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shares GE Vernova Ltd. (NYSE:GEV) Indicates post-split trading price of approximately $145 GE (GE), It itself now consists mainly of aerospace activities.This transaction is the continuation of GE Healthcare (GEHC) was spun off from a once powerful conglomerate that was now fragmented.
While GE Vernova has a positive long-term outlook, it has really struggled in recent years, and while it’s made some progress and the balance sheet looks pretty strong, I don’t have much confidence in it. Trading at about 1x sales, with a low free cash flow multiple (a few years out), the valuation looks quite reasonable. That being said, the company certainly still needs to achieve some goals through better execution (in terms of expected improvements).
GE Vernova – designed to electrify and decarbonization
GE Vernova, formerly GE Power, serves the critical energy transition and has decades of growth opportunities, calling the energy transition the next supercycle. The global power generation market is expected to double by 2040, but will also need to be decarbonized as coal needs to be replaced.
With trillions of dollars in investment, Vernova’s total addressable market (“TAM”) is expected to grow from $265 billion in 2022 to nearly $500 billion in 2030. The company aims to capture a larger share of these growing markets through its 80,000 employees. Workers are active in more than a hundred countries. These activities include an installed base of 7,000 gas turbines, 55,000 wind turbines and critical software used to manage electricity production, transmission and storage.
The company operates in three areas: power, wind energy and electrification solutions, each with multi-billion markets. Electricity is the largest segment, with sales of natural gas, steam, hydro and nuclear services at approximately $17 billion. The segment has a massive backlog of $73 billion, enough to meet more than four years of current revenue. New technologies include switching to natural gas, increased production and use of hydrogen, the emergence of carbon capture technology, and small modular reactors. The segment’s EBITDA margin is stable, equivalent to 10% of sales in 2023.
The wind power business has sales of US$10 billion and a backlog of orders of US$27 billion. This segment provides onshore and offshore wind power solutions. Like many wind companies and their peers, Vernova’s wind business is losing money. The company reported an EBITDA loss of about $1 billion in 2023, equivalent to about 10% of sales, and expects to break even in 2024.
The Electrification segment provides grid solutions, power conversion, solar and storage solutions, and related software. The unit has sales of $6 billion and an order backlog of $16 billion. Despite good growth prospects, the segment is barely profitable, with EBITDA expected to be $200 million in 2023, as margin expansion in the segment is also limited in 2024.
The company has a 140-year history of innovation and strong relationships with large power producers and energy companies. Despite its history and potential, the business has historically experienced negative free cash flow, which the company is working to turn around, in part due to better selectivity, pricing and risk management practices.
Valuation
GE investors will receive one GE Vernova share for every four GE shares they hold. GE has approximately 1.09 billion shares outstanding and GE Vernova has approximately 272 million shares outstanding. Post-split the shares would trade at $145, valuing the equity at $39.5 billion.
The company actually has a strong balance sheet, including $4.2 billion in cash, just $100 million in conventional debt, and a net pension deficit of $1.9 billion. This suggests net cash is expected to be over $2 billion, bringing the business valuation down to around $37 billion.
In 2024, the company expects sales to reach $3.4-35 billion and adjusted EBITDA margins in the high single digits. This implies EBITDA in the billions, as free cash flow is only $0.7-1.1 billion amid continued investment needs. Through 2025, the company expects organic growth to be in the mid-single digits, adjusted EBITDA in the low double digits, and free cash flow expected to be in the range of $12.0 to $1.8 billion. Over the long term, margins and growth are the same, but free cash flow is expected to improve to 100% over time.
Factoring in approximately $200 million of projected cost excess from becoming an independent entity, the $37 billion enterprise valuation should be viewed based on mid-year free cash flow of $900 million in 2024 and $1.5 billion in 2025, This resulted in a sharp rise in free cash flow multiples applied to the business. If EBITDA margins hit around 10% and free cash flow conversion hits around 100%, then those free cash flows could grow to around $3 billion over the long term.
Now?
Despite good intentions and apparent progress, it was clear that the business within GE was very poorly managed and, like many of its peers, was going through tough times. While the opportunity for GE Vernova LLC in its end markets is great, the company itself has also had to undergo a transformation, which has had a huge impact on the business.
While the unlevered balance sheet is just a start, and free cash flow multiples will be in the modest low double digits if medium-term targets are met, there’s still a lot of work to be done. Furthermore, the nature of this equipment is dangerous, as Siemens Energy (OTCPK: SMEGF ) has discovered real quality issues with its wind turbines, and Danish Vestas Energy (OTCPK: VWDRY ) is also facing some profitability issues .
Still, GE Vernova was a story that was presented to me first. I’m eager to learn more about the business in the coming quarters. The real question is whether and to what extent margins will continue to improve.
