A new forecast on U.S. electricity demand growth shows why we own these 2 industrial stocks
The U.S. is going to be turning on a lot more lights in the coming years — and that glow means good things for Club names GE Vernova and Eaton . That is our takeaway from Wolfe Research’s annual deep dive into the state of play for the power industry, which is an essential player in the artificial intelligence infrastructure buildout that’s captivated Wall Street in recent years. AI computing is a power-hungry process, so the U.S. needs more electricity to keep up with all the new data centers planned to be built. Notably, Wolfe Research sees significantly more U.S. power supply coming online over the next five years than it did when conducting this exercise in 2024, in a sign this investment trend is not letting up. Wolfe now projects that 265 gigawatts of electricity supply will be added in the U.S. by 2029 — well ahead of the 184GW that analysts last year expected for the five-year period ending in 2028. To help contextualize these numbers, consider this: If the Hoover Dam were running at peak capacity, it could generate a little over 2GW of power. Put simply, based on Wolfe’s forecast, the U.S. needs to add a lot more electricity generation capacity. Alternatively, for the movie buffs among us, it has also been said that with a flux capacitor and 1.21 gigawatts, traveling at 88 miles per hour will take you “Back to the Future.” Now back to your regularly scheduled programming. Against this bullish backdrop, Wolfe analysts told clients this week that they “continue to see an outlook for sustainable sales and EPS outgrowth for electrical/power-levered industrials.” That is Eaton, which makes electrical equipment used in data centers and other products across the grid, such as power capacitors mounted on electricity poles. And that is GE Vernova, which makes gas and wind turbines used to generate electricity. When we took a technical look at potential buy levels for both Eaton and GE Vernova earlier this week, we mentioned that, at the Club, we only get interested in a stock’s technical setup if its fundamentals are attractive enough for us to invest in the business. That’s just our MO as long-term investors. In that context, Wolfe’s projections are exactly the kind of data points that support the fundamentals of both Eaton and GE Vernova. The demand picture is quite strong. For GE Vernova, in particular, the supply side of the equation — i.e., its production capacity — is a big focus of investors. If a company doesn’t have enough capacity, it takes longer to deliver orders, with the risk of customers canceling orders and going to another firm that has more capacity. Too much capacity, on the other hand, and pricing power declines. That matters a great deal for GE Vernova shareholders because, as Wolfe highlighted, “price/margin expansion is more important to the GEV equity story than the pure volume ramp.” It’s economics 101: If demand for a product is very strong but supply is limited, which is the case for GE Vernova’s gas turbines, then the seller can command a higher price. GE Vernova finds itself in that exact spot . At the Morgan Stanley Laguna Conference, GE Vernova CEO Scott Strazik said the company is expected to hit a gas power backlog of 60GW by the end of the third quarter — that includes both orders and slot reservation agreements, which are effectively spots in the longer-term line. It arrives at the 60GW figure by measuring the power generation capacity of the units that have been ordered or reserved. So, that’s the demand dynamic. But, for comparison, GE Vernova’s gas production capacity is set to be only 20GW by the end of 2026, according to Wolfe. In other words, GE Vernova already has about three years of revenue locked in. As the Wolfe analysts put it, “This level of visibility/backlog coverage is not normal” for companies in their electrical equipment and industrial coverage area. With profitability being the key to the GE Vernova investment story, we have to consider what production capacity is coming online and what it could mean for GE Vernova in the years to come. At the Morgan Stanley conference, Strazik said the company plans to “build an amount of supply that we think makes economic sense.” Additionally, a boom-and-bust cycle in the early 2000s informs some of the company’s prudence on expansion. To get a full picture, though, we need to look beyond GE Vernova to its two main rivals: Siemens Energy and Mitsubishi Heavy Industries . While GE Vernova intends to keep capacity in check in order to protect pricing power and therefore profit margins, it has no control over its peers. Siemens is planning to expand capacity by about 30% to 40% over the next two years, similar to what GE Vernova has guided. However, Mitsubishi recently announced that it would look to double its capacity in that timeframe . If Mitsubishi is able to accomplish that, it “would bring demand and supply into better balance” across the turbine industry, according to Wolfe analysts. In that scenario, “we don’t see how pricing momentum would not normalize,” they wrote. “The clear risk here is that increased production capacity erodes current pricing power.” That makes monitoring the production capacity growth at all three companies a crucial task for GE Vernova shareholders. The upshot: Wolfe doesn’t think capacity expansion efforts will be able to destroy pricing dynamics any time soon. The analysts offered up two reasons why: Supply chain bottlenecks may stand in the way of ramping up capacity as much as Mitsubishi intends to, based on their conversations with industry participants. Additional capacity could end up stimulating more demand, providing an offset “to limited future pricing growth.” Basically, a more stable pricing environment than what we’ve seen in recent years could lead to a step up in orders from customers who previously had return-on-investment concerns due to the big price hikes. Consequently, the favorable pricing dynamics for the turbine makers can continue if they all expand production capacity in the 30% ballpark. “This would put industry capacity in the ~60GW range, i.e., still well short of 2025E order levels that sit in the ~80GW range,” Wolfe wrote. Bottom line Ultimately, while the capacity investments require monitoring, we think the near-to-midterm outlook looks very favorable for GE Vernova and, by extension, Eaton. Plus, as Jim Cramer has said, he believes it’s possible for GE Vernova to expand capacity even more than it plans to without derailing the investment story. Now what about the technicals that we covered earlier in the week? As it stands now, we may well be looking at a bounce off GE Vernova’s 50-day moving average, an event we highlighted as a possible buy signal. We are sitting on it now, however, so we’ll have to wait until next week for confirmation that it is indeed serving as support. For the Club, we do maintain a hold-equivalent 2 rating, meaning we want to see a larger decline before adding to our position in GE Vernova. But for members without a position who wish they had one, the combination of a favorable technical setup and strong fundamentals does make this an interesting point in time. (Jim Cramer’s Charitable Trust is long ENT, GEV. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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