General Electric: New Energy?
General Electric may be one of the world's mightiest companies, but so far this century the stock has been a dud. The shares are down about 46% since peaking in 2000. The slide reflects a compression of GE's once lofty price-earnings ratio and coincides with a period of tepid profit growth. Between 2000 and 2005, GE's earnings climbed only 33%.
To spur growth and excite investors, GE wants to develop businesses aimed at meeting the world's need for more-efficient and cleaner sources of energy. The strategy, dubbed "Ecomagination," has yet to catch on with most investors. But Citigroup analyst Jeffrey Sprague sees opportunity in the market's apathy and considers GE (symbol GE) a top play on global infrastructure demand.
Opportunities in emerging markets are particularly exciting. China is the world's second-largest consumer of energy, behind the U.S., and has the fastest-growing rate of consumption. GE's energy unit sold $5 billion worth of equipment to China last year. Some investors perceive the Chinese market competing more on price than quality, Sprague says. But when the government is buying infrastructure, it wants the top of the line. For example, China was the first customer to buy GE's new 9FA gas turbine technology.
GE is also a player in nuclear energy. The Energy Information Administration projects world electricity consumption will double over the next two decades. This means that China and its enormous energy-hungry neighbor, India, must harness the power of the atom to sustain their economic growth.
GE is in a race with Westinghouse, which was recently purchased by Toshiba, to supply the next generation of nuclear reactors to new and existing power plants. The Nuclear Regulatory Commission has already approved Westinghouse's reactor. Sprague says that it's unlike that GE will win approval for its new reactor until 2010, but utility companies, including Entergy and Dominion Resources, have nonetheless decided to go with GE's reactor design. GE's nuclear business now generates about $1 billion per year in sales, mostly for fuel and services for existing power plants.
If atomic energy doesn't spark your enthusiasm, GE plans to offer customers greener options, including coal gasification and wind power. Coal gasification generates power more efficiently and creates less pollution than traditional coal plants. But price has always been a hurdle. GE, with the help of engineering firm Bechtel, wants to standardize the design of coal gasification plants to make them more affordable for utilities. GE also is working with American Electric Power to construct its first U.S. coal gasification plant, in southern Ohio.
GE bought Enron's wind-power business in 2002 to enhance its portfolio of environmentally friendly businesses. Last year, wind-turbine sales grew more than 200%, to $2.5 billion.
Sprague recently raised earnings estimates for GE through 2008. For 2006, he boosted his estimate by 2 cents a share, to $2. The stock, recently $35, trades at a bit less than 18 times 2006 earnings estimates.
-- Thomas Anderson