General Electric – JPMorgan Swings And Misses?

JPMorgan’s presentation on General Electric Company (GE) from the Framework Member Conference Call.

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C. Stephen Tusa, CFA

  • Long career covering General Electric and competitors
  • Inside access: Mentioned Jeff Immelt discussing whether or not GE Capital should be jettisoned at a breakfast in 2005.
  • Well thought of on the buy-side – “an analyst you can trust”
  • GE report published in July is 133 pages and is very thorough. I was in awe with his knowledge of the company
  • We believe Tusa’s call is essentially a bet on the strength of the Power market and for the paradigm for that
  • His most credible economic argument is that General Electric, a firm whose Power services are focused on providing “H-Class” gas turbine generators, is ill-placed for a world of renewables.
  • Believes that GE is perennially behind the curve regarding strategic portfolio balancing.
  • Worries that GE’s cash flows are insufficient to cover dividends.

Revenues

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2020 Assumptions (FWI)

Worst Case: $129.9 billion - 1.2% CAGR Best Case: $146.1 billion - 4.3% CAGR

General Electric

2020 Assumptions (JPM)

Base Case: $131.8 billion - 1.6% CAGR Tusa's argument relies upon projections for gas turbine (GT) market over the next four years.

General Electric

  • In his view:
    • GT market is oversupplied right now – EM buildouts and developed world switch to
    • GE holds largest market share but Siemens is close, Mitsubishi Heavy and an Italian firm also in the running.
    • Increasing competition for business and lower service contract payments cause GE’s Power business to decline at 4%-5% per year in 2019-2020.

General Electric

  • Tusa is probably right about near-term conditions. GE also said 2017-2018 will be weak, partially due to competition and oversupply.
  • His 2019-2020 forecasts rely upon his implicit assumption that heavy-duty gas turbine (HDGT) generation is no longer needed because of renewables’ generation ascendency.

Revenues - GT Demand

  • Europe has seen a rapid fall-off in GT generation since 2010.
  • Siemens, GE’s closest competitor has been affected by this and are skeptical of the health of the (HDGT)

General Electric

  • Europe has seen a rapid fall-off in GT generation.
  • Siemens, GE’s closest competitor has been affected by this and are skeptical of the health of the heavy-duty gas turbine (HDGT)
  • However, EU decline did not show up in the GT order data Tusa quotes in his own report
  • EM might be oversupplied right now, but it is hard to draw a trendline four years out on the basis of these data.
  • IEA and others also see GT generation as largest single source through 2035

General Electric

  • GE’s sales also derive from industrial demand – GT generation for smelters and mini-mills – in addition to utility demand.

General Electric

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