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Investment Overview for General Electric (NYSE:GE)
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- Impact of Coronavirus Crisis On GE
Industrial companies’ stocks generally move in tandem with the broader market trend and economic growth trends. In the case of GE, its stock though, declined 45% since early February (through April 2), after the WHO declared a global health emergency. This decline was much steeper than 21% for the broader S&P 500 over the same period. With rapid contraction of air travel, the company’s aviation business is expected to take a hit. Boeing, one of GE’s customers, stopped making MAX aircraft in January 2020. GE has decided to cut 10% of its U.S. work force, amid the current crisis. Also, with the coronavirus outbreak, several types of surgeries are being postponed, which will impact the company’s healthcare business. This will partly be offset by an increased demand for ventilators and patient monitors, with most of the countries facing a shortage. Overall, GE is likely to face immense pressure on its bottom line in 2020, and this also explains the sharp drop in the company’s stock price.
- Latest Earnings
General Electric posted a better-than-expected performance in its Q4 2019 earnings. The total value of GE’s orders witnessed a decline of 5% year-on-year, while the full-year revenue declined by 2% to 95.2 billion. However, GE reported adjusted earnings of $0.65 per share, an increase of 14% from the previous year. 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 initiated 2020 guidance with industrial revenues expected to grow in low single digits, with earnings per share clocking in $0.5 to $0.6. The company is expecting a free cash flow in industrial business (its most tracked metric) to a range between $2 billion and $4 billion.
- 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.
- GE Spins-off 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 high 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 Aviation Revenues: The Aviation Segment forms a large part of company’s value and continues remaining GE’s cash cow. Company’s LEAP Engine program has been gaining traction with deliveries of 420 LEAP-1A and -1B units, up 41 from last year. There is, however, a headwind in terms of the delay in resolution of Boeing 737 MAX grounding, which uses the CFM engine, a consortium of which GE Aviation is a part of Although Boeing’s order book has not declined substantially, a significant delay in approval to fly may result in canceled orders.
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 $11 billion in 2019. We currently anticipate this increase gradually throughout our forecast period and reach around $23 billion by the end of our forecast period.
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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 $95 billion in 2019. 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 of 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 GE’s dependence on oil. 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.
In 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 intends to pursue an orderly separation from BHGE, which firm believes will take place over the next two or three years.
${header:sourcesofvalue} 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 $15.34 billion in 2019, 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. Also,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 34% of total revenue in 2019. 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 significant decline in oil prices has helped improve margins from around 21% in 2011 to 25.2% in 2016. This figure grew to 29.1% in 2019, 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.
${header:trends}Steady increase in the global energy demand
Driven by a growing world population, and rising income levels in developing countries, the worldwide demand for energy is growing. This is expanding 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, increasing trade, and globalization. Forecasts from Boeing anticipate the global airline passenger traffic to grow by around 5% per year over 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 aircraft will be delivered to airlines over the next 20 years, up from about 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 areas, 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. It has established several manufacturing plants across Asia-Pacific, the Middle-East, and Latin America.
We figure that due to the healthcare sector’s critical importance to a country, there is limited protectionism in this sector. This plays out in 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?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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