Contact: Hassan Zaheer, Power Technology Research, Germany
Press release date: 7th August 2020
- GE beat expectations by reporting a revenue of $17.7 billion, up from the general market expectations.
- GE’s businesses from Alstom’s acquisition concerning power and grid assets in 2018 is underperforming, as focus is being shifted from heavy gas turbines and towards renewable energy as a source of electricity.
- Recognizing offshore wind energy’s potential to grow, GE has invested more than $400 million to develop the most powerful offshore wind turbine that can help achieve its $1 billion target in FCF in the next few years for renewable energy.
- Major emphasis by GE will be laid on making future power and renewable energy FCF’s positive, moving away from oil by completely liquidating its position in Baker Hughes and using these funds to reduce its debt.
Munich, Germany – August 7th, 2020
Recently, GE released its Q2 results, the conglomerate beat expectations by reporting a revenue of $17.7 billion, up from the general market expectations. GE reported a loss of $0.15 per share compared to earnings per share of $0.16 last year at a revenue of $24.41 billion. Analysts expect earnings per share to go down to zero, before picking up in 2021. Furthermore, the company reported an industrial free cash flow loss of $2.1 billion, whereas the company itself, and the general market, expected losses of over $3 billion. However, given a dim macro-economic outlook, especially for its aviation arm, it does not expect to return to positive FCF until at least 2021.
The power segment has caused a lot of problems for GE. The market for heavy gas turbines has shrunk over the last 5 years. The revenue from power is $4.16 billion in Q2, up from FactSet estimates. This not very comforting, however, given the trend of free cash flows and revenues over the last 2 years.
The power division has had a free cash flow of – $2.3 billion in 2018, and – $1.5 billion in 2019. Therefore, more cash is going into these businesses than is coming out.
GE is trying to turn the division into a cash producer by reducing jobs, capital spending and other cost cuts. “While one cannot put the blame on Covid-19 for Q1, there is, however, no denying its business’s impact on Q2, as renewable projects are being delayed” says Sasha Munir.
The chart below shows the revenues from 2017 to 2019 for the Power business:
The revenue from renewable energy is $3.51 billion in Q2. GE is relying on its investments in offshore win energy to pay off. According to GE, “The offshore wind industry is projected to grow from 17 to 90 GW in the next decade, and offshore wind power is expected to account for ~15% of the global wind industry going forward. Recognizing this offshore wind energy potential, GE has invested more than $400 million to develop the most powerful offshore wind turbine.”
For now, it seems that GE renewable energy, which includes its Grid Solutions business, could meet its target of achieving $1 billion in FCF in the next few years, but that is dependent on the offshore wind orders taking off.
The chart below shows the revenue trend for GE renewable energy:
An important metric to look at, especially in the case of GE, is the division-wise free cash flow. Through the free cash flows, the company shows the money left over after capital spending and operating expenses. For GE, the management is aiming for the Power division to generate free cash flows again. For renewable energy, management is hoping that the offshore energy projects will pay off, and margins will match those of its industry peers. The FCF for renewable energy was -$1 billion in 2019. GE has also reiterated its intention to improve its balance sheet. Over the next three years, it plans to completely liquidate its position in Baker Hughes and signal a move away from oil. It plans to use these funds to reduce its debt.
According to CNN Business, investment analysts maintain a buy rating for GE, which has been unchanged since May 2020. GE continues to be a popular choice among investors, with typically 103 million shares bought and sold in a typical day.
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