GE Vernova has 'multi-year pathway' to profitability: Analyst

General Electric (GE) has successfully split its business into three independent companies, with GE Vernova (GEV) representing the energy-focused division. RBC Capital Markets Analyst Chris Dendrinos joins Yahoo Finance Live to discuss his bullish initiation of coverage on GE Vernova, rating the stock as Outperform with a $160 price target.

Dendrinos explains that with "multi-national conglomerate[s]," funds are often invested in certain parts of the business while others remain underinvested. With General Electric's company splitting into standalone businesses, he believes all investments for GE Vernova will be directed into the energy business, boosting transformation efforts.

When asked about competition concerns, Dendrinos says that GE Vernova is a "leader" in all of its segments. However, he notes that on the wind front, Siemens Energy (ENR.DE) could be a competitor, and in the power segment, Mitsubishi (6503.T) could pose a challenge.

Dendrinos highlights that GE Vernova has a "multi-year pathway" to financial improvement, emphasizing that it will be a long-term effort to reach normalization. Nevertheless, he believes the company will eventually achieve the desired free cash flow, which should boost the stock's valuation.

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Editor's note: This article was written by Angel Smith

Video transcript

- GE completing its energy spinoff under the new name GE Vernova-- RBC Capital Markets initiating coverage on that stock with an outperform rating this week. For more, we're talking to the author of that note RBC Capital Markets analyst, Chris Dendrinos. Chris, it is good to see you.

And maybe just to start kind of at a high level, Chris, interested to get your take on the overall strategy here. GE decided to split into these three independent businesses. The right move in your opinion, Chris?

CHRIS DENDRINOS: Yeah, absolutely. And I think the way that I think about it is if you look at a multinational conglomerate, the idea behind that business structure is you have economies of scale, and you can benefit from cost-savings there.

But what happens in a business like that is there's naturally capital allocation decisions that go on, and everyone everywhere prioritizes their best investments first. And so for GE that has a different margin profile across that business.

You know, aerospace is fantastic. Energy can be fantastic, but it's a lower-margin business than aerospace. And so I think naturally, you know, that business gets underinvested in. And as a spin-out, as a standalone business, now, the only investments that this company can make are in the energy business.

And so you have an opportunity here to prioritize everything and execute and accelerate the transformation. So I think I think it's definitely the right move for them.

JULIE HYMAN: And Chris, Vernova operates sort of a cross different types of sub-sub-energy sectors, if you will, right, whether it be solar or wind, et cetera. How should we think about its comparables? Who are its main competitors in that space? Or does it sort of stretch across other different subindustries?

CHRIS DENDRINOS: Yeah, yeah, sure. So GE Vernova, they are a leader in each of the segments they play in. And so maybe starting with the wind portfolio, the key players there are Simmons Energy, Vestas, and Nordics. And in the US, they have a leading position. In the US-- in Europe, it's competitive. And they, maybe, have a 10% or 15% market share there.

If you shift over to the power segment, it's Mitsubishi. It's them. It's-- Simmons there as well. And so they are another leader there. They have a number two market share in that segment.

And then in the electrification portfolio, it's a broad number of players-- the ABBs, the Schneider Electrics. You've got Simmons there as well. So there's a broad level of competition across every space, but the-- it's a small-- it's a small pool of companies that are competing against.

- And Chris, how does valuation look to you for this name? You argue there's more room to run?

CHRIS DENDRINOS: Yeah, yeah. And so the way I'm thinking about this-- and if you look through the company's financials and their expectations-- you have a multi-year pathway here of performance, and improvement, and growing free cash flow that is well above any of their comp group. And so my argument is you need to look out a really long way to see that growth and appreciate the value that that's being created there.

So our argument is that you don't look at 2024, don't look at 2025. Look at 2026. And that's a period of time where the business looks more normalized to us. Right now, what they're doing is they're working through a backlog of unprofitable wind losses in that portfolio, and those sort of roll off completely in 2026.

And that's when you get that full clean picture of what the true cash flow story of this company looks like. And so our argument is, look out that far, put it in a multiple that's in line with the multi-industrial average, and you get a really, really attractive valuation, and a lot of upside, and a lot of free cash flow that, I think, is ultimately going to get returned to shareholders.