GE to Benefit From Boom in Gas Turbines
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It's always good when a company raises its revenue growth forecast. This is especially true when the company is one of the world's largest.
General Electric (NYSE: GE) recently raised its 2012 industrial revenue growth forecast to 10%, the high end of the previous 5%-10% forecast. This news sent its stock price to levels not seen since the autumn of 2008. That increased revenue forecast stemmed largely from GE's prediction of global power companies' booming demand for gas-fired turbines. This comes as utilities increasingly generate baseload electricity from natural gas.
In the past few days, the company announced $1.2 billion in new orders for 19 of its recently-developed, heavy-duty gas turbines. The orders came from Saudi Arabia, Japan, and the United States. General Electric has invested heavily into its “flexefficiency” turbines, and in technology designed to allow rapid ramp-up and ramp-down in power output while using gas efficiently. GE developed technology for both 50Hz and 60Hz, the two main frequencies for power grids around the globe. It placed a big bet on a bright future for natural gas in the past few years. This includes acquisitions worth $11 billion in 2010-2011. Now it looks as if GE's bet is beginning to pay off.
Among the clients buying the GE turbines here in the United States are Hess, Xcel Energy (NYSE: XEL), and an unnamed industrial client. General Electric is supplying two gas turbines to the Cherokee Clean Air Clean Jobs Project in Denver, Colo. This project will convert an existing coal power plant into a cleaner-burning natural gas combined-cycle facility. This conversion will lower carbon dioxide emissions by half. The new plant is owned and operated by Public Service Company of Colorado, a subsidiary of Xcel Energy.
General Electric is not alone in its belief of a bright future for gas turbine power. Its major competitor in the sector, Germany's Siemens AG ADR (NYSE: SI), also thinks along the same lines. Earlier this year, Siemens announced it had earmarked more than $1.3 billion to expand production of gas turbines -- and hopefully fend off GE, as the two industrial giants jostle for top spot in the sector. This division is the largest of the German company's 10 main segments, accounting for about 14% of the company's revenues last year.
In recent years, Siemens nearly doubled its market share to 40% in the large turbine segment for power exceeding 100 megawatts. It also currently has the at least 10-unit-a-year market to itself, as GE and Japan's Mitsuibishi Heavy Industries (NASDAQOTH: MHVYF.PK) are still developing their offerings for that particular segment of the market.
Another competitor of GE and Siemens in the turbine market is France's Alstom SA ADR (NASDAQOTH: ALSMY.PK), but it is more focused on the steam turbine market. However, even Alstom recently launched an upgraded version of its GT24 gas turbine and KA24 combined-cycle power plant. Alstom says the upgrades are a response to the increasing demand for gas-fired power generation around the world.
The upturn in gas turbine business for GE, Siemens, and the rest is being driven by four factors:
- The global shale boom, which is making natural gas cheap and plentiful.
- Fast-growing power needs in emerging economies.
- Concerns about nuclear energy in the wake of the Fukushima disaster.
- Stricter emissions rules in the United States.
Environmental regulations alone will lead to roughly half of all U.S. coal power plants being upgraded or replaced in the next decade. General Electric itself forecasts that more U.S. power plants fueled by natural gas rather than by coal within five years (2017). As for the emerging world, as shale gas deposits are developed in China and elsewhere, the markets for gas turbines will expand even further. This bodes well for Siemens and GE, especially as the latter company moves away from financial services and back toward its industrial roots in the years ahead.
For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio.
To help, The Motley Fool offers comprehensive coverage for investors in a premium report on General Electric, in which their Industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.
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