When Sharifa John got her first big job in 2003, she was a 21 year-old figuring out how to manage her finances. She hesitated when her father, a seasoned investor, suggested she take her extra income and put it in the stock market.
Her father, a Coca Cola and General Electric shareholder himself, had a lot of faith in both companies. John’s father has kept his investment in GE for over twenty years, a long time for a company that’s had its ups and downs.
“I think I’m going to stick it out with GE,” John said. “As long as I realize I’m not losing a whole lot of money, I feel okay.”
The now 34 year-old was persuaded to invest by two things her father said — everybody buys soda and electricity will never go out of business.
But, 125 years after it was founded, General Electric’s power division is in trouble.
For years, investors have looked to the company’s power business as one of its strengths, but with the long-term demand for renewable energy growing globally, GE faces competition from rivals in its energy, oil, and natural gas markets.
GE’s high capital spending rose significantly in the last few years, rising nearly 90 percent in 2015, primarily due to acquisitions in energy and investments in GE digital. Investor concern over low short-term returns and low cash flow have dragged down the company’s overall performance.
GE’s power business, which produces one-third of the world’s electricity, is the company’s biggest division. It accounts for more than 20 percent of the company’s revenue, and raked in $26.8 billion in sales last year alone. It’s essential to the company’s position in the power industry.
But the segment’s troubles have been at the forefront for some time now. The segment was the main cause management slashed full-year earnings guidance from an operating earnings per share range of $1.60 to $1.05. GE Power is made up of products like gas-power systems and steam turbines which it sells to utilities and industries.
The company saw a fall of 51 percent in power-segment profit to $611 million in its latest third quarter earnings, from $1.3 billion at the same time last year. A disastrous outcome for a company hoping to turn itself around. It also saw a 32 percent drop in power-equipment orders.
As the company struggles to meet goals in cash flow, dividends and profits, newly-minted CEO John L. Flannery, plans to downsize the conglomerate while slashing costs and changing company culture as part of his three-component strategy plan. Any of GE’s underperforming businesses, like its power division, could face the same fate as Flannery aims to sell off assets worth $20 billion over the next two years.
As of the beginning of last year, the company employed 57,000 employees in its power business. It plans to layoff 12,000 people in order to cut $3.5 billion in costs by the end of 2018. It may be a sign the segment could be falling off the deep end.
“Our power business is a challenged business right now,” said Flannery to an audience in a conference last November. “We’ve got a lot of work to do. It’s a heavy lift to turn around, but it’s a fundamental asset, strong franchise in an essential infrastructure business.”
Mismanagement and a shift in the power industry has left GE overwhelmed and underprepared according to analysts. End-market for turbines is no longer what it used to be and the services market tend to have a higher margin than equipment. Because GE sells its power equipment with long-term service agreements attached, a slow in growth in power services means GE is affected not only one but two of its markets.
“There’s been this shift overall from coal to gas to renewables,” said Jeff Windau, senior analyst at Edward Jones & Co. “That transition with some fundamentals of the market changing, holding off on some of their expenditures, as they’re trying to walk through where regulations go and demand — I think when you throw all this stuff together, it led to some underperformance for sure.”
Acquisitions have also made a dent in the segment’s business. GE spent $13.5 billion to buy the power division of Alstom, a French company two years ago. This was one of GE’s largest industrial acquisitions at the time and has since “clearly underperformed below our expectation,” said Flannery in a conference call last year. The acquisition not only increased the number of employee count by 65,000, the stock has also seen its up and downs in price change.
“The power business, was basically a business that had a lot of signs of weakness over the last 18 to 24 months,” said Robert McCarthy, analyst at Stifel Financial Corp. “They were still in the process of integrating Alstom, they weren’t really thinking about the kind of overall market demand and output.”
Investors and analysts have blamed mishandling of the power business and careless investments as some of the leading causes of the segment’s poor performance.
When GE merged its oil and gas unit with Baker Hughes, an industrial service company in summer of 2017, many investors recoiled. They saw Baker Hughes as another acquisition at the wrong time. Today, Baker Hughes has underperformed rivals and analysts believe GE may be looking to put an end to the merger.
Renewable forms of energy such as wind and solar power—businesses GE has fallen behind its competitors in—are expected to take a bigger share of the market in the coming years. They will generate more electricity than coal by 2040, according to a report by the International Energy Agency.
Instead, GE is at the forefront of gas turbine technology. Its new line of large power generators can each produce enough energy for 500,000 households. But it misjudged the market for these smaller and replacement equipment, which has lead to losses. Worldwide, GE saw sales of large turbines drop, falling from 134 in 2009 to 104 last year.
This new shift in the market has simply outrun GE’s innovation. While coal is still being burned and shipped around the world, renewable sources are favored and production costs are rapidly falling. Fewer coal and gas-fired power plants are being built and this in turn is leaving companies like GE with excess inventory.
And while GE is looking to shrink its power segment workforce in order to cut costs and keep afloat, it is still behind on industry trends.
One of its biggest competitors, the German conglomerate Siemens, is also struggling on the power forefront. The company also cut jobs in its power segment at the end of last year and reported losses, but most of its mishaps have been less costly than GE’s.
Siemens’s success in factory automation and medical equipment have sustained its earnings. Its less reliant on its power business.
Unlike GE, Siemens business structure is also more decentralized. The company not only lists divisions separately but it’s also become semi-autonomous. All of its businesses are bundled into nine divisions that are managed separately, a key factor that has helped Siemens but one in which GE still struggles.
Both companies have taken steps to mark their paths in renewable energy, GE being the second-largest wind turbine manufacturer last year. Siemens acquired turbine company Gamesa in April last year.
For GE, what it really boils down to is changing its old conglomerate ways. The company has historically bought and merged companies with success in the past, but now may have to change the way it functions.
“They’ve been known of and thought of as one of these strong, diversified industrial companies,” said Windau. “That’s still a big diversified business and industrial focus. I think the challenge will be that second part of that identity and that’s where they need to get things kind of back aligned, where the street has always felt that they were.”