GE Stock Could Plunge From Chinese Competition, Analysts Says -- Barrons.com
By Al Root
Bearish General Electric (ticker: GE) analysts won't stop worrying about management's ability to turn around the company's ailing power division. Now, they are focusing on potential China-based power competition.
JPMorgan and Gordon Haskett both rate General Electric stock (ticker: GE) Sell and have written about possible Chinese plans to introduce a new competitor into a market with just three players -- GE, Siemens (SIE. Germany), and Mitsubishi Heavy Industries (7011. Japan). Such a rival could mean GE could miss out on the massive Chinese market for electricity generation, which could boom as the world's second-largest economy shifts to natural gas and away from coal.
Bullish analysts, of course, don't believe the power business's turnaround will depend on Chinese demand far in the future, especially when a Chinese competitor likely couldn't come to market until 2023 at the earliest. The debate over power illustrates the complex challenges GE faces, and the complexity of rating the stock itself.
At the Electrical Products Group conference on May 20, Siemens made news by suggesting China might create a so-called national champ selling turbines that generate electricity by burning natural gas -- a cleaner, less carbon intensive fuel than coal.
"[China in 2025] would be by far the single biggest market for the combined cycle gas [power generation]," Siemens CEO Joe Kaeser said, adding that the Chinese government is combining the activities of a number of companies, including Harbin Electric (1133. Hong Kong), which makes power electric equipment. "You can see the typical Chinese model already working to create a national champion."
Tuesday, Haskett analyst John Inch took another, deeper look at the Chinese power market and what it means for GE Power.
"With GE increasingly shut out of the Chinese power market, we believe the advent of [Chinese turbine export capability] poses a steep challenge for GE to ever regain and hold significant power sales growth and profitability," Inch said.
GE is already smaller in China, because antitrust regulators required asset sales when GE bought Alstom's power turbine business in 2015. GE sold power assets to Italy's Ansaldo, which was bought earlier this year by Hitachi (6501. Japan) -- another competitor GE has to worry about.
All that has left GE's power business in China about half the size it once was. Nonetheless, growth in Chinese demand is still critical to the future profitability of the division, according to Inch.
"Next year [natural gas power generation in China] will represent almost 10% of [total thermal power generation]," Inch explained to Barron's. "China remains a very large steam-coal fired power market -- that is why the transition of about 400 gigawatts from coal to gas will represent a massive future opportunity for GE [and other power equipment makers]."
Last month at the EPG conference, CEO Larry Culp indicated that China isn't critical to restoring GE power to profitability. Some bullish GE analysts agree.
"Chinese competitors have been on GE's radar for some time, RBC analyst Deane Dray wrote last month after the EPG conference. He doesn't think the Chinese threat will affect GE for several years, and that the company is being conservative planning future power demand. "[GE] management isn't baking in any recovery in [the power division's] addressable markets in [2019 to 2021]."
New turbine demand is likely to be 25 to 30 gigawatts for the next few years, according to Dray. Global demand for new thermal power generation was 34 gigawatts in 2017.
Dray rates GE shares Buy with a $13 price target. He values GE by looking at the company's different divisions, such as aviation and power, and assigning different valuation multiples to each division based on his estimated 2020 earnings.
Bearish JPMorgan analyst Stephen Tusa, by contrast, has a $5 target on GE shares. He values GE based on his 2021 free cash flow estimate and doesn't believe GE's cash flow generation will improve for years.
So, in one respect, the debate among the bulls and the bears is all about timing. Dray isn't wrong to focus on 2020, looking beyond that can get hard to predict. And Tusa isn't wrong to try to predict earnings after all the extensive restructuring is complete. He doesn't want JPMorgan clients caught holding an expensive stock at the end of 2020.
The debate won't end soon, and both sides probably think they are winning. The bulls, when claiming victory, can point to GE stock's 36% gain in 2019, far better than the 9% gain of the Dow Jones Industrial Average this year.
Bears can respond that GE shares are still down almost 30% from their 52-week high while industrial peers in the Industrial Select Sector SPDR ETF (XLI) are only off 7% on average from the 52-week high.