What happened
Shares in General Electric (GE 8.28%) were up 2% by 10 a.m. ET today, significantly outperforming the S&P 500 index. However, the reason for the move might surprise you. It's not about GE per se; instead, it's a read-across from some positive commentary on a rival coming from HSBC analysts.
The analysts upgraded Siemens Energy to a buy from a hold, citing support for the company's plans to take complete control of Siemens Gamesa – a company that, along with Vestas, is GE Renewable Energy's main competitor in wind power in the West. The analysts believe Siemens Energy can restructure Siemens Gamesa and benefit from buoyant end demand in the industry.
So what
In recent years, all three leading players have had significant issues with soaring raw material and logistics costs. Consequently, they've suffered margin pressure, as they are executing on orders previously won under conditions of highly competitive pricing.
However, all three are restructuring and actively raising new order pricing as they work through difficult backlogs. As such, the upgrade from HSBC (for Siemens Energy) should be welcomed by GE investors because it implies improving conditions for the wind power industry.
As discussed previously, the loss-making GE Renewable Energy is critical to the industrial company's future, as it's the business set to improve profitability the most over the next couple of years.
Now what
GE's management believes GE Renewable Energy will go from a $2.2 billion loss in 2022 to being profitable in 2024. A vital part of the plan is improving order pricing as it works through a challenging backlog, notably in offshore wind power.
If HSBC is correct, the market should improve, and Vestas, Siemens Gamesa, and GE Renewable Energy should start to see profit margins pick up in the next few years. That would be good news across the industry.
