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What's Threatening GE?

Our moat downgrade was prompted by secular threats facing GE power and lingering liabilities at GE capital.


Josh Aguilar: We recently downgraded General Electric's moat to narrow from wide. The way we differentiate between a wide moat and narrow moat comes down to our confidence in excess returns. When we assign a firm a wide moat, we're saying we have very high confidence that a company will achieve normalized excess returns over the next decade, and more likely than not over the next 20 years. By contrast, with narrow-moat-rated firms, we're still saying we think it's more likely than not a company can clear that 10-year hurdle, but we don't have that same high degree of confidence we do with wide-moat-rated firms. What ultimately affects our visibility into the future with GE really are two main factors: secular threats facing GE power and lingering liabilities at GE capital.

With power, which is the firm's largest segment by revenue, renewables like wind power are now a cheaper alternative from an unsubsidized levelized cost of energy standpoint. Median prices for wind power as measured by dollar per megawatt hours are, on average, about 25% cheaper than natural gas through the cycle. Moreover, while natural gas generates around half the carbon dioxide emissions that burning coal does, wind power produces virtually no negative environmental impact--it's a clean source of fuel that doesn't emit particulates into the air. 

Joshua Aguilar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.