General Electric (GE) missed on Q3 earnings and the stock is off over 20% since. Things might have gotten worse after Fitch downgraded the industrial giant:

Fitch Ratings has downgraded the Long- and Short-Term Issuer Default Ratings (IDRs) for General Electric Company (GE) and GE Capital Global Holdings, LLC (GE Capital) to ‘A+’ and ‘F1’ from ‘AA-‘ and ‘F1+’. The Rating Outlook is Negative … The downgrade of GE’s ratings considers the deterioration in the company’s operating and financial performance including a slower return to higher margins and stronger free cash flow than previously anticipated by Fitch. GE’s performance is being affected by secular changes in the Power segment’s gas turbine business that has reduced long term prospects for growth.

The downgrade follows a Moody’s downgrade weeks earlier. It could also signal more pain ahead for GE.

Power’s Demise Could Be Structural

A major task for management is to fix the issues related to Power Systems. Revenue from the unit was down 4% Y/Y and orders were off by over 15%. Power is undergoing structural changes and apparently GE has not reacted quickly enough. The market for heavy duty gas turbines declined to 40 gigawatt from 46 gigawatt, which apparently caught the company unawares. Too much equipment and/or inventory geared towards a segment in decline might have hurt working capital as well.

The growth of wind and solar power are beginning the disrupt the traditional business models of more established power companies, including GE. Fitch also alluded to the fact that there could be excess capacity within the segment. That excess capacity could be exacerbated by the encroachment of renewable energy. Secondly, it could also make cost outs for Power less effective. I originally assumed cost outs would improve margins. If revenue falls due to a shift to 40 gigawatt gas turbines, or continued encroachment of renewable energy then the company would likely have to cut costs simply to sustain margins.