ohu in recent years, General Electric (NYSE: GE) has sold assets at a rapid pace in an effort to simplify the business, pull out of less desirable lines of business and consolidate its struggling balance sheet.
The GE Power unit has been a key target in this restructuring effort, after the segment’s revenues and profits fell a few years ago. GE has made substantial progress in streamlining its power business over the past few years, improving performance. However, the company could be on the verge of announcing another big move: the sale of its nuclear turbine business.
Power unit remodeling
General Electric’s electricity business generated operating profit of $ 5.1 billion on revenue of $ 36.8 billion in 2016, adjusted for a subsequent change in the way GE has defined its business segments. Two years later, revenues had plunged to $ 27.3 billion and the unit recorded a loss of $ 808 million.
That abrupt collapse – combined with GE’s growing pension deficit and massive losses in the company’s insurance operations – forced the company to rethink its energy business from the ground up.
The heart of GE Power is to build and maintain gas turbines. This part of the company has strong synergies with the industrial conglomerate aeronautical company. In addition, he is already in the process of regaining his health. Earlier this year, management estimated that the gas-fired power business will generate a high single-digit operating margin in 2021, with improved free cash flow.
Image source: General Electric.
The rest of the power segment has less to offer for GE. As a result, the company reduced its activities there. At the end of 2017, it agreed to sell its industrial solutions business (which manufactured equipment for electric utilities) to ABB for $ 2.6 billion. Less than a year later, it struck a $ 3.25 billion deal to sell its distributed electricity business to Advent International, a private equity firm.
Finally, last September, GE announced that it would “exit the new-build coal-fired power market” as it shifts its business to low-carbon technologies. It plans to complete most of its existing new construction coal projects by the end of next year.
One more transaction under study
Gas-fired electricity generated $ 12.7 billion of GE Power’s $ 17.6 billion in revenue last year. GE’s steam power generation business accounted for most of the remainder, at $ 3.7 billion. This included nearly $ 1.4 billion in the new coal business that GE is shutting down, about $ 300 million in new steam turbines for nuclear power plants, and about $ 2 billion in services for power plants in the United States. existing coal and nuclear.
At the start of this year, General Electric predicted that revenues from new nuclear turbines would rebound to $ 900 million by 2023, while revenues from services would remain roughly flat. But now GE plans to sell its nuclear turbine business to French utility giant EDF for $ 1.2 billion.
Image source: Getty Images.
GE’s interest in such a deal should come as no surprise. In early 2020, Bloomberg announced that the company wanted to sell the entire steam production unit. With GE already exiting coal-fired power generation, the sale of the nuclear turbine business would essentially achieve this goal, reducing the steam power generation business to consist only of services. for historical customers, in particular in the coal-fired energy sector.
A smart move
Years of restructuring efforts are paying off for GE’s gas-fired power business, which is on track to record a high single-digit segment margin this year. Management anticipates further improvement in margins over the next few years and a conversion of over 90% of free cash flow.
In contrast, the rest of GE Power – including the steam power industry – appears to be losing money and spending money. GE could probably bring the steam plant back to profitability within a few years, but that’s an unnecessary distraction. With just $ 3 billion in expected revenue in 2023 (including services and new nuclear turbines), low margins, and minimal long-term growth potential, the steam plant represents an undue distraction from its value.
If GE can sell its nuclear turbine business, the company will get a small injection of cash to help it continue to reduce its debt. Meanwhile, this would offload a turnaround project with modest upside potential, allowing management to focus more on Key long-term growth drivers for GE. It sounds like a no-brainer.
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Adam levine weinberg owns shares of General Electric and is short in January 2022 for $ 15 of calls on General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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