5 Things You Need to Know About General Electric's Big Spinoff

The General Electric (GE 3.09%) name is set to disappear. The forthcoming spinoff of GE Vernova (trading under the ticker GEV) in early April will result in the remaining company trading as GE Aerospace. The change will create two dramatically different companies, with GE Vernova arguably being the most interesting, albeit the weaker. Here's what GE shareholders need to know about the company, which will receive stock soon.

GE Vernova is a mix of three business

The following chart shows GE Vernova's revenue breakout in power, wind, and electrification segments. It's color-coded to separate each segment and then broken into each constituent business. The chart shows the particular importance of gas power (gas turbines and services), onshore wind (wind turbines), and grid solutions (including high voltage direct current, or HVDC, solutions to connect offshore wind farms).

The businesses are complementary because gas is a transition fuel source as the world moves toward renewable energy (wind power and solar) and will act as a support given the intermittent nature of renewable energy. Meanwhile, a large part of the growth in demand for grid solutions is coming from offshore wind farms and the need to connect renewable energy to the grid.

Data source: GE presentations. Chart by author.

Offshore wind is the problem child

The revenue split above doesn't reflect each segment's profit disparity, including the significant losses in offshore wind. The table below breaks out organic earnings before interest, taxation, depreciation, and amortization (EBITDA). It shows how losses in wind are offset by solid profit in power, with electrification contributing in 2023 as well.

Digging deeper into the numbers for the wind segment, onshore wind lost money in 2023 and turned profitable in the third quarter, but the offshore wind business lost $1.1 billion last year.

Data source: GE presentations.

Offshore wind is where the battle will be won

Zeroing in on the wind segment, specifically onshore wind, management's conscious decision to work through less profitable contracts, implement lean manufacturing techniques, and exhibit more discipline in the pricing of contracts while refocusing the business on its core North American market is paying off. The onshore wind business is now profitable, and management expects to deploy a similar game plan with offshore wind.

The offshore wind industry has been beset with issues in recent years, such as soaring raw material and logistics costs. Offshore wind farms are highly complex logistically and require significant transportation of bulky components. This has led to losses on projects won in less inflationary times.

Management is working through the backlog in offshore wind. According to GE Vernova CEO Scott Strazik, offshore wind, after starting 2023 with $6 billion of backlog, will begin 2024 "with an equipment backlog down to roughly $4 billion, which we expect to largely complete over the next two years." He promised that the company will "be highly selective on adding to the backlog."

Image source: Getty Images.

As such, investors should expect significant improvement in profit in the offshore wind area and, in turn, the wind segment and GE Vernova overall in the coming years.

The game plan for offshore wind sounds familiar, as it's what Strazik implemented at GE Gas Power and GE Power in recent years (see table above for EBITDA improvement). The leader responsible for the recent improvement in the onshore wind business, Victor Abate , will be appointed as the CEO of the overall wind business upon the spinoff.

Investment-grade debt

Management has already achieved its aim of preparing both GE Aerospace and GE Vernova to have investment-grade debt. That's excellent news for GE Vernova, as it will start life as a loss-making company. Both Fitch and S&P Global Ratings gave GE Vernova a "stable" outlook and noted the low debt levels, citing adjusted debt to EBITDA levels below 1.

Both agencies expect solid performance at power (backed by its 70% revenue share in services) and profit improvement at offshore, leading to overall profit and cash flow improvement.

Image source: Getty Images.

GE Vernova in 2024 and beyond

Management's guidance for GE Vernova in 2024 calls for revenue to grow from $33.2 billion in 2023 to $34 billion to $35 billion in 2024, with adjusted EBITDA margin rising from 2.4% to the "higher end" of mid-single-digit growth, and free cash flow of $0.7 billion to $1.1 billion, with significant cash flow growth to come.

With that guidance, GE Vernova looks set for a solid start to life as a stand-alone company.