When Larry Culp assumed the role of CEO at General Electric in 2018, the company faced substantial challenges, particularly in its power business. Fast forward less than four and a half years, and the once-troubled power segment has transformed into the core strength of GE Vernova, a company scheduled to be spun off on April 2. This analysis delves into the recent Investor Day presentation, shedding light on the business and providing insights into what investors can anticipate from the upcoming spin-off.
A prior article on GE Vernova outlined the company's revenue distribution, earnings trajectory, emphasized the significance of its wind business, and highlighted its impressive financial profile. This discussion now shifts its focus to the updated guidance provided by the management.
One noteworthy aspect is the compelling attractiveness of the company based on management's guidance. Specifically, examining earnings before interest, taxation, depreciation, and amortization (EBITDA), the analysis centers around the figures presented in the table below. Assuming a 6% EBITDA margin in 2024, progressing to 7% in 2025 and utilizing the midpoints of revenue guidance, the projected EBITDA sees an ascent from $0.6 billion in 2023 to $2.1 billion in 2024, culminating at $2.5 billion in 2025.
A parallel narrative unfolds regarding robust growth in free cash flow (FCF), rising from a modest $0.1 billion to $1.6 billion at the midpoint of the 2025 guidance.
While the numbers provide a compelling story, it's equally crucial to gauge the level of confidence in these projections. Encouragingly, there are grounds to believe that GE can achieve the discussed figures. The breakdown of EBITDA for each of the three businesses in 2023 is particularly illuminating.
Of note is the recovery trajectory of the wind business, especially in offshore wind. Further elaboration on this aspect will follow shortly, underscoring management's optimism as they anticipate the business to be "approaching profitability" by the close of 2024 – a noteworthy improvement from the conditions observed in 2023.
The current focus is on power and electrification within the context of GE Vernova. Projections for the power business anticipate mid-single-digit revenue growth in 2024, coupled with margin expansion that could result in $1.95 billion in EBITDA.
A key contributor to this optimistic outlook is the $73 billion backlog, with 81% comprising higher-margin services. This success story underscores GE's broader turnaround efforts, particularly in enhancing its services business to adapt to lower demand growth rates for gas turbine equipment.
Conversely, the electrification business is positioned for growth, benefiting from the trend toward electrification across various sectors. Its grid solutions and software play a vital role in integrating renewable energy into the grid and enhancing its quality and stability. Management envisions this as a low-double-digit growth business in 2024, with a conservative EBITDA estimate of $0.35 billion based on their guidance.
Addressing the wind business, it combines a now-profitable onshore wind segment with a loss-making offshore wind segment. The challenges faced by the offshore wind business, including increased costs, have affected profitability, a situation also experienced by competitors like Vestas and Siemens Gamesa. GE has actively managed the offshore wind backlog, reducing it from $6 billion at the start of 2023 to $4 billion by year-end. The company is selectively pursuing new contracts in offshore wind, emphasizing profitability improvements in onshore wind, particularly in the core US market. Management anticipates overall profitability in the wind business by 2025.
Both Culp and GE Vernova CEO Scott Strazik have taken a pragmatic approach to address challenges in the gas turbine equipment business, concentrating on gas services and restructuring the wind business amid cost pressures. This strategic positioning positions GE Vernova for significant profit growth in the coming years. Based on a conservative EBITDA estimate of $2.1 billion in 2024, assuming an enterprise value of 11 times EBITDA and $4.2 billion in cash, the fair valuation for GE Vernova stands at around $27.3 billion. Investors should keep an eye on this valuation when the company commences trading on April 2.
As long as the price is above 150.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 166.21
- Take Profit 1: 175.00
- Take Profit 2: 185.00
Alternative scenario:
If the level of 150.00 is broken-down , follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 150.00
- Take Profit 1: 140.00
- Take Profit 2: 130.00
