Long-besieged GE’s electrical business may finally have bottomed out

Could General Electric (NYSE: GE)to finally be on the verge of a turnaround? For the first time in a long time, it seems possible.

Such a change would certainly be welcomed by shareholders. Expectations of current CEO Larry Culp were high when he was hired in late 2018, but he inherited a mess that has been exacerbated by headaches from coronaviruses. Its redesign has been lackluster so far.

There is still a silver lining on the horizon. GE’s electricity business – the heavy equipment used to generate electricity – appears to be stabilizing after years of deterioration. Even a modest recovery on this front could dramatically improve the company’s bottom line, as it was at one point GE’s largest business.

Image source: Getty Images.

GE Power is out of gas

Investors who have followed General Electric for the long term know the story all too well. In 2016, GE’s electricity division had sales of $ 26.8 billion, making it the company’s largest unit, accounting (at the time) about one-fifth of General sales. Electric. Power’s $ 5 billion revenue that year generated more than a quarter of GE’s profits in 2016.

In the meantime, things have changed dramatically. In the first three quarters of the current year, electricity generated $ 12.2 billion in revenue, of which $ 4 billion materialized in the three-month period ending in September. That puts it on pace for 2020 sales of just over $ 16 billion, and perhaps a little better than a breakeven point.

What happened? A combination of factors contributed to the demise of GE’s electrical business, but two of them stand out.

One of them was (and still is) the advent of alternative renewable energy solutions, and solar in particular. They are now sufficiently cost effective and more socially acceptable than electricity produced from fossil fuels, reducing demand for GE gas turbines and coal-fired electrical equipment from utility companies. As a prospect, more than 70 gigawatts of solar energy infrastructure were put in place in 2016, and the 2019 installations are closer to 115 gigawatts.

The other stalemate was specific to General Electric. In 2018, a design flaw in its new gas turbines was discovered. Namely, some of the fan blades of newer turbines oxidize, making them unsuitable for safe and reliable use.

GE Power President and CEO Russell Stokes assured shareholders and customers in September of the same year that a solution was underway. Of course, for a turbine that takes years to develop, even a simple fix can take months just to start being implemented. There is also the question of its tarnished reputation. In total, in 2018, GE sold 60 fewer gas turbines than the previous year. This coincides with a double-digit drop in revenue slump, including a significant drop in its lucrative service business that keeps General Electric’s equipment in working order.

Slowly but surely

Replacements of the faulty fan blades began shortly thereafter. Reuters reported that the fix was simply a return to an old method of casting these blades.

This repair job was of course not covered by the media with as much fervor as the issue of oxidation, but the electricity providers noticed it … and started to believe it again. General Electric sold 13 fewer turbines in 2019 than in 2018, but turbine orders increased by 52 units last year. Electricity division orders and revenues have cooled a bit in this COVID-marked year, but as the graph below shows, revenues and orders are leveling off somewhat.

General Electric's electrical division is no longer shrinking and may be starting to recover.

Data source: General Electric quarterly investor reports. Chart by author. All dollar figures are in millions.

Not shown on the graph is another important change. Services revenue for the last quarter was in line with Q3-2019 levels, and sales specific to its gas branch were up year over year. Its smaller steam / coal activity is the weak point of the overall power unit, but smoothness on that front was inevitable. General Electric explained in its quarterly report that “revenues from steam equipment have also declined mainly due to the timing of the project.”

It is a start, even if it is not exciting.

The long game

General Electric’s electricity business is unlikely to return to its former glory anytime soon. Industry analysts generally expect solar installations to forget this year’s lull and re-accelerate through 2024. And, although GE’s portfolio of gas turbines does offer natural gas combustion options. , the fracking that makes clean-burning natural gas so cheap is proving politically unpopular … less in the United States. Natural gas remains a relatively clean energy option, however, and can meet the needs of the country en route to more prolific use of solar energy.

In the meantime, the technology remains sufficiently marketable abroad. Australia recently installed new electric turbines manufactured by GE, and the Vietnamese electric utility has just reached an agreement with GE to secure the parts and service that will allow its power generation turbines to run in a foreseeable future.

This largely overlooked dynamic is perhaps why GE’s electrical business is stabilizing rather than continuing to collapse. Although the plant’s backlog has grown from $ 85.3 billion at the end of 2019 to $ 79.3 billion at the end of September, consider the context. COVID-19 presented logistical challenges. It should also be considered that nearly 80% of this order book is linked to services rather than the sale of equipment. Lukewarm orders for new turbines in 2018 and 2019 canceled the need for new service contracts. But, the resumption of turbine purchases should in turn revive its higher margin business, albeit slowly.

In fact, GE’s power-generating gas turbine business – and its smaller coal-fired power business – appears to have contracted as much as it can. It will likely take some time to travel through it, but there is finally a plausible, cash-rich growth path ahead. It’s a nice change in itself.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.