NYSE:GE   General Electric Company
General Electric was once a massive power producer. Back in 2017, turbine manufacturing was the company's biggest business. Then it all went downhill.

A turbine design defect (now fixed) forced potential power producers to put their purchase plans on hold. And then clean natural gas power began to lose its popularity as alternatives to solar power became more affordable. GE's energy turbine revenues are now down to about half of their peak levels. This decline in sales has further trimmed the company's bottom line of profits.

Investors should pay attention to the fact that the company is changing. This could be an indicator that GE's once-great energy business is slowly recovering.

Of course, it's hard to distinguish between organic growth driven by increased demand and growth that is merely the mathematical result of last year's COVID-19-induced outages. For most companies, it's probably a mixture of both.

For General Electric's power turbine business, however, it will likely be organic growth. Utility companies plan million-dollar investments years in advance and then maintain the purchased turbines for 20 years or more. The difficulties associated with time constraints designed to keep consumers at home are not a major hindrance to the power generation industry.

Knowing this fact helps put the chart below in the right perspective. Last year's modest orders and revenues for GE's power division are not the result of the spread of the coronavirus.

Rather, business began to decline in 2018 when several turbine blade failures took out too many GE-made gas turbines. General Electric quickly began responding, but its institutional customers were reluctant to do so until it became clear that the company's turbines would not fail for a long time.

It's also naive to ignore the fact that around the same time that GE turbine blades began to fail, alternative energy sources were undergoing a real revolution, leading to a shift away from old technology and toward investment in cleaner, greener technologies. According to IHS Markit, the rate of annual photovoltaic panel installations more than doubled from 2015 to 2019, more than doubling global solar power capacity, according to the International Energy Agency. It would be surprising if General Electric's energy business didn't face obstacles.

But take a closer look at the chart above. Specifically, note the fact that, at least, energy business revenues and orders stabilized in 2020 - despite the turbulence - during the recently ended quarter. Equipment orders also improved significantly in two of the last three quarters. That's a subtle hint that things are changing for the better, even if most investors don't see it yet.

Of course, not losing ground is not necessarily the same as growing, and frankly, it could be years before GE's energy division approaches its glory days, when revenues of $8 billion and quarterly profits of a few hundred million dollars were the norm.

But don't be too quick to dismiss the potential of this part of the company's business for several reasons.

Foremost among them is that, as reliable as solar power is, it still faces the problem of a lack of overnight power generation. This problem is solved quite effectively with battery-based energy storage. However, this solution still lacks the "instant-on" capability that most power producers need, especially in the extreme heat of summer and the bitter cold of winter. A multifaceted power generation portfolio using all available options seems like the most plausible future.

The second reason to expect demand for natural gas turbines in the foreseeable future is that the world is simply not ready for such a leap. In a long-term market forecast released last year, the U.S. Energy Information Administration predicts that by 2050, 36% of the nation's electricity will be generated by natural gas , just 1 percentage point less than 37% currently.

That's despite the fact that renewables will likely double their current share of the nation's electricity production from 19% to 38% over the same 30-year period.

And to the extent that there will be pressure for clean energy, GE's gas turbines can be made to run on hydrogen, which can be produced with minimal impact on the environment and - ultimately - produced economically. The company believes that all of its turbines can run on pure hydrogen within a few years, making the issue of natural gas's environmental impact moot.

The fact of the matter is that it all shows up in numbers that the company tacitly discloses. As of the end of June, GE's backlog of energy equipment and services totaled $71.8 billion.

That's more than four years ahead, not counting the new contracts signed during that time.

Investors expecting GE's energy business to blossom overnight will be disappointed. The company's customers are not fast-moving consumers. Rather, they are corporations that can take months to decide to shell out millions for new equipment.

But for long-term investors, the electric power industry offers an undervalued growth opportunity that is on par with GE's renewable energy and aviation businesses. This reinforces an already bullish position based on consistent cash flow growth, even if the company is slightly riskier than the average blue chip



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