I will stay long on GE.

[Gaurav Agnihotri]

Great comment , thanks .

[Silli-Con Doc]

You’re not the only prediction in town!

I can predict, like you, that: “the stock may rise... or fall.... or stay the same.”

See how easy it is?

[Gaurav Agnihotri]

May rise..May fall... May stay the same ...so easy . thanks for the info 😊

[2EZ]

Another nothing article from a disguised short. GE will move up to $15 in the near term because it’s a great company
The rest it’s just noise naturally it’s great to have an adult to run the company instead of the three previous greedy and egotistic clowns

Long GE

[rongolfer]

Let me understand, all power plants with turbines will never need another replacement turbine! Sooner or later they will. I believe service on turbines are being stretched due to funding shortfalls and sooner or later.........

[Gaurav Agnihotri]

the demand for turbines has been falling globally. so , you either exit this business , or trim down operations/ costs and focus on markets where turbine demand is still rising . Let me know if I have said something wrong here .

[ArbLover]

@Gaurav Agnihotri Since this is the third time you've posted replies in this thread without answering the question I've asked you twice, I'm going out on a limb and assuming you don't have a rationale for why you believe the stock price will drop over 30% in the near term.

GE is pretty confident that global demand for power is going to remain at +25GW for the foreseeable future. That's a large drop, but one that GE is getting very well positioned for and is already demonstrating their willingness to streamline, consolidate, and cut other costs, which you indicate is an issue, but your article makes no mention of how these things are already being done.

You also aren't addressing the difference in revenue stream margins for new orders vs service which is an important distinction.

This is a poor article, and you should feel bad. Not because you are a GE short, there are plenty of meaningful reasons to short GE, its because there isn't a basis to your argument. Last year your article on why GE would fall made sense: GE was going to reduce dividends, and had significant power declines forecast for the next several years, and the stock was up 35% from where it is today. You also indicated you thought it might get to $10. Now it is at $10, your issues are mostly accounted for, and you are alleging another 30% drop to below 7 with no rationale given?

In all likelihood, when 13F's are due on 2/15 we will realize that smart money has entered this stock in the 7-8 range when there was significantly more uncertainty much of which has since been resolved.

[G. Blair Bauer]

Culp looks encouraging. I am with you;think GE will crash again-and then I may speculate on a small position. Still think more dirt will come out and unhappy about that last minute change with the WAB deal. Trusting a company is important to me.

[udi pas]

no one will let you buy the stock at 7$, this price wont come back

[Gaurav Agnihotri]

It's fascinating. This is what I heard last year , when I said that the stock will fall to $10....

[ArbLover]

You detail concerns with GE but don't go into why share price is going to drop by over 30%, i.e. why it is that much overvalued. "I was right before" just doesn't cut it for me, but I do appreciate the color in your article.

[Gaurav Agnihotri]

I have already given the reason as to why the stock will drop by 30 percent . read again and connect the dots . And yes , I say again that I had correctly predicted that the stock will drop to $10- and I was criticised by many that time .

[Just Some Guy]

I agree that the Power division is now the issue with GE.
And the question is whether the turbine blade issue is now fully resolved.
Since I cannot even be sure about that, I bailed from the stock in the Culp rally.

[doc47]

News Flash: GE has to get a lot more than "one thing right."

[Gaurav Agnihotri]

There's difference between what you say and what the title suggests . read again.

[cjsmit77]

Ditto

[doc47]

Read it twice: I win! If they get "power" right they will still be in a lot of trouble and still may go broke. Besides, the French are doing their best to make sure that Power will never be right. Learn to write better headlines.