GE Vernova's Rally Could Continue as Wind Business Gains Ground

Key Points

• GE Vernova has only been an independent company for a few months, but it has already distinguished itself due to the dominance of its Power unit.
• Improving cash flow and bottom-line results have helped the company work toward streamlining its Wind business.
• A surge in global power demand has helped to propel Vernova shares to all-time highs as of late August.

Shares of energy business GE Vernova LLC NYSE: GEV surged to all-time highs at the end of August, the first time the firm's stock ascended to $200 per share since it was spun off from parent company General Electric Co. NYSE: GE several months prior. The recent uptick in share price may be most closely linked to a massive increase in global power demand thanks to economic growth, the proliferation of new technologies making use of sizable quantities of electric power, and summer heatwaves.

Stepping back from the advantageous position GE Vernova currently enjoys as a power supplier in a high-demand environment, investors will want to know whether this newly independent company can maintain this upward trajectory over a longer period. Though GE Vernova was only listed earlier this year, it benefits from legacy infrastructure that allows it to include upstream and downstream power generation operations and a broad array of wind, gas, and electricity products and services.

Mixed Earnings Reveal Positive Income, Cash Flow Trends

GE Vernova's second-ever quarterly report contained mostly good news and some bad news. At a crucial time when demonstrating profitability is crucial, the company delivered a net income of $1.3 billion, leading to EPS that beat analyst predictions.

Additionally, the energy firm turned around last year's pre-spin-off cash outflows, instead generating cash flow from operating activities of slightly under $1 billion. This left GE Vernova with a cash balance of $5.8 billion at the end of the quarter, healthily balanced against total debt of under $1 billion.

One area that was lacking was revenue, as total revenues of $8.2 billion represented just a 1% year-over-year improvement and fell short of consensus estimates.

GE Vernova's Power Unit Buoys Other Business Lines 

By far the best-performing of GE Vernova's three units in terms of revenue, Power experienced orders growth of 30% year-over-year for the most recent quarter. A full $4.5 billion of quarterly revenue—more than half of total revenues for the period—came from the company's Power unit.

For GE Vernova, the strength of its power business means it has the flexibility to adjust and improve its electrification and wind arms, with a particular focus on the latter. For the second quarter, the company's Wind unit saw orders and revenues decline. This unit was the only one of GE Vernova's three primary business lines to experience declines in both of those categories. As a result, Wind remains unprofitable, although its situation is improving. With cash on hand and supported by strong power demand, GE Vernova can shift its focus toward profitable on shore wind projects in favor of costly offshore projects.

Despite a 44% year-over-year decrease in Wind orders, revenue for that segment fell at only half that rate, suggesting that GE Vernova's wind business is experiencing beneficial pricing momentum.

GEV's Big Bump From Jefferies

To start September, analysts from Jefferies began covering GE Vernova with an initial buy rating and a lofty price target, giving the company a 30% upside potential. As a fledgling independent company, retail investors may be inclined to wait to hear from analysts across Wall Street before making significant moves on Vernova shares. It's no surprise, then, that the share price reached its peak around the same time as Jefferies released its commentary.

Another major question from potential investors—and one that analysts cannot answer—is both whether and when GE Vernova may begin to issue dividends. Not only would doing so entice investors with the potential for passive income on their investments, but it would also further strengthen the company's signaling that its financial health and cash positions are strong. If the company is prioritizing reconfiguring its Wind arm, it may be less likely that we'll see dividend payments start up until a later quarter.

Positioning and Demand for GE Vernova

GE Vernova currently benefits from two vital advantages: it has well-established divisions across multiple power modalities, and each of those units stands to benefit from a protracted increase in global power demand. To be prepared to continue to ride the recent rally beyond this particular moment, the company is moving to maximize efficiency in its Wind business, a move that could bring this segment into profitability and further boost top- and bottom-line performance.