Modern Power Infrastructure And Decarbonization Will Open New Horizons

Key Takeaways

• Investment in power and electrification driven by demand for reliable power, grid modernization, and decarbonization initiatives supports growth.
  
• Expanding gas and decarbonization strategies enhance margins, future revenue streams, and profitability through operational improvements and high-margin service growth.
  
• Execution challenges in wind segments and reliance on European markets may hinder revenue growth and diversification amid economic and operational uncertainties.

Catalysts

An energy company, engages in the provision of various products and services that generate, transfer, orchestrate, convert, and store electricity in the United States, Europe, Asia, the Americas, the Middle East, and Africa.

• The investment super cycle in the electric power sector, driven by the growing demand for reliable power, grid modernization, and decarbonization initiatives, is expected to increase orders and revenue in GE Vernova’s power and electrification segments. Impact: Revenue growth.
  
• Expansion plans to produce 70 to 80 heavy-duty gas turbines per year by 2026 aim to meet the rising demand linked to data center and AI capacity needs, which could grow the gas equipment backlog considerably through 2025 and beyond. Impact: Revenue and earnings growth.
  
• The company anticipates significant growth in high-margin services, with expectations of a 50% increase in its gas business upgrades by the end of the decade, due to customers seeking improved plant capacity and performance. Impact: Net margins and earnings improvement.
  
• Advancements and strategic partnerships in decarbonization technologies such as small modular nuclear reactors and carbon capture are poised to influence future sector growth, offering substantial potential for increased revenue streams in the long term. Impact: Long-term revenue growth.
  
• Lean culture and operational improvements are expected to enhance productivity and reduce costs across facilities, contributing to margin expansion and increased profitability. This is expected to support significant free cash flow generation and shareholder returns. Impact: Net margins and free cash flow improvement.

GE Vernova Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GE Vernova's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $4.2 billion (and earnings per share of $15.06) by about April 2028, up from $1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.0 billion in earnings, and the most bearish expecting $2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, down from 50.5x today. This future PE is greater than the current PE for the US Electrical industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

GE Vernova Future Earnings Per Share Growth

Risks

• The timing of inflection in North America Onshore Wind orders remains uncertain due to challenges customers face with interconnection queues and higher interest rates, which could impact future revenue growth in this segment.
  
• The offshore wind segment faces execution challenges with significant contract losses due to blade events and project execution delays, which may continue to affect earnings negatively.
  
• In the Wind segment, the company foresees stable to modestly lower backlog in '25, and ongoing uncertainties in offshore economics could hinder the expected margin improvements, affecting overall net margins.
  
• The need for substantial capital outlays to meet expansion plans in various segments, such as power and electrification, may pressure cash flow and earnings, especially if demand does not materialize as forecast.
  
• While demand for electrification products is robust, the potential risk of being overly dependent on European markets could threaten revenue diversification if geopolitical or economic shifts occur adversely in the region.

Valuation

• The analysts have a consensus price target of $402.856 for GE Vernova based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $272.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $43.8 billion, earnings will come to $4.2 billion, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 7.5%.
• Given the current share price of $286.89, the analyst price target of $402.86 is 28.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.