"Turn one into three" - this motto fits well with the latest development at General Electric (GE). The US industrial group has split into three parts. In addition to the healthcare business, this includes the aerospace division and the energy segment. The latter segment debuted on the New York Stock Exchange as GE Vernova on April 2, 2024. Since then, the spin-off has performed magnificently on Wall Street. GE Vernova is trading more than 80% above its initial share price and has reached a capitalization of USD 73 billion. Based in Cambridge, Massachusetts, the company supplies turbines for gas, steam, hydro and nuclear power plants ("Power" business segment), wind turbines ("Wind") and various solutions for the transmission, conversion and storage of energy ("Electrification"). In 2023, the Group generated total sales of USD 33 billion with these three divisions.
The order books are well filled. Since the beginning of 2023, GE Vernova has received orders with an average volume of around USD 10.5 billion per quarter. A good 60% of these were for new systems, with the remainder for service orders. As at mid-2024, the company had a total order backlog of USD 116 billion. Based on the sales expected for the current year, GE Vernova would therefore be working at full capacity for more than 40 months in purely mathematical terms. "The global trends towards electrification and decarbonization are driving demand for our products and services," commented CEO Scott Strazik on the latest interim report. This development is having a positive impact on the profit side. In operational terms (adjusted EBITDA level), GE Vernova earned USD 714 million in the first half of 2024, compared to USD 18 million in the same period of the previous year. The EBITDA margin shot up by 450 basis points to 4.6%.
Free cash flow achieved a turnaround. In the first half of 2023, outflows amounted to just under USD 1.3 billion. From January to June 2024, the company replenished its cash by USD 161 million. "Given our strong performance in the first half of the year and the momentum in our Power and Electrification segments, we are raising our forecast for the full year 2024," explained the CEO at the end of July. Sales are expected to land at the upper end of the targeted range of USD 34 billion to USD 35 billion. At the same time, the US company is forecasting an EBITDA margin of between 5% and 7%. The GE spin-off had previously targeted the upper end of the mid-single-digit range. Last but not least, Scott Strazik wants to generate free cash flow of between USD 1.3 billion and USD 1.7 billion in 2024. The CEO had originally assumed a maximum of USD 1.1 billion at this point.
The forecast remains valid, although GE Vernova is struggling with higher costs in offshore wind power. At Ebitda level, those responsible therefore expect a loss of around USD 300 million in the wind division for the third quarter. Despite this announcement, GE Vernova really took off on Wall Street in September. The large cap also benefited from the megatrend of artificial intelligence. The data centers required for AI consume enormous amounts of electricity, which is why high investments in the energy infrastructure are necessary. Nevertheless, the rally may have gone a little too far. GE Vernova is now trading 7% above the average analyst price target of USD 245.
The soft-callable barrier reverse convertible (BRC) with a conditional coupon offers an interesting alternative to direct investment. During the short term of one year, there is the chance of a coupon payment of 3.50% every three months. Prerequisite: GE Vernova is quoted above the coupon trigger level on the respective observation date. The decisive level is a low 59% of the initial fixing. If the underlying does not meet this condition, the payout can be made up at a later date thanks to a memory function. Let's assume that GE Vernova is at or below the trigger on the first reference date (07.01.2025), but is above it three months later: In this scenario, the issuer would pay a distribution of 7.00% on April 14, 2025. In the best case scenario, the BRC yields a coupon of 14.00% in total. The redemption is partially protected by the barrier, which is also 59% of the initial fixing level. As long as GE Vernova does not fall to or below this level, investors receive the full denomination.
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