Here's What Siemens' Big Power Move Means to GE Investors
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There is no more bitter rivalry in the industrial sector than General Electric (NYSE: GE) and Germany's Siemens (NASDAQOTH: SIEGY), so when one company's management speaks, it's a good idea for followers of the other company to take note. The two compete on a number of fronts, but the focus of investors' attention is likely to be on power -- particularly relevant because an improvement in power is essential for GE to successfully execute its turnaround strategy. That said, let's take a look at what Siemens' latest presentations mean for GE investors.
A declining market
It's no secret that the market for gas turbines has been in decline for the last few years, and this fact lies at the heart of the problems GE and, to a lesser extent, Siemens have had in the last few years -- Siemens stock has underperformed the S&P 500 by around 62% in the last five years, and GE has also by a whopping 114%. As you can see in the chart below, gas turbine orders (in terms of gigawatts of power) have roughly halved in that period.
To that effect, there's been a lot of speculation around what both companies will do to combat pricing pressure and ongoing margin declines that led to Siemens' power and gas segment profit declining 76% to 377 million euros in 2018 and GE power reporting a loss of $808 million and a cash outflow of $2.7 billion in 2018.
Data source: General Electric presentations.
GE restructures and Siemens announces big news
GE's CEO Larry Culp has set about restructuring the power segment by separating it into two -- GE Gas Power business and the ongoing GE Power business comprising steam, grid solutions, and nuclear. The more problematic of the two, GE Gas Power, plans to expand margin in its transactional services and equipment sales in the next couple of years.
Meanwhile, Siemens recently announced it would spin off its gas and power business and add to its majority stake (currently 59%) in wind power company Siemens-Gamesa. Moreover, Siemens announced its moves to separate the business would lead to an additional cost savings of 500 million euros on top of the 500 million euros already planned for. In total, Siemens believes it will generate 1 billion euros in cost savings by 2023, with 700 million euros' worth by 2021.
As such, the segment's margin is expected to double to 8% from 2018 to 2021, and adjusted earnings before interest, taxes, and amortization (EBITA) is expected to more than double in the period, with a low-single-digit increase in revenue. Clearly, GE's big rival is shaping up to better compete.