General Electric’s Power Spinoff Could Be Formidable Once Fully Charged

General Electric’s spinoff of its power and wind business—named GE Vernova—comes at an opportune time when investors are excited about everything electricity themed. Yet investors might also be cautious about picking up a GE business unit with a checkered past.

GE Vernova spun off and started trading as a stand-alone entity on April 2. Since its debut as a stand-alone company, the shares have declined about 7% to about $130, well below the $152.25 mean target price from analysts polled by FactSet.

Investors have some reason for caution. GE’s power business endured years of shrinking income—culminating in a year in the red in 2018—after the company’s former leadership aggressively pursued growth at the expense of profitability. Its wind segment, meanwhile, went through a rough patch starting around 2018 when the entire industry was in an “arms race” to bring the cost of equipment down so that it could compete better with solar, according to Mark Strouse, equity analyst at JPMorgan. Most recently, equipment providers like GE and Siemens Energy have been working through a backlog of unprofitable offshore wind contracts after costs for steel and other materials surged over the pandemic.

To be fair, these decisions preceded GE Vernova Chief Executive Scott Strazik, who took over GE’s gas power business in 2018 and then the broader power segment in 2021. Under his direction, the company narrowed its focus to certain markets where it has scale and advantage. In the wind business, GE Vernova reduced the number of product types offered, a move that should help cut manufacturing costs and prevent quality issues. JPMorgan’s Strouse said the wind industry has also changed the way contracts are written such that they now account for changes in input costs such as steel or transportation.

Those efforts appear to be bearing fruit. The company has reduced structural costs by $1.8 billion across gas power, onshore wind and electrification since 2018, according to its investor presentation from March. All three units were free-cash-flow positive in 2023, and analysts polled by FactSet expect GE Vernova to turn profitable this year after at least three years of being in the red. The company’s first earnings call—scheduled for next week—should help illuminate how quickly its margins are improving and if it has plans to return any of its cash to shareholders.

GE Vernova does appear to be well positioned to ride the electricity-demand growth story, which has gained more attention lately because of the hefty energy requirements that artificial-intelligence data centers come with. Its gas turbines represent roughly 51% of global capacity, according to JPMorgan. That comes with an attractive stream of recurring service revenue, especially as natural-gas-fired power plants run more frequently to make up for the loss of coal-fired power plants.

It is also the top onshore wind installer in the U.S., a market that now has robust and prolonged policy support from the Inflation Reduction Act. Electrification, the unit that sells equipment and software for the grid, is its smallest segment but also comes with high growth and margin potential.

There is always the risk that equipment providers could launch another so-called “arms race,” cutting prices and grabbing market share at the expense of margins. But this seems less likely for some time, at least as competitors like Siemens Energy focus on regaining profitability. Notably, Siemens Energy’s wind unit has suffered due to quality issues and offshore wind’s general troubles, and the company is expected to burn cash this fiscal year and next. What is more, a growing market for electricity overall should alleviate the industry’s land-grab instincts.

GE Vernova’s unenthusiastic market debut could be a buying opportunity for investors looking for an entry point into the electrification theme.

Write to Jinjoo Lee at [email protected]