General Electric falls on fears of lost nuclear sales
9:58 AM, E.T. | March 15, 2011
Shares of General Electric Co. (GE-N 19.18 -0.43 -2.19%) and other large U.S. industrial companies extended this week’s declines on Tuesday on concerns that Japan’s nuclear crisis will reduce future sales of nuclear technology and prevent a global economic recovery from gaining traction.
But the declines moderated as investors reassessed the likely risk to the companies.
GE designs nuclear reactors, including all six at the plant at the center of Japan’s nuclear disaster, but analysts and investors said that business is a tiny portion of its industrial revenue. They also downplayed any legal risk to GE from the damaged nuclear facility, parts of which include the company’s equipment.
Once the crisis passes, Japan will need to add power capacity, and GE’s gas-driven turbines could benefit from increased investment.
“I don’t think the issue with GE is going to be material,” said Perry Adams, senior portfolio manager at Huntington Private Financial Group, which owns shares of the company.
The sell-off is “more related to general uncertainty from the horrific tragedy,” Adams said. “Japan’s the third-largest economy in the world.”
So-called channeling laws place risk more on a nuclear plant operator, protecting suppliers of the equipment, he said, adding: “We still think the fundamentals are sound for GE.”
Japan faced a potential catastrophe after an earthquake-crippled nuclear power plant exploded and sent low levels of radiation floating toward Tokyo. Two reactors exploded on Tuesday at the Fukushima Daiichi plant after days of efforts to cool them. Kyodo news agency said the nuclear fuel pool at the No. 4 reactor may be boiling.
GE supplied equipment to reactors 1, 2 and 6 at the Fukushima Daiichi plant, according to Citi; Toshiba supplied reactors 3 and 5; and Hitachi supplied equipment to reactor 4.
A GE partnership with Hitachi that makes reactors generated about $1 billion US in revenue last year.
If the reactor releases large amounts of radiation, GE stands to lose tens of billions of dollars in future sales. If the current situation is contained, GE and its rivals are more likely looking at delays to future nuclear plants.
GE’s nuclear business accounts for only about 1 percent to 2 percent of its industrial revenue—mainly from services, since few new reactors are being installed, JPMorgan analyst Stephen Tusa said in a research note. Tusa said the drop in GE shares was overdone even given the possible hit to earnings from weaker Japanese and global economies.
“The biggest (potential future sales) go out to command economies like China,” said to Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire. “It’s in the democracies where this is going to gum up the pipeline for nuclear.”
GE is unlikely to be held liable, and any legal action would take decades, said De Gan, whose firm owns shares of the company.
ROOM TO FALL
Still, GE shares could have farther to fall because of the potential hit to its reputation.
“It’s not so much the loss of revenue, it’s the chink in the armor (for GE),” said Keith Springer, president of Springer Financial Advisors in Sacramento, California, which recommends clients underweight large-cap and industrial stocks.
“This could open up the door to competition in other areas,” he said. “It could make cities, states and governments start to think, maybe we should start looking at alternatives.”
That in turn could double the decline in GE’s share price, Springer said.
Other industrial stocks were lower, but off the day’s worst levels. The S&P Capital Goods index was down 2.1 percent, while global manufacturers like United Technologies (UTX-N 78.99 -0.52 -0.66%), SPX Corp. (SPW-N 74.04 -0.57 -0.76%) and Caterpillar Inc. (CAT-N 101.63 0.88 0.87%) were also down.
For U.S. industrial companies, Japan’s crisis is “probably a benefit,” said analyst Brian Langenberg of Langenberg & Co, who covers industrial names and considers GE “an also-ran” in nuclear technology. Sales of gas and other turbines, which have higher margin and less risk, could benefit if development of nuclear facilities stalls.
If Japanese industrial production is knocked offline, rivals in other countries, such as U.S. automakers, could gain a portion of that business, he said.
Analysts are unlikely to cut earnings estimates for industrial companies because of Japan’s crisis, but concerns about risk and the global economy will cause investors to revalue the sector.
“The market is going to pay less,” Langenberg said. “The actual economic impact will be minimal. I think they get hit roughly in line with the market.”