Trouble looms in the Power business
Although General Electric (GE) had the most gas turbine orders last quarter, the deal situation hasn’t always been attractive for the industrial conglomerate.
GE’s CEO, Larry Culp, hinted earlier that previous managers had focused on obtaining more orders to increase the company’s market share. However, some of the terms weren’t attractive or profitable, which cost GE millions of dollars.
GE had to write off $22 billion worth of Power assets last year to reflect these realities. In 2018, the company’s Power division registered falls in order value and revenue of 23% and 22%, respectively. The division recorded an operating loss of $808 million last year compared to an operating profit of $1.95 billion in 2017.
Once GE’s primary growth engine, the Power division has been struggling to cope with changing industry dynamics. The division has been underperforming for years due to falling demand for fossil fuel–based power plants as energy-generating companies increasingly rely on solar and wind energy and power conservation. GE’s Power division’s performance depends on the gas and coal turbine market.
In the last few years, energy utilities such as Dominion Energy (D) and Vistra Energy (VST) have been focusing on renewable sources and have reduced their dependence on fossil fuel–based power plants.
Since taking charge as CEO in October last year, Culp has undertaken several initiatives, including a management change and splitting the Power division into two different units to turn its ailing business around. His efforts have shown positive results, as GE’s Power business reported an $80 million profit in the first quarter.
Investors have been optimistic about Culp’s restructuring initiatives, as we can see in GE’s stock price, which has soared 41.8% YTD (year-to-date) and has outperformed all the major US indexes. The NASDAQ, the S&P 500, and the Dow Jones have risen 16.6%, 13.1%, and 9.5%, respectively, YTD.
The stock has also outpaced the returns of the Industrial Select Sector SPDR ETF (XLI), which tracks the performances of industrial-sector stocks in the S&P 500. The ETF and GE’s peers Honeywell (HON) and United Technologies (UTX) have gained 16.2%, 27.3%, and 25.8%, respectively, YTD.