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

2020 Assumptions (FWI)

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

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.

• 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.

• 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)

• 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

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

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