When General Electric (GE 0.68%) appointed Larry Culp as CEO in 2018, its power business was front and center of its problems. Less than four and a half years later, it's the core strength of GE Vernova, a company set to be spun off on April 2. Here's a look at the business in light of the recent Investor Day presentation and what investors can expect from the company.
Management's guidance
In a previous article on GE Vernova, I outlined the company's revenue breakout, earnings trajectory, importance of its wind business, and impressive financial profile. Now, it's time to turn to management's updated guidance for the company.
The first thing to note is that the company looks highly attractive based on management's guidance. Let's focus on earnings before interest, taxation, depreciation, and amortization (EBITDA) for the moment, playing with the guidance in the table below. We'll assume a 6% EBITDA margin in 2024 and then 7% in 2025 while using the midpoints of revenue guidance. That results in EBITDA rising from $0.6 billion in 2023, to $2.1 billion in 2024, and then $2.5 billion in 2025.
It's a similar story for strong free-cash-flow (FCF) growth from just $0.1 billion to $1.6 billion at the midpoint of 2025 guidance.
|
Metric |
2022 |
2023 |
2024 |
2025 |
By 2028 |
|---|---|---|---|---|---|
|
Revenue |
$29.7 billion |
$33.2 billion |
$34 billion to $35 billion |
Mid-single-digit organic growth |
Mid-single-digit organic growth |
|
Adjusted EBITDA margin |
(1.4%) |
1.7% |
High end of mid-single digits |
Low end of high single digits |
10% |
|
Free cash flow |
($0.6 billion) |
$0.1 billion |
$0.7 billion to $1.1 billion |
$1.2 billion to $1.8 billion |
90%-110% conversion from net income |
Data source: General Electric presentations.
Reason to believe in GE Vernova's outlook: Power and electrification
There are the numbers, and then there's the level of belief in the numbers. The good news is there's reason to think GE can hit the numbers discussed above. Here's a look at the EBITDA for each of the three businesses in 2023.
Wind, notably offshore wind, is a business in recovery mode. I'll discuss it more in a moment; note that management believes it will be "approaching profitability" at the end of 2024 -- a significant improvement over 2023.
|
GE Business |
2023 EBITDA |
|---|---|
|
Power |
$1.7 billion |
|
Wind |
($1 billion) |
|
Electrification |
$0.2 billion |
Data source: General Electric presentations.
I'm focusing on power and electrification for now. The power business is expected to grow revenue by mid-single digits in 2024, with margin expansion in tow, which could lead to $1.95 billion in EBITDA.
One reason GE can get there comes down to its $73 billion backlog, containing 81% of higher-margin services. That's a significant success story for the overall GE turnaround effort, as management set about improving its services business in light of the need to adjust to lower gas turbine equipment demand growth rates.
In contrast, the electrification business is a growth business and a beneficiary of the electrification of everything trend. Its grid solutions and software help integrate renewable energy into the grid and improve the quality and stability of the grid in general. Management sees it as a low-double-digit growth business in 2024, and a conservative estimate of its EBITDA (based on management's guidance) sees it rising to $0.35 billion.
Image source: Getty Images.
Reason to believe in GE Vernova's outlook: Wind
As previously noted, the wind business combines a now-profitable onshore wind business and a loss-making offshore wind business. The latter has been a tough place in recent years, as soaring raw material and logistics costs have crushed profitability on contracts won in less inflationary times. It's no coincidence that GE's rivals Vestas and Siemens Gamesa (part of Siemens Energy) have both suffered the same fate.
That said, management is working down the equipment backlog in offshore wind (from $6 billion at the start of 2023 to $4 billion at the end of it) while being highly selective over new contracts in offshore wind and continuing to improve profitability in onshore wind, notably in its core U.S. market.
Management believes the overall wind business will be profitable in 2025.
Image source: Getty Images.
What's next for GE Vernova
Culp and GE Vernova CEO Scott Strazik took a pragmatic approach to deal with the slowdown in the gas turbine equipment business, focusing on gas services and restructuring the wind business in the face of severe cost pressures.
As such, GE Vernova is set up to increase profit significantly in the coming years. Based on the conservative estimate of $2.1 billion in EBITDA in 2024 shown above, assuming an enterprise value of 11 times EBITDA and $4.2 billion in cash, GE Vernova is fairly valued at around $27.3 billion. That's a number to look out for when it starts trading on April 2.
