SBT has suggested in the past that GE would come back stronger and smarter someday. We didn’t think it would take this long, but some analysts think it may be close to a decent recovery, given its depth of struggles the past almost two years.
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.
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, but every 1% change in margin (relative to sales) will push segment profits up by over $100 million annually.
One analyst reported that “It’s important to note that 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.”
Another added 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.”
GE sales and segment profit results show that 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.
Seeking Alpha’s Daniel Jones adds that “GE’s Renewable Energy 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.”
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. The bottom line for some analysts is the fact that management mentioning 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.
