XJNGF - GE Vernova: Optimism Has Grown Ahead Of Fundamentals

2024-05-07 10:17:17 ET

Summary

• General Electric spun off Vernova in early April with the new company active in the manufacturing of power generators and wind turbines as well as electrification solutions.
• With Power a stable but slow growing division and Wind's profitability severely challenged in the near term, I view Electrification as the company's most promising asset.
• While I estimate significant tailwinds from increased electricity consumption due to AI and data centers, the segment thus far remains immature and can't compete on scale with global peers.
• Through 28E Vernova trades up to ~200% above closest peer Siemens Energy on EBITDA which I don't find fully justified given comparable market exposure and margin trajectory.
• Initiate shares at Underweight as I remain cautious on Wind's status as a "show-me" story in profitability and an overextended valuation following a ~45% surge since spin-off (PT $150/sh).

In early April, the company then still known as General Electric ( GE ) completed the last step in CEO Larry Culp's multi-year journey to slim down and refocus the behemoth he inherited. With GE Healthcare having been spun-off earlier and GE Aerospace as legal successor, April 3 saw the final spin-off of the company's former power and renewables segments as GE Vernova ( GEV ), aiming to better capitalize on what management believes are exciting market opportunities in the energy transition.

And while I am very positive about GE Aerospace, as laid out in my initiation note and Q1 review , I am less optimistic on Vernova as I see significant execution risk in what is essentially a turnaround story. GE's Power and Renewable Energy segments, recently due to significant losses and cost overruns in its offshore wind division and previously due to weak demand for its gas turbines, have been a drag on corporate level performance for most of the recent years. The new company does undeniable have the opportunity to capitalize on some strong mid and long-term tailwinds in both rising electricity demand and the broader energy transition, which I believe supports the majority of its investment thesis; however, I remain cautious on ongoing profitability issues in Wind and the current lack of maturity in its Electrification division....

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