Another General Electric Business May be 'Gone With the Wind' -- Barrons.com
By Al Root
JPMorgan analyst and longtime General Electric bear Stephen Tusa thinks that GE's onshore wind-power business will decline in 2021. And he sees that as another headwind for a company trying to turn around operations and reclaim its once prominent position as a leading U.S. industrial manufacturer.
Tusa wrote in a research report on Monday that the long-term outlook for wind power is impaired by the expiration of U.S. government tax credit for renewable-power generation at the end of 2020. "Renewables is an important $10 billion of revenues that we believe is largely overlooked, " he said the report cleverly titled "Gone with the Wind."
The back story. General Electric (ticker: GE) renewable-power generation is mainly a onshore wind-power turbine manufacturing and service business. It employees almost 23,000 people and more than 40,000 of its turbines are in operation around the world.
According to CEO Larry Culp, renewable power will be GE's fastest-growing business in 2019 -- a good thing -- even though cash flow in the division will be negative.
"We're going to see negative cash in that business in part because of the nature, the progress, collections and disbursements in and around the demand that we're seeing in the U.S.," Culp said at an investor conference in June. "[Our team has] done a very nice job driving productivity. We have some of the project execution challenges there, but I don't think we feel like we are undersized even though we're third overall in wind."
GE is third in wind behind Siemens (SIE.Germany) and Vestas Wind Systems (VWS.Denmark)
What's new. Tusa thinks investors are too focused on 2019 growth and not focused enough on 2021 declines.
"Both Vestas and Siemens, as well as many industry consultants, expect 2019 to be a good year," Tusa said in his report. He also wrote that demand for wind power turbines will be up again in 2020, before the tax-credit expiration. He sees the market crashing 30% in 2021.
Looking ahead. GE has said it has some ability to manage through the renewable-power declines after 2020 by reducing costs to operate the wind turbines it services, thus helping its renewable-energy customers compensate for the loss of tax credits and continue to produce power at an attractive cost.
"We expect additional opportunities to "repower" existing wind turbines, " read the company's 2019 annual report. "Repowering allows customers to increase the annual energy output of their installed base, provides more competitively priced energy and extends the life of their assets." GE expects the repower market to remain robust beyond 2019.
So, Tusa may be correct in pointing out that power has a 2021 headwind, but investors probably won't care yet. GE has enough on its plate turning around the larger natural-gas power-generation business. Still, investors eventually will have to answer the question about what renewable power is worth.
Vestas can help answer that question. Vestas is a stand alone wind-power generation business and trades for about 8.6 times estimated 2019 Ebitda, or earnings before interest, taxes, depreciation and amortization.
GE stock is up 41% year to date, better than the 12% return of the Dow Jones Industrial Average. The gain came mostly in the first quarter; the stock is up 2.4% in the second quarter, still a little better than the 1.2% total return of the Dow.
Tusa rates GE shares Underperform, with a $5 price target, the lowest on Wall Street.