Going Into Earnings, Is GE Vernova Stock a Buy, Sell, or Fairly Valued?

GE Vernova is set to release its third-quarter earnings report on Oct. 23. Here’s Morningstar’s take on what to look for in GE Vernova’s earnings and stock.

Key Morningstar Metrics for GE Vernova

• Fair Value Estimate: $203.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Earnings Release Date

• Wednesday, Oct. 23, before the start of trading

What to Watch for in GE Vernova’s Q3 Earnings

• The company gave preliminary commentary last month regarding revenue and profitability in the third quarter, so surprises are unlikely there.
• We will be watching for commentary on orders across gas power and electrification. Any comment about gas power demand from data center customers is noteworthy.
• The company’s investor event on Dec. 10 is more important. We expect GE Vernova to raise its long-term profitability expectations there, as well as potentially discuss shareholder returns, such as initiating a dividend or share buyback program.

Fair Value Estimate for GE Vernova

With its 2-star rating, we believe GE Vernova’s stock is overvalued compared with our long-term fair value estimate of $203 per share. We recently increased our fair value estimate after raising our long-term financial forecasts for the gas power and electrification segments, and also awarded the company a narrow moat.

The key drivers of our valuation are revenue growth, EBITDA margins, and free cash flow conversion. We model annual revenue growth of approximately 6% per year through our forecast period, consistent with the company’s mid-single-digit target. We assume the electrification segment achieves the fastest revenue growth, while its power segment sees relatively slower growth.

Read more about GE Vernova’s fair value estimate.

Economic Moat Rating

We assign GE Vernova a narrow moat, underpinned by intangible assets and switching costs. GE Vernova is a market share leader in oligopolistic markets such as gas turbines, wind turbines, and high-voltage equipment. While historical returns on invested capital have been underwhelming, we see a strong line of sight to sharply improved results over the long term. The firm’s power segment consists largely of its gas power business. The market for gas turbines is concentrated in the hands of three global players: GE Vernova, Siemens Energy, and Mitsubishi. GE Vernova has a long history in gas turbines and has the largest installed fleet globally.

Read more about GE Vernova’s economic moat.

Financial Strength

GE Vernova’s financial strength is strong following its spinoff from GE, consistent with its investment-grade credit ratings. The company’s balance sheet has a large net cash position, and cash flow generation is improving.

The company’s balance sheet includes $5.7 billion of cash and cash equivalents, relative to approximately $100 million of debt after the spinoff. In addition, a $3 billion revolving credit facility will support the company’s liquidity. On the liability side, the company’s balance sheet does include an approximate $1.6 billion net underfunded pension liability as of year-end 2023.

We do not expect cash returns to shareholders to be a meaningful portion of GE Vernova’s capital allocation in the near term. The company does not plan to pay a dividend soon, and we do not expect meaningful share repurchases either. We expect both options to remain on the table once its free cash flow generation improves in the coming years.

Read more about GE Vernova’s financial strength.

Risk and Uncertainty

We assign GE Vernova a High Uncertainty Rating based on its cyclical end-market exposure and inconsistent track record of profitability. Many of the firm’s end markets, such as gas power and wind, are subject to cyclical fluctuations, which can impact the company’s results. In particular, the company’s wind business is sensitive to US policy changes, as incentives have historically driven a meaningful role in customer demand. Additionally, during the company’s history under GE, it exhibited an inconsistent profitability track record. Counterbalancing these risks is the company’s well-diversified customer base and geographic diversification.

Read more about GE Vernova’s risk and uncertainty.

GEV Bulls Say

• GE Vernova enjoys leading positions in oligopolistic markets, including gas turbines and North American onshore wind.
• GE Vernova’s products and services stand to benefit from the ongoing electrification and decarbonization of the global economy.
• GE Vernova’s balance sheet is in a strong position, with an investment-grade rating.

GEV Bears Say

• GE Vernova’s historical margin and track record on profitability have been inconsistent.
• The company’s onshore wind business is focused on the US market, which is sensitive to changes in tax policy.
• The market environment for gas turbines could face headwinds from long-term decarbonization targets.

This article was compiled by Kayleigh Hall.