Is Renewable Energy the Key to General Electric's Future?

It might seem strange to highlight General Electric's (GE 1.44%) weakest business as the key to its future, but I think there's a strong case for it being so. If you buy GE stock, you have to believe in the success of the GE Vernova spinoff (a company comprising GE Power and GE Renewable Energy) in 2024.

To do that, you must think that the renewable energy business is set for a turnaround. Here's the lowdown. 

Why GE Renewable Energy matters

The importance of the business can be seen in the chart, and it comes from the fact that it's set to generate the biggest implied profit improvement in the coming years.

As you can see, the $2.2 billion loss is forecast to turn into a profit in 2024. Assuming GE Renewable Energy's profit will only be slightly profitable in 2024 implies a $2.2 billion improvement in two years compared to a profit improvement at GE Power, which is unlikely to be more than $0.25 billion. Management didn't give guidance for GE Aerospace in 2024 but did forecast $7.6 billion to $8 billion in 2025.

Whichever way you look at it, the assumption over profit improvement at GE Renewable Energy is critical to the case for the stock -- even if you are primarily attracted to the aerospace business, there's no point buying the stock unless the renewable energy business can perform and ensure a successful GE Vernova spinoff. 

Data source: General Electric presentations.

GE Vernova

Management's forecast for 2023 calls for a loss of $0.6 billion to $0.2 billion and then profitability in 2024. Given that the business will be spun off in early 2024, it's essential that investors can see a pathway to profitability as the company exits 2023, which means an improving trend at the renewable energy businesses.

GE Renewable Energy's three businesses

As it stands now, the business is actually three different businesses: onshore wind ($8.4 billion in revenue in 2022); grid solutions ($3 billion); and hydro, offshore wind, and hybrid solutions ($1.5 billion). 

Grid solutions, along with GE Power, is one of the big success stories of the Larry Culp era. For the first time since 2018, the business turned profitable in the fourth quarter, and management expects it to be profitable through 2023 on around $3.3 billion in revenue. Moreover, given the importance of grid systems, automation, and transmission to the energy transition, the business has good growth prospects.

It's no secret that the onshore wind power industry has faced a perfect storm since the pandemic hit. Soaring raw material and logistics costs, combined with previously ultra-competitive pricing, left leading players like GE, Vestas, and Siemens Energy executing on an unprofitable backlog. That said, all three have taken significant restructuring actions, and there's clear evidence of improvement in order pricing across the industry. 

At the same time, GE Vernova's management sees the Inflation Reduction Act (IRA) as stimulating 11% annual growth in U.S. onshore wind (its core end market) installations until the end of the decade. As such, management expects onshore wind power to return to low-single-digit profit margins by 2024.

Finally, offshore wind is a relatively new business for the industrial company. Still, with management expecting global offshore wind installations to grow from 34 gigawatts in 2022 to 181 gigawatts in 2030, it's one in which GE Vernova needs to be positioned. Unfortunately, it will take time to work through the $6 billion backlog (that faces the same issues as the onshore backlog discussed earlier), and GE doesn't expect its product margin to be positive until 2025. 

The best is yet to come

GE Vernova's CEO, Scott Strazik, was the turnaround architect at GE Power. Now, he's charged with executing the same playbook at the onshore and offshore wind power businesses.

The excellent news is that GE Power is now a solid cash flow generator, grid solutions is now profitable, and tangible improvements are beginning to show through at onshore wind. Of course, the biggest challenge remains at offshore wind, but it's one of execution, not of end demand, and given the substantive backlog, GE Vernova can afford to be more selective over new orders. 

The likely improvement at GE Renewable Energy is expected to support the investment case for GE as the company prepares for the GE Vernova spinoff in early 2024.