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Investment Overview for General Electric (NYSE:GE)

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GE's diverse product offering insulates the company's stock price from great sensitivity to any one segment or market. However, we have identified key business drivers that will be key to GE's future growth. Below are the key drivers of GE's value that present opportunities for upside or downside to our price estimate:

• GE Oil & Gas Market Share: GE Oil & Gas segment sales continued to decline in 2016 due to the weakness in oil & gas industry caused by low crude oil prices globally. GE made a strategic move in 2016 to form a joint venture with Baker Hughes to form a joint $32 billion company. This is also expected to save around $1.6 billion in synergies for this venture by 2020. We believe that starting 2017 oil prices would also improve and that will lead to industry rebound in the coming quarters primarily due to OPEC deal to cap their oil production. With the presence of Baker Hughes in about 120 countries, GE is likely to increase its market share and will also benefir from increased oil prices. Our current price estimate for GE has about 10% upside potential if GE's market share rises to about 6% by the end of our forecast and its margins reach 20% due to cost synergies by the end of our forecast period. On the other hand, if the market continues to remain sloppy and oil prices remain below $50 in the coming years due to overproduction by U.S., our price estimate for GE has about 10% downside potential.


• GE's Share of the Global Healthcare Market: GE is a longtime leader in the medical device industry with an established track record and commitment to research and development. Emerging economies such as India and China are expected to be the next growth frontier for the healthcare industry as the penetration levels for various healthcare products and services in these markets are far below global levels. GE has established a strong presence in these key markets and the company will likely be able to capitalize on this growth potential while continuing to introduce innovative products to the market. GE Healthcare's market share was 3.37% in 2016. We currently anticipate this increase gradually throughout our forecast period and reach 3.9% by the end of our forecast period. If however, the company's market share rises to around 9% by the end of our forecast period, driven by new product launches, then there could be a potential upside of around 10% to the ${trefisprice}.

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General Electric (GE) is one of the largest and most diversified core infrastructure and financial services company in the world with revenues of around $123.7 billion in 2016. The company's products and services include aircraft engines, power generation turbines, oil and gas drilling equipment, medical imaging machinery, business and consumer financing products. GE serves customers in more than 100 countries and employs more than 300,000 people worldwide.

In 2015, GE announced its plans to realign its portfolio to become an industrially focused company and shrink its financial services business. As a part of this exit plan, GE is going to dispose of most of the assets of GE Capital. This plan will be implemented over 24 months and anticipated to end in 2017. The company will retain GE Capital Aviation Services (GECAS), Energy Financial Services and Healthcare Equipment Finance. The company has already announced the sale of majority of its Real Estate debt and equity portfolios to The Blackstone Group in a deal which is estimated to be valued at $26.5 billion. More such announcements are anticipated regarding non-vertical financial services operations such as commercial banking over the next 24 months.

GE also completed the acquisition of Alstom SA's energy business for $13.5 billion to strengthen its industrial portfolio while the company divests its financial services business in November 2015. It is thus far the company's largest and most critical industrial investment with complementary technologies between the two companies, the opportunity for improved joint capabilities and big cost synergies. A significant portion of these cost savings to come from SGA consolidation and improved manufacturing capabilities.

In September 2015, GE announced the formation of GE Digital focused at combining its various technology efforts and compete with large digital players such as IBM. GE Digital will integrate the company's Software center, global IT and commercial software teams, and Wurdldtech which provides industrial security systems. The vertical aims at being among the top 10 software companies by 2020.

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GE's power and renewable energy portfolio is well positioned to drive significant growth

GE's power and renewable energy segment accounted for about 21.6% and 7.3% respectively of total revenue in 2016. This is projected to reach around 25% by the end of Trefis' forecast period supported by continuous strengthening of its industrial portfolio. The company's renewable energy market share is set to grow by 1.3% in the next couple of years and grow steadily thereafter. Growth in market share can be attributed to acquisition of majority of Alstom SA's energy business. Also, GE's global footprint and cost synergies from Alstom acquisition are set to expand margins and profitability.

Aviation segment set to grow due to declining oil prices

The aviation segment currently accounts for 21.2% of total revenue. GE's aviation market share expected to grow as a result of increasing demand for air travel and wide commercial engine portfolio. Moreover, the major decline in oil prices has helped improve margins from around 21% in 2011 to 31.7% in 2016. With continued weakness in oil prices in the near term, the segment margin is expected to expand and boost profitability.

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Steady increase in the global energy demand

Driven by a growing world population and rising income levels in the developing countries, the worldwide demand for energy is growing. This is growing the global market for oil & gas drilling equipment, power generation turbines based on gas, coal, nuclear, wind and water. Governments worldwide have also announced subsidies and tax benefits to support power generation through newer and cleaner sources such as wind, solar and nuclear. Huge investments are also expected to strengthen the weak power transmission and distribution infrastructure in the emerging economies. As GE provides all these equipment and turbines that enable drilling and power generation, it will likely benefit significantly in the coming years from this growing worldwide demand for energy.

Upcycle in the global commercial aerospace sector

Global airline passenger traffic is rising driven by a steadily growing global economy, rising trade and globalization. Forecasts from Boeing anticipate the global airline passenger traffic to grow by around 5% per year through the next two decades. At the same time, driven by higher global demand for air travel, airline profits are also rising. As a result, airlines are placing orders for new airplanes which has forced airplane makers such as Boeing and Airbus to hike their production rates. Boeing estimates that around 37,000 new commercial airplanes will be delivered to airlines over the next 20 years, up from around 19,000 commercial airplanes that were delivered to airlines in the past 20 years. This tremendous growth in commercial airplane deliveries in turn is raising demand for airplane engines and components.

GE being a leading manufacturer of airplane engines will thus benefit from this upcycle in global commercial aviation.

Rising healthcare spending from the emerging regions

Driven by rising income levels of people in the emerging regions of the world, global healthcare spending is rising. To take advantage of this rising healthcare spending from the emerging regions, GE is expanding its presence in these fast growing emerging markets. For example, GE Healthcare has come up with a super value CT machine specifically for India that costs about one-tenth its premium segment Revolution CT, which costs roughly $2 million a unit. The company has also established research centers in China and India outside of the U.S. and Europe, and has established several manufacturing plants across Asia-Pacific, the Middle-East and Latin America. GE Healthcare’s employee headcount in the emerging markets during 2009-13 has also grown at a CAGR of 13%, while its headcount in most developed markets has either remained flat or declined.

We figure that due to healthcare sector’s critical importance to a country there is limited protectionism in this sector. This plays out in the favor of large healthcare equipment and service providers such as GE when they expand in the emerging markets.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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