The Wind Turns Against GE''s Clean Energy Bet

General Electric GE +0.57%Co. shares are down sharply this morning, despite headlines of a 16% increase in first quarter net income. One reason why is a big downdraft in demand for the company''s wind power technology and other energy production hardware.

GE, under CEO Jeff Immelt, has invested significant financial and human capital in an effort to expand its share of markets for clean (or cleaner) energy technology such as wind turbines. The company''s bet was that government policies aimed at cutting carbon dioxide emissions would lead to rising demand for energy generation systems that didn''t involve burning coal — technology GE could supply at a healthy profit.

Right now, however, demand for GE''s renewable energy gear has hit a downdraft. GE said in a presentation this morning that revenues for its "power and water" sector, which includes its clean energy systems businesses, fell by 26%, and profits in that segment dropped by 39%. Weakness in Europe (revenue down 22%) didn''t help. "Wind" revenue fell by 53%, GE said. Uncertainty about the future of U.S. wind power tax credits may have pulled some orders into the latter part of 2012. But cheap natural gas in the U.S. represents a longer term challenge to renewable technology demand.

GE''s industrial sales overall fell by 6% in the first quarter from year earlier levels. Company executives say they expect the power and water sector''s performance to improve in the second half. The company also points to a backlog of orders in its equipment and services sector of $216 billion, the biggest ever for that chunk of the company''s operations.

Mr. Immelt said this morning the company''s management "always anticipated that the first half of 2013 would be our toughest comparison."

Early reviews from some analysts weren''t kind. Jeff Sprague, of Vertical Research Partners in Stamford, Ct. wrote:

"...we are surprised how bad Power & Water margins are at 14.9%, down from 18.1% last year. Power & Water sales were down 26% missing our -14% estimate decline. Sales were expected to be weak on declining wind and gas turbine volumes, but the argument was that these declines were mix positive given low margins on OE equipment. Last year, GE pointed to margin pressure in Power & Water because wind was strong. GE affirmed its 70bps Industrial margin target for the year, but we are doubtful it can get there and expect negative EPS revisions for 2013 in the wake of this result."

GE reported that cash flow from operations in the quarter fell to $200 million from $2.1 billion a year earlier. But the company said that reflected in part a decision to build working capital to finance work for upcoming orders. The company overall has plenty of cash — including another $16.7 billion realized in the first quarter from the sale of its stake in the NBC Universal joint venture. All together, GE has $90 billion in cash, and $22.1 billion at the parent company level. GE reminded shareholders it plans to give up to $18 billion of that hoard back to them in the form of share buybacks and dividends.