GE Vernova kicked off the earnings season in style for the electrification/powering AI theme last week, with two of its three main units delivering impressive results. The group’s Power unit (generation equipment) recorded a significant +470bp margin expansion to 11.9% and 34% bookings growth, while the Electrification unit (grid equipment) grew 22% and boasted a 660bp margin gain to 10.4%, in both cases driven by strong volumes and pricing.
This strong pricing and volume environment is likely to be sustained over coming years, giving high confidence in the earnings outlook of equipment players for both power generation (turbines) and transmission/distribution (high voltage cables, transformers…). Indeed, electricity demand from data centers has taken utilities by storm and a massive wave of capex to handle this extra demand is now coming, while supply is limited. As an illustration, the lead times for a transformer are above two years according to consultancy Wood Mackenzie.
While the focus has been on generation in recent weeks, with notably the expected restart of dormant nuclear plants and several deals for the installation of small modular reactors (SMRs), the transmission and distribution infrastructure should soon find itself in the spotlight as it is already a bottleneck (e.g. the shortage of transformers) and will have to deliver to customers an increasing amount of energy over the years.
According to various studies (notably from the Department of Energy), there is a pressing need for doubling transmission capacity in the US and globally to improve reliability, reduce congestion and constraints and to absorb large amounts of energy from new sources. Some states in the US have started to initiate capex plans, such as Texas that approved an electric reliability plan for the Permian Basin where demand from the oil & gas and data centers industries is expected to push power demand to new heights. The plan, which includes 765-kV transmission lines, could represent close to $15 billion investment.
The US presidential election outcome could add fuel to the fire as Donald Trump stated that, if elected, he would declare a national energy emergency to achieve a massive increase in domestic energy supply. This would notably include building/restarting new power plants with expedited approval processes, sparking additional or accelerated demand for power generation and transmission equipment.
Overall, a very favorable supply-demand balance is developing for power equipment players. Interestingly, the long lead times in the industry suggest that some of the pricing power/higher margins on current orders will not impact revenue and margins before 2026 at least, offering strong visibility on the earnings outlook well beyond the next quarters.
