GE’s Power business is the most complicated. It also holds the most potential.

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A General Electric wind turbine

Sebastien Bozon/AFP via Getty Images

Thursday,

General Electric

Management immersed investors in its beleaguered energy business at an analyst event just outside Greenville, South Carolina. The energy and renewables sector could be key to the performance of GE shares in the years to come.

GE (ticker: GE) is about to split into three companies: one dedicated to healthcare, another to aviation and a third dedicated to power generation. The valuation and outlook for healthcare and aviation are less controversial on Wall Street than in the power sector.

The numbers show why. GE Aviation has generated positive annual earnings as far as investors want to look. The company even generated about $1.2 billion in operating profit in 2020, at the height of the Covid-19 lockdowns. The healthcare sector also shows consistent profitability. Healthcare has generated nearly $10 billion in operating profits over the past three years, combined.

The electricity sector is more difficult. Electric and renewable energy companies combined have lost about $2 billion on an operational basis over the past three years. The energy segment, which includes natural gas-fired power generation turbines, had sales of $16.9 billion in 2021, but operating profit margins ranged from 14% to 5% in over the past six years. Renewables, which include wind turbines, had sales of $15.7 billion in 2021; but it hasn’t produced a full-year profit for the past three years, and operating profit margins have averaged negative around 5% over that period.

There is a lot of complexity inside these two businesses, both of which will form the basis of the new GE Power which will become a separate entity in early 2024. The business will include onshore and offshore wind turbines, gas turbines natural, carbon-capture technology, nuclear activity, as well as grid resilience and transmission technologies. Additionally, the power generation industry could grow by 50% by 2040.

But GE’s natural gas power business has declined over the past two years. According to GE, this is something that will reverse in 2022. Demand growth in the onshore wind sector is stable over time, but the change in tax credit policy in the United States creates a boom and bust cycle for facilities. The offshore wind business is growing rapidly, but it is not yet profitable. GE thinks profits will arrive by 2024.

There are a lot of moving parts. Adding it all up, GE expects the power business to generate about $1.1 billion in operating profits in 2022 and another $1.5 billion in 2023. Such profits imply margins beneficiaries of about 5% in 2022 and 8% to 10% in 2023. In the long term, GE sees the business growing at low single digits per year. Profits should grow faster than sales.

All the volatility and complexity creates a “trust me” dynamic when evaluating management advice – another reason why it is difficult to evaluate the company ahead.

Multiple peers don’t help that much either. Actions of the supplier of electrical components

eaton

(ETN) are trading for approximately 16 times estimated 2023 operating earnings.

Mitsubishi Heavy Industries

(7011.Japan), another turbine maker, is trading for around 12.5 times estimated 2023 operating profit. Wind players are trading for around 30-40 times estimated operating profit in 2023.

These multiples, along with the potential improvement in profit margin, can yield a value of the electrical business between $15 billion and $40 billion, or about 0.5 to 1.3 times sales. The $25 billion spread is worth about $23 per share and equals 25% of GE’s current stock price.

The good news is that Wall Street is at the lower end of that range for the power sector, with analyst estimates ranging from $10 billion to $20 billion. (The weighted average is closer to $20 billion.) Any improvement in sentiment for this company may drive GE’s price targets higher.

Sales and profit margin momentum will be key to improving sentiment. Breakthroughs in sustainability, such as carbon capture technology, could also help. That’s what the GE bulls are hoping for.

As of Thursday’s open session, GE stock is down about 3% year-to-date, better than the respective declines of 10% and 8% in the


S&P500

and


Dow Jones Industrial Average.

Shares are down 16% since the company announced its plans in November; the S&P 500 is down about 9% over the same period.

Write to Al Root at [email protected]