GE's Getting Hammered, but It Won't Take the Fall for Japan's Potential Chernobyl

Last Updated Mar 16, 2011 6:33 PM EDT

Shares in General Electric (GE) are getting hammered over fears of a meltdown at the Fukushima Daiichi nuclear power plant about 150 miles northeast of Tokyo. Given 24/7 news coverage of the Japanese earthquake and subsequent disaster, selling pressure more likely mirrors nightmarish concerns of another Chernobyl disaster than GE's actual risk exposure.

GE designed boiling-water reactor (BWR) units 1 & 2 currently in operation at the facility, now operated by Tokyo Electric Power Co. (Tepco). Unit 1 was initially placed into commercial operation back in 1971, but was on its third-generation upgrade at the time of the earthquake last week.

In early trading on Tuesday, GE shares fell five percent, costing the company another $10.6 billion in market capitalization, following a similar three percent decline on Monday. The WSJ reports that while Japan's nuclear liability laws hold Tepco principally responsible for all damages, there is an exception for cases "where the damage is caused by a grave natural disaster of an exceptional character" (i.e. earthquake). Nonetheless, short of gross negligence in design, it's highly unlikely GE would crumble under its existing liability shield.

Caveat venditor -- "let the seller beware": Fear-mongering is spreading like the bubonic plague through the financial markets -- quicker than the tsunami that hit Japan last Friday. Breathe slowly: GE hasn't been bitten by any radioactive fleas! Let's separate fact from fiction:
  • Most of the financial exposure at Fukushima rests with GE's joint-venture partner, Hitachi (HIT). The Japanese electronics giant owns 80 percent of the joint venture in Japan, while GE has a majority stake only in the U.S. nuclear market (60%) and certain other overseas markets, according to regulatory filings.
  • There are currently 92 GE-built BWR plants and plants using the licensed GE BWR design operating globally. However, not one of these facilities worldwide has ever "melted" down -- nor even come close to a containment breach.
  • In 2010, the joint venture earned approximately $1 billion in revenue -- less than three-percent of the $37.5 billion in energy infrastructure sales made during the year, according to GE's 2010 annual report.
Established in June 2007, the GE-Hitachi Nuclear Energy (GEH) alliance hasn't made much of a dent in global nuclear equipment sales. It's come up short in markets dominated by two company joint ventures with a combined $12 billion-plus in annual sales -- France's Areva Group, the world's biggest nuclear engineering firm, and Westinghouse Electric-Toshiba.
Additionally, U.S. reactor suppliers like GEH compete with companies owned or supported by foreign governments, GEH Chairman Jack Fuller complained at an industry conference last December.

If GE shareholders need something more material to fixate on, they need look no further than continued high delinquency rates on consumer loans (8%) or two pension plans under-funded by a combined $7.2 billion, according to the company's 2010 annual report. As for the fallout from Fukushima, there's a rainbow behind any radioactive cloud for GE shareholders: the company is a global leader in sales of alternative energy options such as wind turbines - not to mention radiation detection technologies.

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  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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