Not Expecting Much From GE Vernova, Despite Rosy Expectations About The Future (NYSE:GEV)

Over the past few years now, the journey embarked upon by shareholders of industrial conglomerate General Electric has been fascinating. It has been a bumpy ride and many market watchers and investors believed that the long-term picture for the company was negative. I was one of the few analysts to believe that shareholders would be rewarded rather handsomely by keeping hold of their shares for a good portion of the time. I was ultimately rewarded when General Electric spun off its healthcare operations into GE HealthCare Technologies (GEHC). Between the run-up scene and the share price of the conglomerate leading up to that point, and the continued upside seen by the companies following the split, I made quite a hefty return.

Ultimately, I did end up selling my stock in both firms. I felt as though upside from that point on would be more limited and that there would be better opportunities to be had. Unfortunately, that did lead to me missing out on some rather meaningful additional upside. I didn’t think, heading into the final leg of the journey, that shares were cheap enough to warrant further appreciation. But clearly, I was wrong.

Fast forward to today, and we have finally completed that final separation, turning General Electric into GE Aerospace (GE) and spinning off the company’s power and alternative energy operations into a separate firm called GE Vernova LLC (NYSE:GEV).

Given this rather significant development, I figured it would be a wise idea to take a look at GE Vernova in order to see whether now might be a good time for investors to buy in if they haven’t already or to see if it makes sense to hold onto shares received as part of the spinoff. Based on my own assessment of the company, I would argue that, if one holds long enough, GE Vernova might very well turn out to be a decent prospect. However, given how shares are currently priced, I would say that there probably are better opportunities that can be had at this time.

Taking a look at GE Vernova

On April 2nd of this year, GE Vernova and GE Aerospace began trading as separate publicly traded entities. Technically, GE Aerospace just assumed the mantle held by General Electric itself. This means that if you had 100 shares of General Electric, you kept those and they were essentially renamed as GE Aerospace. Meanwhile, for each share of the business that you owned, you should have received four shares of the newly independent GE Vernova. In the event that you ended up owning a number of shares of General Electric that would result in the ownership of partial shares of GE Vernova, you should receive cash in lieu of stock. Depending on your broker, it could take a few days for everything to truly settle into place.

Operationally speaking, GE Vernova really centers around two primary businesses previously owned by General Electric. The first of these is the power segment of the conglomerate. This is the part of the company that focuses on the production and installation of gas turbines and similar technologies. The purpose is to use natural gas in order to generate electricity. These can be used for a variety of applications, including transportation and industrial power. According to management, the company has over 800GW of installed capacity. That makes it roughly twice the size of its largest competitor. These operations touch on all sorts of opportunities, including power generation by means of steam, hydropower, and even nuclear.

It also happens to be the largest part of the firm, responsible for $17 billion of the $33 billion in revenue GE Vernova generated in 2023. It accounts for approximately $73 billion of the $116 billion of backlog that the enterprise has. And what’s really exciting about this is that roughly 81% of that backlog is in the form of services. Generally speaking, services bring with them higher margins than equipment sales due. So to see such a significant amount of revenue in the future coming from these activities is definitely promising.

Unfortunately, things have not always been good for this particular segment. For years, the power portion of General Electric suffered because of elevated costs and industry weakness. But those days seemed to be mostly gone. While the segment generated $17.4 billion in revenue last year, management is forecasting organic growth this year that is in the mid single digit range. That should be somewhere between 4% and 6%, give or take some.

On the bottom line, the picture is also supposed to improve rather markedly. Last year, the segment generated EBITDA of $1.7 billion. But there’s the expectation that the shift towards services, combined with higher prices aimed at offsetting inflation and investments that are being made into decarbonization technologies should result in a roughly 100 basis point organic margin expansion. Assuming revenue growth for the segment of 5%, that should translate to roughly $2 billion in EBITDA this year.

The other big portion of the company falls under the renewable energy space, particularly the construction and sale of wind turbines. This is a part of the company that, despite generating around $9.8 billion in revenue for the company, still struggles from a profit perspective. Part of this likely stems from the fact that, of the $27 billion in backlog the segment brings to the table, 49% is in the form of services.

To put this in perspective, last year, the wind operations of the company generated negative EBITDA in the amount of $1 billion. This year, revenue is expected to remain more or less flat. However, higher volumes in the U.S., particularly pertaining to on shore opportunities, should push the company close to being profitable again. Management seems to believe that profitability will ultimately come in 2025 sometime.

While the power and wind operations of GE Vernova are the two largest, the company is also focused on the electrification market. The firm’s efforts here focus on a variety of activities, such as grid transmission, grid distribution, grid orchestration, power conversion and storage, and power generation and manufacturing. All combined, this unit was responsible for only about $6.4 billion in revenue in 2023.

Unfortunately, EBITDA was only around $0.2 billion. But management forecasts low double digit organic revenue growth for the operations this year, with mid single digit margins. In the long run, this part of the company offers some meaningful upside. This is because management sees the electrification space expanding from about $75 billion in 2022 to $175 billion in 2030.

If all goes according to plan, capturing some of this upside should result in at least $1 billion of revenue for the business coming from software by as soon as 2025. Of course, this isn’t the only growth opportunity for the firm. The power operations of the company are believed to be worth around $110 billion today. The wind operations, meanwhile, should be a market worth somewhere around $80 billion.

These opportunities should allow the company to grow its revenue, organically speaking, at the mid single digit rate between now and the end of 2028. Management is also forecasting some margin expansion. Using the numbers management provided, combined with some reasonable assumptions of my own, I calculated that, operating cash flow should be around $1.7 billion this year, with that number growing to $2.3 billion in 2025 and perhaps $2.66 billion by 2028. When it comes to EBITDA, we can expect similar growth. We are looking at around $2.76 billion this year, with that number likely rising to $4.19 billion by the end of 2028.

Using the numbers management provided, combined with the historical performance of the company as shown in the chart above, you can see how shares are priced in the chart below. This is based on the price to adjusted operating cash flow multiple and on the EV to EBITDA multiple. Because of the pain that the wind operations of the business entailed, the trading multiples for 2023 do not look appealing whatsoever. However, the picture for 2024 doesn’t look awful.

I definitely wouldn’t call this a value opportunity. But at some point, so long as management can achieve their goals, I think that picture could change. That’s because, as the chart shows, the valuation for 2028 looks very appealing. Obviously, when it comes to the EV to EBITDA approach, the business is aided by net cash of $3.47 billion.

Takeaway

To me, it looks as though GE Vernova LLC is heading in the right direction. On a forward basis, though, the stock looks to be more or less fairly valued at this point in time. That’s not bad, but it’s certainly not great for those who want additional upside.

If management can achieve their targets over the next few years, the stock could be quite appealing by the end of that window of time. But in the meantime, investors who hold on to it could be missing out on better opportunities elsewhere. Because of this, I believe that a “hold” rating for GE Vernova LLC stock is the most logical at this point in time. But that could change based on future developments, such as the increase or decrease of share prices and based on bottom line results and expectations.