Is General Electric (GE) Facing End of Nuclear Business?

The rapidly escalating crisis involving at least four nuclear energy reactors at the Fukushima power plant in Japan has put General Electric (NYSE: GE) in the spotlight – and not in a flattering way.  General Electric is diversified conglomerate, and the nuclear energy division at GE designed all six of the reactors at the troubled plant 40 years ago.

GE is in a nuclear energy joint venture with Hitachi Ltd. (NYSE: HIT). General Electric stock was off almost -8% in the last 5 trading days, as of Wednesday’s closing bell, and Hitachi is down nearly -20%.

In the midst of the grave humanitarian and environmental catastrophe that is facing Japan, it seems a bit callous to focus on the financial markets.  But markets move when bad things happen and a crisis of this magnitude hitting the world’s third-largest economy is bound to be more than a blip on the trading screen. Particularly for stocks like GE with a specific interest in the region.

GE is a massive, well-diversified company – a factor that mitigates the actual earnings impact of potential losses in its nuclear energy business.  That unit accounted for only about $1 billion of the company’s $152 billion in revenues last year, although the recent push for green energy alternatives has fueled higher expectations for the nuclear sector.  But if you’re long on GE, here are a few factors that could impact the outlook going forward:

This Could Be GE’s Deepwater Horizon

Even if engineers can avert a full meltdown of the nuclear cores in all four of the crippled reactors, this stands to be a very big and very public black eye for General Electric — in the order of BP plc (NYSE: BP), Transocean (NYSE: RIG) and Halliburton (NYSE: HAL) in the wake of the Gulf oil spill. In the three months following the explosion of the Deepwater Horizon, BP share prices were slashed by more than half.  And although the energy giant’s shares have recovered more than half the ground lost last year, questions remain about the full damage to the company’s brand and bottom line.

GE and Its Particular Reactors to Blame

GE is the only builder of “boiling water reactors” worldwide. Competitors Westinghouse Electric, a subsidiary of Toshiba (PINK: TOSYY) and France-based Areva SA (PINK: ARVCF) produce a different design: the pressurized water reactor. The selling point behind the BWRs at Fukushima I has been their smaller and less expensive Mark I containment system.  But nuclear experts for decades have questioned whether GE’s containment system might be more vulnerable to rupture than larger, reinforced concrete systems. GE was quick to defend the design of its BWRs yesterday, with company officials characterizing the reactors as “the industry’s workhorse with a proven track record of safety and reliability for more than 40 years.”

GE Liability

The potential liability issues for GE are difficult to predict.  In most cases, the insurers and operators bear most of the risk from an accident at a nuclear facility.  But Japanese law appears to insulate the operator, Tokyo Electric, from any damage arising from a “grave natural disaster of an exceptional nature.” That’s just fuzzy enough to dropkick any real determination of liability into the courts.

Too Much Uncertainty

The “What ifs?” are impossible to calculate at this point — and financial markets abhor lingering uncertainty.  Based on the facts available, Fukushima already has replaced Three Mile Island as the world’s second-worst nuclear energy accident, just one step down on the nuclear accident scale from Chernobyl.  Factors ranging from more explosions and fires in spent reactor fuel pools to a complete meltdown of the fuel cores in one or more of the damaged reactors can’t be predicted or at this point even prepared for.  They can only be managed in the best way possible.

Harsh Regulations

U.S. Energy Secretary Steven Chu told a House subcommittee on Tuesday that the U.S. has “rigorous safety regulations in place” for reactors and should push forward with plans to build new nuclear plants.  But the events in Japan are likely to put the brakes on new construction permits as state and local regulators clamor for answers about the safety of nuclear reactors already in their backyards.

As of this writing, Susan Aluise did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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