Secular Shift In Power Systems Has Only Just Begun
Q4 2017 Industrial revenue was up 3% Y/Y, yet segment profit fell 39%. Power Systems, GE’s largest operating segment saw operating profit fall 88%. In December GE announced it would lay off 12,000 employees with the hopes of wringing $3.5 billion in costs out of the business. Recently, GE pivoted by looking to offshore wind power to grow earnings:
General Electric is looking to offshore wind power as one way to rebuild its earnings, as its traditional business making equipment for gas-fired power plants faces weaker demand because of the shift towards renewable energy sources.
That’s a cogent strategy given that (1) offshore wind power represented 10% of all generation capacity installed by major manufacturers last year and (2) the number of installed gas turbines in 2017 was now 30% Y/Y. The emphasis by municipalities on clean energy could hasten this secular shift from gas turbines to offshore wind power.
The problem for GE is that segment profit margins for Renewable Energy are lower than that of Power Systems.
Profit margins for Renewable Energy were 7% in 2017, while Power Systems’s margins have been in the mid to high-teens. As more of GE’s revenue shifts to Renewable Energy the company is likely to experience a diminution in its margins and segment profit. The impact of this secular shift might not be fully-reflected on GE’s financial statements or its share price until the second half of 2018.
