When General Electric (NYSE:GE) appointed Larry Culp as CEO in 2018, its energy business was at the center of its problems. Less than four and a half years later, it is the main strength of GE Vernova, a company scheduled to spin off on April 2. Here’s a look at the company in light of the recent Investor Day presentation and what investors can expect from the company. .
Management advice
In a previous article about GE Vernova, I described the company’s revenue mix, earnings trajectory, the importance of its wind business and impressive financial profile. Now is the time to turn to management’s updated guidance for the business.
The first thing to note is that the company looks very attractive based on management’s guidance. Let’s focus for the moment on earnings before interest, taxes, depreciation and amortization (EBITDA), playing with the indications in the table below. We will assume an EBITDA margin of 6% in 2024, then 7% in 2025, while using the midpoints of the revenue forecasts. This translates into an increase in EBITDA from $0.6 billion in 2023 to $2.1 billion in 2024, then to $2.5 billion in 2025.
The same goes for strong free cash flow (FCF) growth from just $0.1 billion to $1.6 billion at the midpoint of the 2025 forecast.
Metric | 2022 | 2023 | 2024 | 2025 | By 2028 |
|---|---|---|---|---|---|
Income | $29.7 billion | $33.2 billion | 34 to 35 billion dollars | Mid-single-digit organic growth | Mid-single-digit organic growth |
Adjusted EBITDA margin | (1.4%) | 1.7% | Single-digit high-end | Low end high single digits | ten% |
Free movement of capital | ($0.6 billion) | $0.1 billion | $0.7 billion to $1.1 billion | $1.2 billion to $1.8 billion | Conversion of 90% to 110% of net profit |
Data source: General Electric presentations.
Reason to believe in the prospects of GE Vernova: electricity and electrification
There are the numbers, and then there is the level of confidence in the numbers. The good news is that there is reason to believe that GE can achieve the numbers discussed above. Here is an overview of the EBITDA of each of the three activities in 2023.
Wind power, particularly offshore wind power, is an activity in recovery mode. I’ll discuss this more in a moment; note that management estimates that it will “approach profitability” at the end of 2024, a significant improvement compared to 2023.
GE Company | EBITDA 2023 |
|---|---|
Power | $1.7 billion |
Wind | ($1 billion) |
Electrification | $0.2 billion |
Data source: General Electric presentations.
For the moment I am focusing on electricity and electrification. The power sector is expected to see revenue growth of around 5% in 2024, accompanied by an increase in margins, which could lead to EBITDA of $1.95 billion.
One reason GE can achieve this is because of its $73 billion backlog, which is 81% higher-margin services. This is a significant achievement for GE’s overall turnaround effort, as management has worked to improve its services business in light of the need to adapt to lower growth rates of demand for gas turbine equipment.
On the other hand, the electrification sector is a growing sector and benefits from the trend towards the electrification of everything. Its network solutions and software help integrate renewable energy into the grid and improve overall grid quality and stability. Management considers it a low double-digit growth business in 2024, and a conservative estimate of its EBITDA (based on management guidance) sees it reaching $0.35 billion.
Reason to believe in the prospects of GE Vernova: Wind
As previously noted, the wind business combines a now profitable onshore wind business with a loss-making offshore wind business. The latter has been a tough place in recent years as soaring raw material and logistics costs have crushed the profitability of contracts won in less inflationary times. It is no coincidence that GE’s competitors Vesta and Siemens Gamesa (part of Siemens Energy) both suffered the same fate.
That said, management is reducing the equipment backlog in offshore wind (from $6 billion at the start of 2023 to $4 billion at the end) while being very selective on new contracts in offshore wind and by continuing to improve profitability in onshore wind power, particularly in its main American market.
Management estimates that all wind activities will be profitable in 2025.
What’s next for GE Vernova
Culp and GE Vernova CEO Scott Strazik have taken a pragmatic approach to dealing with the downturn in the gas turbine equipment sector, focusing on gas services and restructuring the wind sector in the face of severe pressures on costs.
As such, GE Vernova is expected to grow its earnings significantly in the coming years. Based on the conservative estimate of $2.1 billion in 2024 EBITDA presented above, assuming an enterprise value of 11 times EBITDA and $4.2 billion in cash, GE Vernova is aptly valued at around $27.3 billion. This is a number to watch when trading begins on April 2.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
3 things you need to know about General Electric’s new business was originally published by The Motley Fool
