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Renewables Offer Huge Growth Potential for GE


GE Renewable Energy doesn’t get a lot of attention during investor conferences. But if you’re looking to build a bullish case for buying General Electric (NYSE:GE), you must include positive assumptions about this segment. It could swing the needle in terms of earnings and cash flow over the long term. Here’s why it’s GE’s most interesting business.

Why GE Renewable Energy matters

It might seem bizarre to single out the renewable energy business. After all, it’s currently loss-making and eats up cash. However, it is the GE division with the biggest potential to surprise investors. 

Looking at the other segments, the healthcare business is low-growth now that the biopharma segment has been sold. In fact, GE Healthcare only generated $1.2 billion in free cash flow (FCF) in 2019. Aviation will obviously be the biggest earnings/FCF generator in the future, but investors already knew that.

Since the power segment is being restructured, investors can expect more margin improvement to come with positive FCF in the 2021-2022 time frame. However, there are questions around the long-term demand for gas turbines in light of the growth in demand for renewable energy for electricity generation. Even GE CEO Larry Culp spoke of an “energy transition.”

A wind turbine.

Image source: Getty Images.

All of which leaves GE’s renewable energy segment as the business with the greatest potential to turn around FCF generation and grow over the long term. You can see in the table below how the company’s various segments performed last year.

Segment, Full Year 2019

Revenue

Segment Profit

Segment Margin

Free Cash Flow

Power

$18.6 billion

$0.4 billion

2.1%

($1.5 billion)

Aviation

$32.9 billion

$6.8 billion

20.7%

$4.4 billion

Healthcare

$19.9 billion

$3.9 billion

19.5%

$2.5 billion

Renewable Energy

$15.4 billion

($0.7 billion)

(4.3%)

($1 billion)

Data source: General Electric.

GE Renewable Energy

To get an idea of what to expect for the renewable energy division, look at the guidance for the segment given in the investor presentation on March 4. It has been replicated in the table below. As you can see, FCF won’t be positive until at least 2022, and the segment’s margin won’t break even until 2021. As noted in the presentation, this is a long-term story.

Business Within GE Renewable Energy

2019 Actual

 2020 Guidance

 2021 Guidance

Core onshore + LM Wind Power revenue

$10 billion

up

flattening

Offshore revenue

$0 

up

up

Grid and hydro revenue

$5 billion

down

flattening

Total revenue

$15 billion

low single-digit growth

up

Segment margin

(4.3%)

Improving, but negative

breakeven

Free cash flow

($1 billion)

lower

better, but still negative

Data source: General…



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2020-06-15 14:24:00

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