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Burgess COMMENTARY Peter Burgess | ||
General Electric's Shake-Up Will Add Value
Summary
Earlier this year, the management team at General Electric announced plans to change around its Renewable Energy segment.
This plan will help the conglomerate to reduce costs and position it to better capitalize on opportunities.
Industry data, combined with this shake-up, suggests the firm may finally begin taking solar opportunities seriously.
If so, this would position the business for greater growth in the years to come.
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Change can be a great thing, especially when that change involves a struggling conglomerate very much in need of a way to do things differently than it had in the past. That is why, when the management team at General Electric (GE) announced plans to restructure its Renewable Energy segment, I was thrilled. Over the past year or so, the company has referred to the segment as a $10 billion startup focused on meeting future energy needs, but while growth has been impressive over the past few years, the firm never really targeted Renewable Energy as a key part of the enterprise. Now, with these changes that will consolidate some operations and lead to growing margins, management has taken a great step in the right direction and, if all goes well, will pave the way for additional value creation for investors down the road.
A look at the news
In a recent press release, the management team at General Electric said that they will be taking their Renewable Energy segment, which consists largely of wind and hydropower operations, and add to it various operations under its grid solutions business as well as its hybrid energy products and services like solar and energy storage. In the past, I have written about the firm’s solar operations, which I recommend that you read here, and I have written about some of its grid operations (insofar as they relate to the company’s exposure in Sub-Saharan Africa), which I recommend you read here.
According to management, this maneuver will enable the conglomerate to cut down on costs, in part by “eliminating its headquarters layer” and pushing up its regional teams. This is an interesting strategy, because management is basically saying that much of upper management in the segment is fat that can be trimmed. It’s difficult to say precisely how much of an impact this will have on the business until we see things in action, but we do know that every 1% change in margin (relative to sales) will push segment profits up by over $100 million annually.
Unfortunately, there is a lot of ambiguity regarding what the new Renewable Energy segment will ultimately look like. This is because financials have not been provided for things like its grid operations or for solar. We do know, for instance, that the grid solutions operations, which sell high-voltage equipment, power electronics, and automation and protection equipment (as well as provide software solutions), is part of a larger sub-segment that, on the whole, generated $10.08 billion in revenue in 2017, but breaking things down further than this is, at this time, impossible.
The biggest piece of information that we do have is that investors should expect for the segment to become more relevant to the enterprise and to shareholders, especially as Transportation and Healthcare get divested and as management somehow unwinds the rest of the firm’s Lighting segment. This increased size over what exists today will, hopefully, entice management to place a greater emphasis on Renewable Energy.
None of this is to say, by the way, that today we don’t have some sort of idea as to how big the segment will be. After all, the bulk of the operations, which is the business’s current Renewable Energy segment, does have its own financial figures reported. Sales and segment profit results for it between 2013 and 2018 are interesting. Back in 2013, the segment made up just $4.82 billion of General Electric’s revenue (barely enough to really be considered a separate segment), and it generated $485 million in segment profits.
By 2017, sales grew to $10.28 billion, while segment profits had hit an all-time high of $727 million. In the conglomerate’s recent financial results for its 2018 fiscal year, changes to the company resulted in 2017’s revenue for the segment being revised down to $9.21 billion, while 2018’s figures came in at $9.53 billion. Profits under these two years were $583 million and $287 million, respectively, indicating some underperformance for 2018 on the bottom line, but continued growth on the top line on an adjusted basis.
*Taken from General Electric
On the whole, the Renewable Energy we know today is a fairly diversified set of operations. 53% of its revenue, for instance, came from outside of the US back in 2017. Of its total sales, 86% were attributable to onshore wind operations. Only 3% came from offshore wind, which is a space with little-perceived upside in the years to come, and the remaining 11% of the business’s revenue came from hydropower. While wind has been and will remain a meaningful part of the renewable energy strategy across parts of the world, my hope is that management’s move to restructure the firm will open the door for something even greater.
This could be setting General Electric up for a nice upside
In my aforementioned article I linked to regarding the company’s current solar operations, I made the case that solar offered the company significant upside potential, even more than its large and widespread onshore and offshore wind solutions. Today, I believe that to be more true than ever. According to the IEA (International Energy Agency), for instance, it’s believed that between 2018 and 2023, the world will add between 1TW (TerraWatt) and over 1.3TW of renewable energy capacity. In 2017 alone, the figure was 178GW (GigaWatts).
*Taken from the IEA
Of this expansion, it’s believed that wind will be a meaningful contributor, adding between 324GW and 398GW. Of this expansion, only about 10% is forecasted to be offshore, with the rest being onshore. To put this in perspective, in the years 2011 through 2017, we saw additional capacity come online globally that totaled 295GW. This is clearly a great place for General Electric to be if it wants some growth, while hydro is likely to present investors with fewer prospects. Between 2011 and 2017, hydro additions globally came out to only 210GW. Between 2018 and 2023, this is expected to fall to just between 125GW and 156GW.
Any sort of additional revenue management can capture from wind and hydro will be great for investors, but the real prospects lie in solar. Between 2011 and 2017, 327GW of capacity in solar came online. Between 2018 and 2023, this should accelerate, with additional capacity of between 575GW and 714GW. These figures, in fact, imply that over half (perhaps close to 60%) of global renewable energy capacity over the next few years will be in the form of solar.
Takeaway
The fact that management mentioned solar as one of the sets of operations being moved into Renewable Energy is encouraging, as is the fact that management is placing greater focus on the segment in general. By capitalizing on an undeniable trend, and adding to it the firm’s digital services and grid solutions that can make any sort of large offering even more appealing, the right steps are being taken for the business to see Renewable Energy’s share of revenue expand. If cost-cutting measures are also effective, this low-margin growth machine, by establishing itself as an early leader in the space, could be setting investors up for years of attractive value creation.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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| Feb. 13, 2019 12:00 PM The text being discussed is available at | https://seekingalpha.com/article/4240582-general-electrics-shake-will-add-value and |