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Investment Overview for General Electric (NYSE:GE)

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1. Latest Earnings

General Electric posted a better-than-expected performance in its Q3 2019 earnings. The total value of GE’s orders witnessed a decline of 5% year-on-year while the revenue remained flat at $23.4 billion. However, GE reported adjusted earnings of $0.15 per share, an increase of 36% from the year-ago quarter. Moreover, the adjusted industrial segment margin expanded by 150 bps to 10% driven by improved performance across Power and Healthcare segments. Additionally, the company continued to deleverage as it announced or completed more than $9 billion of total Industrial deleveraging actions. GE also hiked its full-year guidance and now expects industrial free cash flow to a range between zero and plus $2 billion, up from the previous range of negative to plus $1 billion.

2. GE Cedes Majority Ownership of Baker Hughes

GE sold a total of 144.1 million shares in Baker Hughes for $3.0 billion in cash (net of expenses) which reduced the company's ownership interest from 50.2% to 36.8%. And, as a result, GE incurred $8.7 billion pre-tax charges related to the deconsolidation of the Oil & Gas segment. These one-time charges were recorded under discontinued operations.

3. GE Spin-offs its Transportation Division

During Q2 2019, GE completed the spin-off and subsequent merger of its Transportation segment with Wabtec Corporation, helping the company generate $2.8 billion in cash. Moreover, the company generated another $1.8 billion in cash by selling 25.3 million shares received in the merger.

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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 Revenues: GE Oil & Gas segment revenues consist of its equipment and services revenues. The sales of this segment continued to decline in 2016 due to the weakness in the 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 segment has since sustained its growth momentum through 2017 and 2018, driven by the recovery and growth in crude oil prices. The deal is also expected to save around $1.6 billion in synergies for this venture by 2020. We believe oil prices to sustain its growth momentum in 2019, as a result of enhanced demand for crude oil from the emerging markets. Further, with OPEC and its allies cutting production coupled with U.S. sanctions on crude exports from Iran and Venezuela. Consequently, we expect these measures to drive oil prices higher amid supply concerns. With the presence of Baker Hughes in about 120 countries, GE is likely to increase its market share and will also benefit from increased oil prices. Our current price estimate for GE has about 13% upside potential if GE's oil and gas revenues rises to about $37 billion by the end of our forecast and its margins reach 16% due to cost synergies by the end of our forecast period. On the contrary, if the market saturates and oil prices slide below $60 in the coming years due to overproduction by the U.S., our price estimate for GE has about 10% downside potential.


• GE's Healthcare Revenues: 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 revenues were $19 billion in 2018. We currently anticipate this increase gradually throughout our forecast period and reach around $23 billion by the end of our forecast period. If however, the company's healthcare revenues rises to around $30 billion by the end of our forecast period, driven by new product launches, then there could be a potential upside of around 15% 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 $121.62 billion in 2018. 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 180 countries and employs more than 283,000 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 disposed most of the assets of GE Capital. The company has retained GE Capital Aviation Services (GECAS), Energy Financial Services and Healthcare Equipment Finance. The company has already sold the majority of its Real Estate debt and equity portfolios to The Blackstone Group. GE also completed the acquisition of Alstom SA's energy business which is the largest and most critical industrial investment the company has made recently.

In September 2015, GE announced the formation of GE Digital focused on 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.

GE completed the acquisition of Baker Hughes Company in July 2017 and that has led to an increase in oil dependence of GE. This provides a significant risk to GE as the oil prices have not recovered much from its 2015 levels which may put pressure on GE's profits going forward.

On June 2018, GE announced its intention to streamline its business, by focusing on Aviation, Power and Renewable Energy segments. With the primary goal of creating a simpler, stronger, leading high-tech industrial company also, to strengthen its balance sheet - which has plagued the company for long. GE has since sold its Transportation segment to Wabtec and plans to spin off its Healthcare segment. Further, it plans to pursue an orderly separation from BHGE, which firm believes will take place over the next two or three years.

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

GE is one of the leading players in the renewable energy space and is well positioned to increase its market share over time. The renewable energy segment revenues stood at $9.26 billion in 2018 and we estimate this to reach just under $11 billion by the end of our forecast period. We expect this growth to be driven by the increasing domestic and international wind and hydro orders. Growth in market share can be attributed to the acquisition of the 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. In addition,we expect the acquisition of LM Wind Power should provide reasonable growth opportunities.

Aviation segment set to grow driven by growth in global air travel

The aviation segment currently accounts for 24.4% of total revenue in 2018. GE's aviation market share is expected to grow as a result of increasing demand for air travel and enhanced demand for its LEAP engines. Moreover, the major decline in oil prices has helped improve margins from around 21% in 2011 to 25.2% in 2016. This figure improved to 26.9% in 2018 mainly due to increased price, increased volume, and higher spare engine shipments. With ample order backlog and continued efficiency of its LEAP engine, 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 have 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.

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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