Word on the Street is that General Electric (GE) might be readying to offload its Steam Power division to multi-national electric utility player EDF, a company majority-owned by the French government. According to reports, the deal is worth roughly $1.2 billion, although neither of the companies have made any formal announcement on the matter yet.
Based on sub-segment level disclosures, BofA analyst Andrew Obin believes Steam Power was a loss maker in 2020. The division made up ~75% of the Power Portfolio sub-segment, which reported a $(0.1) billion loss, or (1.5)% operating margin. Steam Power delivered revenue of $3.7 billion amounting to ~5% of GE Industrial.
Obin thinks the move amounts to an acceleration of a “transition already underway.” Back in 3Q20, GE said it will exit new build coal activities, which at ~1.4 billion, at the time amounted to 37% of Steam Power revenue. The transition is meant to take another 12-18 months and involves shipping existing backlog, the closing of facilities, and related restructuring costs. With more than half of the $0.6-0.7 billion cash costs completed in 1H21, the plan is currently on track. By 2023, management expects the division to generate ~$3 billion in revenue, positive margins, and positive FCF.
The ~$1.2 billion price tag, says Obin, is probably a reflection of the “execution risks and frictional costs necessary to reach these targets.” In any case, Obin is not much of a Steam Power fan.
“Even if Steam Power met these 2023 goals, we view it as a below-average part of the GE portfolio on both FCF margins and organic growth,” the 5-star analyst went on to say. “The potential Steam Power sale would modestly accelerate GE’s progress on FCF margins, deleveraging, and strategic repositioning, in our view.”
Overall, due to “progress on operational turnarounds, the prospective Aviation recovery, and deleveraging,” Obin reiterated a Buy rating on GE shares, and sticks to a $128 price objective, indicating one-year gains of ~21%. (To watch Obin’s track record, click here)
Looking at the consensus breakdown, the Buys outclass the Holds by 9 to 4, resulting in a Moderate Buy consensus rating. The average price target stands at $118.20, suggesting shares have 11% upside in the year ahead. (See GE stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
