Make no mistake, the market loves GE Vernova (NYSE:GEV), the utility business spun out earlier this year from the remnants of the old General Electric conglomerate. GEV stock has nearly tripled in value since its debut on the NYSE back in April at $115 per share.
While there is good reason for the solid backing the utility stock has received, investors need to consider whether they should be buying shares at these levels.
24/7 Wall St. Insights:
- GE Vernova (GEV) is one of the world’s leading utilities and was spun out from the old GE last April.
- The market is pricing in a lot of growth into GEV stock, but there are numerous tailwinds driving those gains.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Reasons for excitement
GE Vernova focuses on energy generation and decarbonization through gas-powered plants and wind energy. Its power segment has the world’s largest installed base of gas-powered turbines and it has a 57% share of the U.S. onshore wind turbine market.
While gaining market share has been one of the primary driving forces for the utility, more recently it has begun focusing on profitability. It adopted a lean operating model in its gas power business in 2018 that has driven out $1 billion in fixed costs. Now that it has been spun out into a standalone company, investors can expect GE Vernova to pursue similar savings in the wind business to drive profitability higher and expand margins.
Because of its global presence, it also stands to benefit from the electrification and decarbonization efforts occurring worldwide. In the third quarter, orders for equipment and services organically grew $2.5 billion, or 17%, while organic revenue growth surged 24% to $1.9 billion. Across all segments, total orders of $9.4 billion were up 17% year-over-year.
Reasons for caution
The problem remains its wind power business. While it has been enjoying gains across gas, nuclear, hydro, steam, and electric grid solutions, it suffered “incremental contract losses” in offshore wind power that resulted in a 19% drop in orders in the third quarter.
I find GEV’s wind power business to be the least attractive aspect of the company, despite its leading position. Turbines, onshore or offshore, are unsightly scars on the landscape; they endanger wildlife and sealife, especially whales; and they are increasingly facing a backlash.
The New York Times says that since the so-called Inflation Reduction Act was signed in 2022 as a way to spur investment in renewable energy in the U.S., solar projects have soared, but wind power projects have declined. There is also likely to be less support for renewable energy with the incoming Trump administration.
GE Vernova is going to find it increasingly difficult to generate the sort of cost savings it did in its gas power business.
So is it a buy?
As noted previously, the market has factored in a lot of growth into the stock. While industrial stocks generally have performed well over the past year, GE Vernova is running away with it right now.
Industrial stocks on the S&P 500 like GEV typically trade around 15 to 20 times EBITDA. If we look at the utility’s forecast for revenue and take the midpoint of guidance of $34.5 billion and use the midpoint of its 5% to 7% adjusted EBITDA margin estimate, we can see that GEV stock is trading at over 45 times EBITDA.
Wall Street analysts do have a buy rating on the stock, but they also have a 12-month price target of $274 per share. The market high is only $385 per share, implying 14% upside.
While there are strong tailwinds behind GE Vernova, not least of which is strong spending on artificial intelligence at data centers, and it has a strong balance sheet to support it, having come so far so fast, I’d wait for weakness in its shares before buying in. The long-term prospects for the utility are bright, but I’d prefer a lower price point before getting too excited.
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