by Jonathan Berr | August 22, 2014 6:48 am
Is the answer for General Electric (GE) investors blowin’ in the wind?
Yes. (But don’t forget geothermal, too.)
As The Wall Street Journal recently reported, the IRS recently gave the renewable energy sector a shot in the arm by making it easier for the industry to qualify for a federal tax credit. According to the WSJ:
“The IRS and the Treasury Department said renewable-energy projects could qualify for a pair of tax credits if they had incurred at least 3% of the total project cost before the beginning of 2014, down from the previous threshold of 5%. Credits would be proportionally reduced in value below the 5% threshold, the IRS said.”
While the 2-percentage-point difference and changes in wording don’t seem like a big deal, experts say they are.
“There are thousands of megawatts that are on hold as far as the financing goes,” Navigant’s Bruce Hamilton told the WSJ.
The most obvious beneficiary of this move is General Electric.
Wind is a big deal for the conglomerate, and is becoming even more important thanks to GE’s planned $13.5 billion deal to buy Alstom’s power and grid business. Alstom’s business will help General Electric expand its foothold in growing renewable energy markets such as France and Brazil, and will help GE expand its foothold in the smart grid businesses. Navigant Consulting expects spending on improving the nation’s electric grid to reach $57.6 billion between 2014 and 2023.
Renewable energy is a key market for GE. The conglomerate led the wind turbine market in 2012, though it did fall to fifth place a year later as wind installations fell thanks to worries about the IRS rule, among other reasons.
During its most recent conference call, Chief Financial Officer Jeff Borenstein noted that between 400 and 500 wind orders were delayed last quarter because developers weren’t sure if they qualified for the tax credit, also known as the PTC.
“So very tough to move those projects along until we’re absolutely certain that they’re going to qualify for the PTC,” Bornstein said, adding that $1 billion worth of orders were delayed.
While General Electric is a sprawling behemoth, the company’s Power & Water business (which includes wind) generated $6.29 billion in revenue in the latest quarter, the most of any division. Interestingly, even with the uncertainty over the IRS rule, wind equipment revenue was up 30% in the latest quarter. P&W also earned a profit of $1.13 billion, the second-best performer behind Aviation.
It’s still tough to argue that wind alone will move the needle for General Electric, but it’s something investors should consider if they’re looking for a second or third reason to buy GE stock.
If you’re looking for a couple others, I’d point out that CEO Jeff Immelt recently announced plans to unload GE’s slow-growing appliances business, a move that investors have demanded for years. Investors can hope that he will invest the proceeds from that sale into wind and other faster-growing businesses.
GE stock is cheap, too, trading at 15 times next year’s earnings, which is far less than the S&P 500, which is trading at closer to 19. General Electric also yields a significant 3.3%, and has been ramping up payouts significantly ever since its 2009 dividend cut.
All that said, GE isn’t the only company poised to benefit from the IRS’ announcement…
Siemens: Germany’s Siemens (SIEGY), which ranks third in market share, is another big player in renewable energy. Markus Tacke, who heads the company’s Wind Power division, recently predicted that wind power capacity will more than quadruple by 2030, fueled by surging demand in Asia, especially China. Another market research report from Fredonia Group is bullish on the U.S. wind market as well, expecting it to increase by nearly nine-fold to $18.9 billion in 2018. SIEGY does trade over-the-counter in the U.S., and shares are not terribly liquid, but at $100 billion, Siemens is no fly-by-night stock. That said, investors who can might consider buying Siemens’ German-listed shares.
Calpine: The rule also will benefit geothermal companies such as Calpine (CPN), North America’s largest producer of energy from this clean source. Calpine has 15 geothermal plants at The Geysers region of Northern California that generate 36% of the geothermal energy produced in North America. However, Calpine trades at a multiple of more than 80, making the stock too expensive to recommend.
Baker Hughes: Baker Hughes (BHI), which is best known for its work in oilfields, is a big player in geothermal energy as well. The company’s technology has been used in 95 percent of the world’s geothermal wells. Baker Hughes is worth a look. It trades at a multiple of about 26 and analyst have an average 52-week price target on the shares of $84.67, $16 above where it currently trades.
What makes GE, Siemens and Baker Hughes attractive to renewable energy investors is that they aren’t one-trick ponies. In fact, GE also is a big player in hydroelectric power, which got a thumbs up from the IRS as well.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
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