Is GE’s Clean Energy Bet Faltering?

Weakness in Europe and a sharp downdraft in demand for General Electric’s (NYSE:GE) wind power technology and other energy production hardware concerned investors. Despite posting a 16 percent increase in first quarter net income, the company shares were trading in the red Friday morning, dropping as much as 3.88 percent.

Chief Executive Officer Jeffrey Immelt has focused on reducing the company’s reliance on its financial arm — GE Capital —  in order to invest in the grow of its industrial businesses, which investors tend to value more highly. To further this goal, GE has invested a significant amount of financial and human capital to cement its position in the markets for clean energy technologies, like wind turbines. The company gambled that government policies aimed at lowering carbon dioxide emissions would increase the demand for energy generation systems that did not use coal — a technology that GE could provide at a healthy profit, according to The Wall Street Journal.

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But demand for GE’s renewable energy products has stagnated. As the company said in a presentation Friday morning, revenues for its “power and water” unit — which includes its clean energy businesses — dropped 26 percent and profits fell 39 percent. For wind, revenue dropped 53 percent, likely pulled down by customers concerned about the future of the U.S. wind power credits. Excluding the problems brought by government policy, natural gas also represents a challenge to renewable technology demand over the long term…

Following the release of the company’s earnings report, Immelt acknowledged that GE’s management “always anticipated that the first half of 2013 would be our toughest comparison.” But he noted that the power and water sector’s performance was expected to improve in the second half of the year.

However, early assessments from analysts were not as forgiving. In a research note seen by the Journal, Jeff Sprague, of Vertical Research Partners, wrote:

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“…we are surprised how bad Power & Water margins are at 14.9%, down from 18.1% last year. Power & Water sales were down 26 percent, missing our -14 percent estimate decline. Sales were expected to be weak on declining wind and gas turbine volumes, but the argument was that these declines were mix positive given low margins on OE equipment. Last year, GE pointed to margin pressure in Power & Water because wind was strong. GE affirmed its 70bps Industrial margin target for the year, but we are doubtful it can get there and expect negative EPS revisions for 2013 in the wake of this result.”

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