when general electric (G.E. 0.88%) When Larry Culp was named CEO in 2018, the center of the company's problems was its power business. Less than four and a half years later, this has become a core strength of his company, GE Vernova, which will be spun off on April 2nd. Here's an overview of the business in light of its recent Investor Day presentation and what investors can expect from the company. .
Management guidance
In my previous article on GE Vernova, I outlined the company's revenue breakdown, revenue trajectory, the importance of its wind energy business, and its impressive financial profile. Now it's time to look at management's latest guidance for the company.
The first thing to note is that the company looks very attractive based on management guidance. For now, let's focus on earnings before interest, tax, depreciation, and amortization (EBITDA), using the guidance in the table below. Assume his EBITDA margin is 6% in 2024 and 7% in 2025, using the midpoint of the earnings guidance. As a result, EBITDA will increase from $600 million in 2023 to $2.1 billion in 2024 and $2.5 billion in 2025.
It's a similar story for its strong growth in free cash flow (FCF) from just $100 million to $1.6 billion at the midpoint of its 2025 guidance.
|
metric |
2022 |
2023 |
2024 |
2025 |
By 2028 |
|---|---|---|---|---|---|
|
revenue |
$29.7 billion |
$33.2 billion |
$34 billion to $35 billion |
Mid-single digit organic growth |
Mid-single digit organic growth |
|
Adjusted EBITDA margin |
(1.4%) |
1.7% |
mid-low single digits |
Lower limit in the second half of single digits |
Ten% |
|
free cash flow |
($600 million) |
100 million dollars |
From $700 million to $1.1 billion |
$1.2 billion to $1.8 billion |
90% to 110% conversion from net income |
Data source: General Electric presentation.
Reasons to believe in the GE Vernova outlook: Power and electrification
There are numbers and there are levels of belief in those numbers. The good news is there's reason to think GE can hit the numbers discussed above. Let's take a look at the EBITDA of each of the three businesses in 2023.
Wind power, especially offshore wind power, is a business in recovery mode. More on this later. Note that management believes it will be “close to profitability” by the end of 2024. This is a significant improvement compared to 2023.
|
GE business |
EBITDA in 2023 |
|---|---|
|
Power |
$1.7 billion |
|
Wind |
($1 billion) |
|
electrification |
200 million dollars |
Data source: General Electric presentation.
I'm focused on power and electrification for now. The power business is expected to see mid-single-digit revenue growth in 2024 with expanded profits, which could lead to EBITDA of $1.95 billion.
One of the reasons GE can get there is because of its $73 billion backlog, which accounts for 81% of high-margin services. Management has begun to improve the service business in light of the need to adapt to lower growth rates in gas turbine equipment demand, an important success story for GE's overall turnaround efforts.
In contrast, the electrification business is a growing business, benefiting from the electrification of everything trend. The company's grid solutions and software help integrate renewable energy into the grid and improve overall grid quality and stability. Management sees the company as a low-double-digit growth business in 2024, with a conservative estimate of EBITDA of $350 million (based on management guidance).
Image source: Getty Images.
Reasons to believe in GE Vernova's outlook: Wind power
As mentioned earlier, the wind business is a combination of the currently profitable onshore wind business and the loss-making offshore wind business. The latter has been under pressure in recent years, as rising raw material and logistics costs have weighed on the profitability of contracts won during less inflationary periods. It's no coincidence that GE has competitors. Vestas and (part of) Siemens Gamesa siemens energy) Both suffered the same fate.
That said, management is working to reduce the offshore wind capacity balance (from $6 billion at the beginning of 2023 to $4 billion at the end of 2023) and at the same time being selective about new contracts for offshore wind. and continues to improve the profitability of onshore wind power generation. This is especially true in the core US market.
Management believes the entire wind business will be profitable in 2025.
Image source: Getty Images.
What’s next for GE Vernova?
Culp and GE Vernova CEO Scott Strzyk are taking a pragmatic approach to dealing with the slowdown in the gas turbine equipment business, focusing on gas services and reinventing the wind business in the face of severe cost pressures. It was constructed.
As such, GE Vernova is expected to significantly increase its profits in the coming years. Based on the conservative estimate above of his 2024 EBITDA of $2.1 billion, assuming an enterprise value of 11 times his EBITDA and $4.2 billion in cash, GE Vernova's fair value is approximately That's $27.3 billion. This is a number to watch when trading opens on April 2nd.
Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
