Shift To Wind Power Could Come At A Cost
GE’s Q4 Industrial revenue grew 3% Y/Y, but segment profits fell 39%. Industrial’s segment profit margins were a paltry 10%, down from 17% in the year earlier period. This is unacceptable by a former bellwether like GE. The company was stung by an 88% decline in segment profit within Power Systems. Nonetheless, Power is still core to GE’s strategy.
Power and Renewable Energy represented a combined 38% of GE’s total Q4 revenue, but only 13% of segment profits. Power’s Q4 performance was hurt by by lower orders and a need to rightsize he business amid margin declines. As more of GE’s energy business shifts towards offshore wind energy, its margins could remain compressed.
The following chart illustrates the segment profit margins for Power, Renewable Energy and blended (assumes Power and Renewable Energy were one segment).
In full-year 2014 Power’s segment profit margin was 17%. It was flat in 2015 and fell to 14% in 2016 after the Alstom deal. Margins plummeted to 8% in 2017 as the company was stuck with large gas turbines amid a shift to offshore energy.
Margins for Renewable Energy were 11% in 2014, dipped to 6% in 2016 and rebounded to 7% last year. Blended margins for both segments declined from 16% in 2014 to 8% last year. As more revenue shifts to wind power I believe the blended margins will remain in the single digits and begin to mirror those of Renewable Energy. Can management and GE bulls live with single-digit margins in its largest operating segment? We may soon find out.
Conclusion
GE’s emphasis on offshore wind power could capture some of the lost revenue from Power Systems. However, its segment profit margins will likely decline from the high teens to single digits. This slide could wreak havoc on its largest business segment. GE remains a sell.
