Summary
- Power was once General Electric's crown jewel, but it has since become the firm's fallen angel.
- This year and next will continue to show investors pain, but the bottom of the cycle should be this year.
- Its backlog size, plus orders and rumored orders, could provide some light to re-assure investors of the long-term picture.
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For several years, the segment of General Electric (GE) that defined the company and served as its cash cow was its Power segment. Up until recently, the segment was the largest on the company's books, and as it has declined in size, impaired by the firm's Alstom acquisition and hit by a decrease in industry demand for its turbines, so too has General Electric fallen. Right now, the management team at the industrial conglomerate continues to work on turning Power around, and at some point in the future, this is very likely to come to pass. That said, recent data suggests that while the segment might have some bright spots in the coming months, it will still probably be quite a while before it can contribute positively to the company's overall improvement.
This should serve as a sign to investors, perhaps more than anything else, that General Electric is not the kind of company investors should invest in today hoping to make an easy buck over the next year. No, while that is possible, the business is one where investors need to take a long-term approach to it if they want to play here. For those who do adopt this mindset, where patience is exercised, the upside potential could be significant in size.
Power continues to take a beatdown
Anybody who has dug into General Electric's financials in recent months (or even the past year or two) will know that Power is not what it used to be. Back in 2016, for instance, the segment generated revenue of $35.84 billion, and off of those sales, it saw segment profits of $4.19 billion. In the three yearsending 2016, revenue averaged $30.83 billion per annum, with average segment profits of $4.56 billion per annum. In 2017, however, industry weakness took hold, and when combined with the effects of less-than-stellar M&A activity, sales and profits took a dive.
In 2017, revenue came in at $34.88 billion, but the segment's overall profit came out to just $1.95 billion, less than half of where it was in 2016. Last year was even worse, with the segment's revenue totaling $27.30 billion and it generating an aggregate loss for the year of $808 million. The single biggest contributor to these problems, according to management, was a slide in the number of heavy-duty gas orders received, with the company estimating a range of 25 to 30GW (gigawatts) per annum for the foreseeable future compared to more than 35GW seen in some prior years.
For investors hoping that 2019 was going to look any better, the answer appears to be no. In the first quarter of this year, for instance, revenue generated by Power came out to $5.66 billion, down from the $7.22 billion seen the same time last year. Segment profits, meanwhile, are at only $80 million this year compared to $273 million the same time last year, even as management has touted progress in reducing the firm's structural costs.
Perhaps worse than revenue and profits are the bookings generated by the segment. During the first quarter, Power saw orders come in worth $4.8 billion. This represents a sizable decline compared to the $5.6 billion in orders seen the same time last year. Fortunately, even though backlog for the segment has dropped $3 billion in the span of just one year, it does still stand at $92.9 billion, so there is plenty to keep the segment afloat. At some point, though, backlog must at least stabilize, if not increase, in order for the segment to fare well.
