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About GE Vernova

Sometimes I wake up in the morning and think about how luxurious a spin-off is.

The birds chirp, the sun is peeking its face out of the blue-tinted sky and all I’ve got on my mind is how often spin-offs unlock shareholder value through refocusing and sometimes even reinventing companies as a result of breaking a large enterprise into a few separate parts, allowing it to better allocate capital, enhance operational efficiencies and put a smile on my face.

Ok, so I’ll admit that this isn’t what’s always on my mind when I wake up in the morning, but I’m afraid to say it’s not that far off.

In the most digestible and reasonable terms, a spin-off is a formal corporate maneuver in which typically a larger enterprise seeks and finds tangible ways in which it can split its entire company into a handful of parts in order to do the things I just mentioned, the ultimate goal being generate value for shareholders, of course, including themselves.

For a very large company such as General Electric, it is usually a stellar and highly feasible way to simplify the business.

In April 2024, General Electric spun off its main energy division, now known today as GE Vernova, which both simplified operations on the part of the still large and in charge General Electric while also giving a little more room to run to GE Vernova (i.e., allows those at Vernova to just focus on what they know best, energy, and best focus its resources on energy alone), which as a result of the spin-off became its own publicly traded company, particularly focusing on segments such as renewable energy, power and also electrification, obviously intent on playing a sizable corporate role in the proposed clean energy transition. If you couldn’t quite already tell, the company also plays an important position in grid systems globally and other means of power generation.

In diving a bit deeper into how the company actually makes money, Vernova manufactures and sells equipment to those that operate gas power plants, steam power plants, nuclear power plants, hydroelectric power plants, also being involved in wind turbines and solar systems along with other power conversion technologies. Outside of these products, Vernova also services the equipment it sells to its clients, which I favor since this can be viewed as a definitive recurring element in the company’s revenues, and regardless of the economic climate, when its customers need to get its machines routinely (or immediately) serviced, they will pay up given just how mission critical said equipment is and just how detrimental it could be if they weren’t, costing them a lot more than GE’s recurring maintenance fee.

One of the initial things I favor about this company is that it is clearly forward-looking in its technologies. In other words, this company isn’t trying to be some new legacy oil and gas company, but rather it is focused on the rapidly expanding decarbonization market, and whether or not you necessarily agree with the premise of clean energy and the green economy, in the long run it is more than likely here to stay, whether you like it or not.

All I know is that this presents a slew of opportunities for a firm like this one, including some potential favorable financial and permitting (i.e., zoning, construction, etc..) benefits to be garnered from the municipalities and other global governmental agencies it works with both now and in the future.

In the scope of whether or not one could reasonably consider GE Vernova to be resistant towards recessionary pressures, long-term servicing contracts certainly don’t hurt, and upon performing some more research, the company already has a market share of 30% when it comes to the global electricity generation, and having this much of a foothold in electricity generation globally speaks to the scale and dependability people have on this company, acting as an inherent revenue cushion in the long-term. Plus, I enjoy the fact that Vernova has a rather diversified, yet clean energy-focused portfolio, being that if there happens to be some softening in one area of energy, it has other avenues through which it can continue attaining revenues and even grow in order to counterbalance slowdowns.

A general word of caution, however, might be that since we are still in the relatively early innings of clean energy, GE Vernova and others are still going to be a bit sensitive towards current and future policy shifts, but on the net, this doesn’t concern me a great deal being that many governments around the world are leaning green and in many respects actually putting their money where the mouths are. Also, energy markets and associated prices can fluctuate based on general supply and demand dynamics, and although this has been true for centuries, it is still a bit more of a risk one must be willing to assume.

In putting this introduction to the side, let’s now put some more down regarding Vernova’s finances, so as to give us a better idea as to just how financially healthy and viable this company is post-spin-off.

Vernova’s stock financials

GE Vernova has a market capitalization of $89.23 billion, a stock price of $323.71, a price-to-earnings (P/E) that is in the order of 70.75, and the company does not pay its investors a regular annual dividend at the moment. 

So far, mostly sensible, as this company is in investment mode, and being that by nature it is a capital intensive enterprise, I couldn’t begin to blame Vernova’s leadership for not dishing out an annual dividend to its shareholders, especially as it is still entering new territory. What I can say regarding the company’s present price-to-earnings ratio is that this company’s stock (NYSE: GEV) is far from cheap, which tracks given the heck of a run its stock has had ever since going public, trading well above the commonly held fair value benchmark of 20.

At any rate, don’t be too quick to forget that GE Vernova became a public company in early April of this year, so it is still a very, very new company with respect to the public markets.

With that in mind, some of the financials I am about to dive into are going to be a bit limited in terms of historical figures as well, but we will do the best that we can with the information that we have, hell or highwater.

