One old-school energy stock that has been particularly struggling as of late is General Electric (NYSE: GE). GE has long been a staple conservative investment option, but its fortunes have been deteriorating rapidly in recent years, with no end in sight.
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What damage has coronavirus caused the industry?
A lot of energy companies are still trying to assess what their strategy is going to be going forward as the world continues to get to grips with the coronavirus. In addition to many people losing their lives, the pandemic has caused significant economic upheaval, with demand and supply chains significantly affected. With no solution on the horizon, there is a sense of vulnerability for all those in the sector.
GE is involved in four key sectors these days — power, aviation, healthcare, and renewable energy. Naturally, the aviation sector has taken a hit with U.S. domestic air travel dropping by more than 95%. It is the supplier of aircraft engines, with demand for new engines collapsing. GE also had a number of significant renewable energy investment projects in the works that have been derailed by the pandemic.
There has been a record low demand for oil and gas, resulting in plummeting profits for a lot of energy companies. There are concerns that the sector may never be the same, with a lot of investors focusing on clean energy alternatives instead.
Challenges GE is facing
GE still has a large amount of debt that needs to be dealt with. While CEO Larry Culp has managed to cut it down significantly from $375 billion to $68 billion by the end of 2019, there is still a long way to go.
GE has also drifted away from a lot of different industries it was previously thriving in, such as light bulbs and kitchen appliances. Some of the other industries it has departed over the past decade or so include oil and gas, locomotives, biopharmaceuticals and mortgage lending.
Perhaps most worrying is the continuing disruption in the aviation sector. This is the best performing part of the GE business (20.7% profit margin in 2019) and it is facing serious challenges going forward. With the threat of a second wave looming, it could take years before air travel and demand for aircraft ramps up once again. This part of the business has been helping mitigate the poor performance of its power and renewable energy divisions for some time.
Threat of alternative energy
While GE is focusing on its renewable energy department, it appears that the company had been focusing on the wrong area. Most of its operations are in the onshore wind turbine market, while the industry appears to be moving more towards offshore. This has led to the development of the Haliade-X, a powerful offshore turbine by GE. However, this is still in testing and production will not begin until the end of 2021 at the earliest.
There are many other companies doing alternative energy, with solar being largely preferable as it is cheaper and more readily available. Tesla (NASDAQ: TSLA) subsidiary SolarCity is one of these companies that has been seeing success in recent years.
The largest U.S. rooftop solar company Sunrun (NASDAQ: RUN) also recently announced it is taking over rival Vivint Solar (NYSE: VSLR) in a $1.46 billion deal. These large scale investments showcase how GE’s competition appear to have a much more optimistic outlook than the old-school energy stock.
Is there any hope of growth moving forward?
GE’s power division had a negative free cash flow of $1.5 billion in 2019 and its renewable energy division’s free cash flow was negative $1 billion for the same period. These are current cash pits for GE and there is no apparent quick fix to help them turnaround. With aviation continuing to struggle and more effort needed to reduce debt, it certainly looks like it will be a bumpy road for some time for GE.
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Contributing Writer at MyWallSt
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.