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How Bears Look at General Electric’s Gas Turbine Issue

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Bears’ case is strong

The markets were surprised when General Electric (GE) retained the GE Power segment at its investor update on June 26. Recently, the Power segment has caused the most woes for General Electric. On September 20, GE Power confirmed that a technical glitch exists in one of its gas turbines at Exelon’s (EXC) power plant at Texas. The situation got worse when General Electric stated that the problem could impact the other models of the company’s advanced gas turbines.

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Analysts’ take on General Electric’s Power issue

The turbine trouble came in as a shock since it involved General Electric’s HA-class turbine. General Electric relied extensively on the Power segment’s revival of the HA-class turbine, which garnered solid orders across the globe. As a fast-selling product, GE Power was expediting deliveries of the HA-class turbines. Out of the total 82 orders, the company has shipped 51 units. So far, 30 HA-class turbines have been commissioned at customers’ sites.

General Electric’s famous bear, JPMorgan Chase’s Stephen Tusa wrote a note to his clients titled “Another Shoe Drops” on September 20. He wrote, “The impact on ‘asset value’ from a failure at GE’s U.S. H-frame launch customer, which tough to estimate, represents a negative development for a company that has little wiggle room for more ‘shoes to drop,’ counting on V-shape recoveries in long cycle businesses to reduce leverage that is already well above levels that support the standing rating.”

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Tusa also wrote, “While the debate can rage around the structural versus cyclical nature of the power industry downturn is as bad as it seems, we believe there should be no longer any doubt that GE Power has company-specific issues. Not only due to the decline in the profit pool from its large installed base of services, but now around the H-frame technology.”

In the second quarter, GE Power’s revenues and earnings fell 19% and 58%, respectively, on a YoY (year-over-year) basis. The current turbine-related issues could also impact GE Power’s cash flows in the quarters to come. As a result, General Electric might struggle to meet its free cash flow target of $6.0 billion in 2018.

ETF investment

Investors who are optimistic about industrial sector stocks could consider investing in the Industrial Select Sector SPDR Fund (XLI). XLI has 8.35% weight on Boeing (BA), 5.24% on 3M (MMM), and 5.12% on Honeywell International (HON). XLI has a 4.26% weight on General Electric.

Next, we’ll discuss GE Power’s new product offering.

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