Not So Fast, Wall Street Analysts!

by Edward Nebinger, Forecast International.

LEAP-1B Engine. Source: CFM International

For the past month, Wall Street analysts have been having a feeding frenzy over General Electric, driving the price lower and lower until it reaches the point where they can jump back in.  It’s like a self-fulfilling prophesy – every day they find some new fault to gripe about, set lower target prices, announce them to the world, and, amazingly, the price goes down!  Actually, it’s wearing a little thin and the price seems to be sticking at around 18 bucks a share. 

We can’t speak to pension plans, windmills and such, but Forecast International, which has been tracking gas and steam turbine markets for over 40 years, can provide some interesting news about GE’s power industry prospects that might open the eyes of the analysts.

While we would be the first to agree that Jeffrey Immelt should have stepped down years ago, we can report that in the realm of gas turbines and steam turbines, which increasingly make up the lion’s share of the power market, GE is absolutely No. 1, and here are the facts that support that statement.

Let’s look at GE’s projected markets, starting with aviation gas turbines.  The market for large jet transports and regional commuter aircraft through 2031 and beyond represents what is probably the largest re-equipment cycle that the world has ever seen, with a projected 31,000+ of these airliners valued at an astounding $4.4 trillion at pre-discounted prices to be built over the next 15 years!  This impressive building cycle will be boosted by strong markets in business Jets, military fighters and transports, trainers, and support aircraft, as well as many thousands of rotorcraft, all powered by gas turbines in the form of turbofan, turboprop, or turboshaft engines.  World gas turbine builders will accrue an estimated total value of $1.25 trillion through 2031, of which General Electric’s share is projected at $417.3 billion, or about 34 percent of the world market by value.  These figures include calculations for depot and maintenance spares, but do not include additional revenues from maintenance and support contracts of many types.  The closest competitor in this market will be Pratt & Whitney, which will accrue about 21 percent of the market value.

The fact is that GE engines are aboard virtually every Boeing airliner being built today, either as the exclusive powerplant or as an engine choice for customers.  Among widebodies, these include variants of the Boeing 747, 767, 777, and 787.  Some Airbus A330-200/300s carry the GE CF6-80, and GE is also a partner on the GP7200 engine, an option on the giant Airbus A380.  Among  narrowbodies, where a tooth and nail battle is being fought for market share, the world famous CFM56 turbofan is doing yeoman duty powering thousands of older Airbus A319/A320/A321s and Boeing 737s, while the newer LEAP-1A is an engine option on the A320neo series and the LEAP-1B exclusively powers the 737 MAX family.  Both the CFM56 and LEAP engines are produced by CFM International, a collaborative effort of GE and the French manufacturer Safran, formerly known as Snecma.

GE will achieve this production at four major manufacturing centers in the U.S., plus the facilities of manufacturing associates in Italy, the Czech Republic, Japan and South Korea.  While Forecast International does not have exact data on the sharing arrangements between GE and its manufacturing associates overseas, our calculations have assumed a 50/50 share of the revenues of each.

A secondary market, while not of the same dimensions, is the market for industrial gas turbines of all types, including large and small installations for power generation, as well as mechanical drives on gas and oil pipelines, oil rigs, and other industrial applications.  Ever-growing needs for more electrical power in emerging industrial nations have resulted in strong demand for new power installations, many of them combined-cycle, in which gas and steam turbines work together to achieve higher efficiencies.  Also, while the more efficient use of coal is being pushed, many coal-fired electrical plants, particularly smaller ones, are being repowered with gas turbines.  America’s resurgence as a producer of oil and gas has also resulted in the construction of thousands of miles of pipelines crisscrossing the U.S., with gas turbines mounted directly on or near the pipeline, providing compression and pumping to push the product.

Specifically, for industrial power generation and mechanical drive applications, the world industry is projected to produce just over 20,000 gas and steam turbines, with a combined value of $353.3 billion.  Many of those turbines are small units used for various small generation and mechanical drive applications.  However, GE’s focus is on very large industrial turbines with ratings often in excess of 100 MW.  Therefore, GE, which is projected to build just over 5,700 units through 2031, will nevertheless capture revenues of $120.2 billion, or 34 percent of the total value, not including the added value of buildings, switchgear, and other essentials to very large installations.  Actually, the world’s thirst for more and more power is leveling off, as the newer power installations are increasingly more efficient in terms of MW produced per dollar of cost. This is particularly noticeable at the top end, with installations of 100 MW plus, where there is a growing overcapacity that needs to be addressed by the competitors, principally Siemens and GE.  Nevertheless, the world power industry is not going to go away and, once again, General Electric, while being pounded daily by critics, is sitting squarely in the driver’s seat.

Finally, an important third market is represented by the increasing use of gas turbines for main propulsion and electrical power requirements aboard many new classes of warships worldwide.  Based upon current and planned builds, the marine gas turbine market through 2031 will call for at least 963 gas turbines valued at $8.02 billion.  Rolls-Royce, with its MT-30 Trent aviation derivative, and Zorya- Mashproekt in Ukraine will each capture about 31 percent of the value, while GE will accrue about 35 percent. Of significance, Rolls-Royce, with its efficient MT-30 – an aviation derivative of the Trent – has been challenging GE for contracts to power new classes of U.S. Navy warships, but GE, with its LM2500+, also an aviation derivative, appears to be fending it off.

In summary, Wall Street analysts, who have been trashing GE daily, should perhaps take another look at the future of this great company.  Maybe Chief Executive Flannery did his homework before he bought 60,000 shares last week!


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