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GE: Vernova Will Continue on Stronger Path Independently; No Surprises In Targets

We think Vernova is poised to preserve its leading position within a small oligopoly in the energy transition.

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GE Vernova—General Electric’s GE future energy spinoff—held its inaugural investor day on March 6. After reviewing the materials, we see no reason to change our $154 fair value estimate for GE. In our discounted cash flow model, we assume Vernova is worth roughly $35 billion in equity value. Over the long term (by 2028), Vernova expects to increase organic sales at a mid-single-digit compound annual rate, achieve a 10% adjusted EBITDA margin, and convert free cash flow at a 90%-110% rate.

We largely agree with these targets, along with the trajectory Vernova will take to reach them. For now, however, we expect more high-single-digit organic growth for Vernova in the back half of the decade, thanks to the demand pull from the Inflation Reduction Act. Reasonable minds could disagree, and the notoriously conservative management team said these targets are a starting point, suggesting potential upside. However, if the trade-off meant underwriting less profitable projects, we’d much prefer that Vernova stick to its more moderate sales outlook to avoid old mistakes.

Much of our confidence in management’s outlook stems from the lean tools the company has adopted since Larry Culp took the helm at GE and Scott Strazik took the reins at the power business. The results of these efforts are evident in continued strength in gas power and inflecting margins in both grid and onshore wind. Until recently, grid and onshore wind were unprofitable. The more certain legislative backdrop has allowed Strazik and his team to rightsize the business for the appropriate level of demand. Furthermore, less-favorable international backlog in offshore wind should roll off over the next couple of years, while much of power’s total backlog is built on higher-margin services.

We think GE Vernova is poised to preserve its leading position within a small oligopoly in the energy transition.

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Data as of Source: Morningstar Direct.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Authors

Joshua Aguilar

Director of Equity Research, Resources
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Joshua Aguilar is the director of resources equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Aguilar joined Morningstar in 2016 as an associate on the financials team, and he was promoted to analyst on the industrials team in 2018 and to senior analyst in 2022. He has served as associates coordinator since 2021 and led Morningstar's diversity efforts as DEI co-chair since 2020. Aguilar has been a mentor to several associates on their paths to becoming analysts. He also has hosted a Morningstar earnings town hall, participated in analyzing Morningstar stock, and been a strong contributor through both client interactions and his General Electric stock call. Aguilar co-authored an Outstanding Research Achievement-winning piece with colleague Kris Inton on CEO compensation in 2021. He also has taught Morningstar's model to new hires for many years as part of the valuation committee.

Before joining Morningstar, Aguilar was a practicing business transactional attorney in Florida. He graduated magna cum laude with a bachelor's degree in political science and criminology from the University of Florida. He also has a Master of Business Administration from Rollins College and a Juris Doctor from Wake Forest University.

Brett Castelli

Equity Analyst
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Brett Castelli is an equity analyst, energy and utilities, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. His coverage focuses on clean energy companies across renewables and emerging technologies.

Before joining Morningstar in 2021, Castelli spent more than eight years in various analyst roles for TortoiseEcofin, a boutique asset manager. His coverage focused on North America and included companies within traditional energy, electric utilities, and renewables. Additionally, he assisted with the firm's environmental, social, and governance efforts and played an important role in integrating ESG into the investment process. Castelli spent a year at the firm's London office following an acquisition.

Castelli holds a bachelor's degree in finance from the University of Missouri's Trulaske College of Business. He also holds the Chartered Financial Analyst® designation.

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