What's Threatening GE?

Josh Aguilar: We recently downgraded General Electric's moat to narrow from wide. The way we differentiate between a wide moat and narrow moat comes down to our confidence in excess returns. When we assign a firm a wide moat, we're saying we have very high confidence that a company will achieve normalized excess returns over the next decade, and more likely than not over the next 20 years. By contrast, with narrow-moat-rated firms, we're still saying we think it's more likely than not a company can clear that 10-year hurdle, but we don't have that same high degree of confidence we do with wide-moat-rated firms. What ultimately affects our visibility into the future with GE really are two main factors: secular threats facing GE power and lingering liabilities at GE capital.

With power, which is the firm's largest segment by revenue, renewables like wind power are now a cheaper alternative from an unsubsidized levelized cost of energy standpoint. Median prices for wind power as measured by dollar per megawatt hours are, on average, about 25% cheaper than natural gas through the cycle. Moreover, while natural gas generates around half the carbon dioxide emissions that burning coal does, wind power produces virtually no negative environmental impact--it's a clean source of fuel that doesn't emit particulates into the air.