The spin-off of General Electric's energy and wind business, operating under the name GE Vernova, meets a market fixated on everything related to electricity. Yet despite the favorable market conditions, investors are approaching the spin-off, which became independent on April 2, with a certain degree of caution. Since then, the stock price has fallen by about 7% to around 130 US dollars, significantly below the average target of 152.25 US dollars determined by analysts at FactSet.
Investors Have Reasons for Their Caution. GE's Energy Business Suffered for Years From Declining Revenues and Resulted in a Loss-Making Year in 2018 After the Previous Management Had Focused on Aggressive Growth at the Expense of Profitability. Beginning in 2018, the Wind Energy Sector Also Experienced a Difficult Phase as the Entire Industry Tried to Lower Equipment Costs in an "Arms Race" to Compete with Solar Energy. Recently, Equipment Suppliers Like GE and Siemens Energy Have Worked to Eliminate Unprofitable Contracts for Offshore Wind Projects that Were Burdened by Increased Steel and Material Costs During the Pandemic.
These Decisions Date Back to the Period Before Scott Strazik, Who Took Over the Leadership of GE's Gas Power Business in 2018 and the Entire Energy Sector in 2021. Under His Leadership, the Company Focused on Certain Markets Where It Has Scale and Advantages. In the Wind Business, GE Vernova Has Reduced the Number of Product Types, Which Should Help to Lower Manufacturing Costs and Avoid Quality Issues. According to JPMorgan, the Contract Terms in the Wind Industry Have Also Changed, Now Taking into Account Fluctuations in Input Costs Such as Steel or Transport.
These efforts seem to be bearing fruit. The company has saved structural costs of $1.8 billion in the area of gas energy, onshore wind, and electrification since 2018. All three units were free from cash flow losses in 2023, and analysts expect that GE Vernova will become profitable this year after at least three years of losses. The company's first earnings call next week will provide further insights into how quickly margins are improving and whether there are plans to return some of its cash to shareholders.
GE Vernova appears to be well-positioned to benefit from the growth in electricity demand, which has recently been boosted by the high energy needs of data centers for artificial intelligence. Its gas turbines represent approximately 51% of global capacity, which constitutes an attractive source of recurring service revenue, especially as gas-fired power plants are run more frequently to compensate for the phase-out of coal power plants.
It is also the leading onshore wind installer in the USA, a market that now enjoys robust and long-term political support through the Inflation Reduction Act. Electrification, the smallest unit that sells equipment and software for the power grid, also offers high growth and margin potential.
The subdued stock market debut of GE Vernova could represent a buying opportunity for investors looking for an entry point into the topic of electrification.
