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8 November 2019

GE investors pile back in – but are any of its problems over yet?

GE’s Q3 results are in, and US investors seem to have fallen back in love with the stock, with it rising about 9% on the day. This is despite a fairly dramatic fall in its power segment, which is being somewhat offset by rises in renewables, aviation and healthcare. Renewables were up 13% to $4.4 billion on the back of sales mostly of onshore Cypress wind turbine sales and not the later long-term order book of its brand new Haliade-X offshore turbine, which is driving additions to its order book.

GE reported orders of $22.5 billion down 5% organically, and revenues of $23.4 billion, just about flat, but a profit margin up from 8.5% to 10% in the quarter, with a net loss of $9.4 billion compared to $22.8 billion this time last year, with much of that loss down to companies it is selling off currently (around $ 8 billion) and only $1.3 billion in losses from continuing operations. We have to say things are a lot tidier and easier to see now.

Naturally the company executives painted a picture more to do with that inflated orderbook in renewables, wanting to talk about the sexy Haliade-X 12 MW turbine, but that will influence its figures in 2021 and 2022 and not today.

GE took its largest onshore Cypress wind turbine order to date, and it reported a backlog of $16.4 billion for equipment and $10.9 billion in services, a rise of $4.5 billion from this time a year ago for its renewables segment.

But also now in the renewables segment is Grid Solutions and the wind turbine order book hides a natural weakness here. People talk ad nauseum about the grid having to be improved, upgraded and digitized to make way for renewable energy, but does it really? Surely the major trend in the renewables sector are Power Purchase Agreements, because that’s how renewables get to market. All the capacity markets tend to deliberately disadvantage renewables against fossil fuels, claiming that their intermittency makes them less usable. Which is why they are sold to energy retailers and direct to major industrials by power purchase agreements.

The fossil fuel loving energy firms don’t want to upgrade their grid, because it would mean sharing more with renewables. This is yet another way that renewables are kept out of the market, but it also means that spend on new transmission is also seen as pro-renewables and almost frowned upon.

This is not a global problem, but it will be enough if the USA alone continues down this route, so that local real time energy markets remain biased against wind, for GE to continue to sell less Grid upgrades.

GE recognized a non-cash impairment of $0.7 billion downrating the goodwill in its Grid Solutions equipment unit. And it did much the same for its Hydro reporting unit, which CEO Larry Culp says is heading for a recovery, but there is no detail of its order book in this sector.

To us investors need to see a business which has its second largest segment (Power) reliant on the continuation of fossil fuels, specifically natural gas turbines, for a major part of its business, and see that this is not going to turn upwards any time soon. As climate change protest turns into government policy around the world, this market has a time bomb strapped to it. Much the same has to be true of its dominant $8 billion plus aviation business – not only is the Boeing 737 Max debacle sitting over its head, but the investment that will be required to take a major global polluting industry and turn it into electricity or hydrogen based flight, is a huge investment which GE could take on as an opportunity. And yet it has shown no signs of this. It just hopes that the attitude to flight will never change, when there are real indications that it will.

It is similar in the grid market – GE could become a leader in digital grid but needs to probably acquire a few businesses, and spend on R&D, but instead sells what it has already as a future solution, when it’s an historic one. It has experienced order declines in the High Voltage Direct Current (HVDC) product lines. Are they coming back? Perhaps.

GE still has the Hitachi partnership on nuclear – going nowhere, and it has steam turbines, gas CCGT, and conventional aircraft jet engines – and they are all varying levels of liability, eventually, not assets.

But after the worries surrounding GE’s $5 billion a quarter healthcare business, with claims that it will be hit with huge future payouts on its policies, which would eat all of its cash, and that its accounts were therefore fraudulent, investors are just happy not to have more of the same. But investors have piled back into the stock, possibly averaging down to make up some of the losses they have experienced in GE.

Those problems remain with it, and to us this is a business with 75% of its sectors threatened by the future, and only renewables squeaky clean, representing a huge opportunity. The IEA said this week wind turbines were a $1 trillion opportunity, and that should have helped.

Meanwhile the ending of the Production Tax Credit (PTC) cycle for wind projects in the US could even see this renewables business hampered in the short term, we can see no reason for investors optimism on any of GE’s horizons.