According to the company’s balance sheet, GE Vernova’s executives are in charge of $46.1 billion in terms of total assets alongside $38.7 billion in terms of total liabilities, which is thankfully the general breakdown that I expected for the most part, especially when considering that industrial companies tend to have higher liabilities given all of the (typically longer-term) capital required to sufficiently build out their projects, and especially when it comes to energy infrastructure, this company was always bound to have a slightly higher-pitched amount of aggregate outstanding liabilities. Still, GE Vernova finds itself in a comfortably asset-hedged position at the time of this publication, with its total assets weighing comfortably greater than its liabilities. Upon conducting more research into the company’s books, Vernova actually boasts a debt-free balance sheet, which might seem a bit counterintuitive given the total liabilities figure I just mentioned, but the important distinction is that liabilities are overall financial obligations that a company maintains, whereas debt is specifically money the company borrowed and is charged that it must eventually repay with interest.

That’s your accounting fun fact for today, but it really is an excellent sign, offering Vernova an inordinate amount of financial flexibility, which is particularly of the essence given the industrial, cost-heavy nature of the company and the energy sector.

With respect to the company’s balance sheet, I am feeling just fine right about now, especially when incorporating the company’s strong cash position, thank you very much.

As it relates to the company’s income statement, Vernova’s reported revenues in 2021 through 2023 have been steady, spanning between a relative low of $29.6 billion (2022) and a high of $33.2 billion in 2023, and I’ll be the first to admit that it sort of sucks that there isn’t more direct information on its annual revenues (again, due to the spin-off), but it is nevertheless what we have at our immediate disposal, and if it tells us anything, it whispers that GE Vernova’s revenues tend to be on the steady side, which is quite typical of energy companies, however, if you know me at all, you know that I don’t make a habit out of allowing past performances fully dictate my perspectives on the future (i.e., the past is already priced in, you must think about the future), therefore, as Vernova continues growing into itself and fully leveraging the power unlocked by virtue of it becoming its own enterprise, I think it will be able to slowly but steadily dial up its revenues in the coming years and decades, especially when including the heightened worldwide governmental agency focus and demand for clean energy worldwide.

Regarding the company’s cash flow statement, GE Vernova’s total cash from operations during this same timeframe have actually made me feel all smitten inside, and you can take it to the bank that I don’t say this kind of thing that often at all.

Mainly because it is just weird to say, but I digress.

Vernova’s cash from operations in 2021 were resoundingly negative, specifically at -$1.66 billion, but the company’s leadership has made more than impressive strides towards and into positive territory, clocking in a much improved -$135 million in 2022, delving into the green in 2023 at $604 million. I am glad to further report that the primary reasons behind such a remarkable turnaround can be attributed to an increase in demand for the company’s services (maintenance) segment, but also through the expansion of its earnings before interest, taxes, depreciation and amortization (EBITDA) margins across all of its segments, acting as a direct means of improving its cash flow.

Vernova’s stock fundamentals

Now, although this might not make a whole lot of sense, bear with me, as when it comes to GE Vernova’s net profit margin, it is not currently shown on Charles Schwab’s platform, and this is one of those rather specific, spin-off-related caveats in which the recently spun-off company doesn’t yet explicitly publicize its net profit margin quite yet, but one could reasonably expect it to begin publicizing it like any other publicly traded company in the coming quarters. Nevertheless, in the spirit of being true inquisitive investors and not stopping there, I’d like to manually calculate the company’s net profit margin by taking its most recently reported net income and dividing it by its revenue and multiplying this figure by 100.

In doing this, it turns out that as of its latest reported 2023 figures, Vernova has a net profit margin just below breaking even, at -0.1317%, to be exact.

When understanding that the company is still experiencing some transitioning and gradual corporate detachment from General Electric, as well as the company’s intensive ongoing capital deployment and the investments it is making rapidly across the board, I am fine with the state of the company’s calculated net profit margin, as the real operational base is still being built and given my bullish stance on clean energy demand in the long run, I refuse to get hung up on Vernova’s objectively lackluster net profit margin for this reason, and other previously mentioned ones.

Should you buy Vernova’s stock?

I love me a good spin-off, and this was not merely a good one, but a seriously great one.

Unfortunately, I think the stock has been a little too hot in terms of performance, up about 100% since its debut in the public markets, and while I think there isn’t a lot in the way of slowing this company down, the risk-reward profile is all too skewed from my vantage point for the time being, and that is the difference between me lending this company’s stock a “buy” rating, and what I’ll actually be offering it today, a “hold” rating.

Still, in putting the valuation on the backburner for a moment, GE Vernova’s balance sheet (and complete lack of associated debt) is well equipped, its revenues have been net stable, its net profit margin is basically where it ought to be when putting all of the pieces of the puzzle together, with its total cash from operations progress being the obvious highlight here.

There is a lot to like, but I don’t like it this much at these price levels.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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