With rapid contraction of air travel, the company’s aviation business has taken a hit in 2020. Boeing, one of GE’s customers, stopped making MAX aircraft in January 2020. Earlier in 2020, GE decided to cut 10% of its U.S. work force, amid the Covid-19 crisis. Also, with the coronavirus outbreak, several types of surgeries are being postponed, which has impacted the company’s healthcare business. Overall, GE faced immense pressure on its top line as well as bottom line in 2020.
That said, now that over 55% of the U.S. population is fully vaccinated, the economic growth is seeing a sharp rebound, which should bode well for the Aviation sector, and in turn, GE. Aircraft manufacturer - Airbus - has already confirmed its plans to accelerate the production of its aircrafts, while Boeing is expected to follow suit.
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.
General Electric (GE) is one of the largest and most diversified core infrastructure and financial services company in the world, with revenues of around $80 billion in 2020. 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.
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 $15.5 billion in 2020, and we estimate this to reach just under $18 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.
The aviation segment accounted for 27% of total revenue in 2020. 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 27.7% in 2019, mainly due to increased price, increased volume, and higher spare engine shipments. However, given the impact of Covid-19 pandemic, the segment margins plunged to 14% in 2020. With ample order backlog and continued efficiency of its LEAP engine, the segment margin is expected to expand and boost profitability.
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.
With the impact of the Covid-19 pandemic expected to wind down sooner rather than later, global airline passenger traffic is likely to rise, driven by a a rebound in global economic growth, increasing trade, and globalization. At the same time, driven by higher global demand for air travel, airline profits are also expected to rise after a challenging pandemic period. As a result, airlines have now begun to place orders for new airplanes, which have forced airplane makers such as Boeing and Airbus to hike their production rates. Boeing estimates that the global fleet of commercial airplanes will climb from 25,900 in 2019 to 49,405 planes by 2040. This tremendous growth in commercial airplane deliveries, in turn, will result in increased demand for airplane engines and components.
GE, being a leading manufacturer of airplane engines, will thus benefit from this upcycle in global commercial aviation.
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.