General Electric (NYSE:GE) has gone through a complete transformation over the past thirty years. A company once synonymous with consumer products like lighting and appliances had become largely known for its financing arm, GE Capital. However, investors didn’t mind too much.
After a couple of decades acquiring different businesses, GE’s market capitalization was over $600 billion. The GE stock price was over $60 a share. But as the company moved further away from its core competencies, it became more difficult to distinguish what businesses GE was invested in.
I wrote about General Electric’s need of an identity back in July. Under the leadership of CEO Larry Culp, the company is focusing on being a “digital industrial” corporation. But many investors are asking how “digital industrial” will show up on the balance sheet? For General Electric and GE stock, the answer may be blowing in the wind.
Wind Energy Is a Multibillion-dollar Business
Wind energy is a multibillion-dollar business. Despite a business model that has been (no pun intended) blown about depending on subsidies and political will, wind power is now less expensive than fossil fuels and could see increased demand if the wind farms are located near coastal cities.
Through their GE Renewable Energy division (headquartered in Paris), GE has been a significant part of the onshore wind story. GE, along with Siemens (OTCMKTS:SIEGY) and Vestas Wind Systems (OTCMKTS:VWSYF), is one of the three largest wind turbine players in the U.S.
Although it represents a relatively small part of their overall business, General Electric is making a significant investment that may lead to substantial revenue in the near term. And it may perhaps provide the company with a signature product to excite skeptical investors.
GE Is Making a Big Bet in Offshore Wind Turbines
Until recently, GE has only been involved in the onshore side of the business. One of the most common turbines is a GE unit that generates 1.5 megawatts (MW). Now GE is attempting to make in-roads in the offshore wind power segment.
Some analysts are projecting the offshore wind industry to become a $70 billion market. Part of the reason for this optimism is that as turbines become larger and more efficient, the development costs for offshore projects decrease.
They are currently testing a 12 MW turbine known as the Haliade-X 12. Not only will the Haliade-X 12 be the largest turbine in the industry, it may also be the most efficient. If this new turbine works as expected, it can power millions of homes from miles off the coast of populated areas.
“Offshore wind is a high-growth segment for our company,” Jerome Pecresse, chief executive officer of GE Renewable Energy, said in a statement.
So far, the gamble seems to be paying off. The company has received two significant orders. One is from Denmark-based Orsted (OTCMKTS:DNNGY). The company is planning to use several of the new turbines in projects off the coast of Maryland and New Jersey. Other coastal states are in the process of pushing legislation in an effort to bring clean power to coastal cities.
The Haliade-X turbine will also be used in three offshore wind projects for Britain’s Dogger Bank. “Dogger Bank will now be home to the largest offshore wind turbines in the world and this pioneering low carbon technology, which will play a central role in helping the UK become carbon neutral by 2050,” Paul Cooley, director of capital projects at SSE Renewables, said in a statement.
Investors Need to See Growth from General Electric Stock
In its earnings report on July 29, the company beat on earnings per share and came within analysts’ expectations for revenue. General Electric stock is up a modest 7.5% for the year. More importantly, it looks like General Electric has weathered the worst of a recent controversy. In August, forensic accountant Harry Markopolos alleged the company is engaged in accounting fraud similar to Enron.
Becoming lean and efficient is one thing. Being able to show growth is another. As CEO Larry Culp marks his one-year anniversary of taking the helm, General Electric stock is down 27%. That speaks to a lack of confidence in the company’s growth prospects. Many analysts agree that under Culp’s leadership, the company has had fewer negative surprises. However, they still question where the growth will come from. Divesting business units will not be enough.
Wind energy is an idea that has finally reached a stage where the economics make sense. To be clear, this isn’t going to be the only move the company needs to make. However, if General Electric can successfully position itself as a leader in the category, they can use it to reframe the question of where growth is coming from.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.