VALUATION HIGHLIGHTS

1. Aviation constitutes 81% of the Trefis price estimate for General Electric's stock.

WHAT HAS CHANGED?

1. GE Vernova Spin-off

General Electric completed the final phase of its spinoffs into three separate companies on Tuesday, April 2, 2024, with GE Vernova splitting from GE Aerospace.

GE Vernova is now the new standalone energy company, with GE Aerospace focused on the company's aviation technology products.

GE first announced its restructuring plans in 2021, and GE Healthcare Technologies was spun off last year.

2. GE Stock Performance

GE stock has seen extremely strong gains of 110% from levels of $65 in early January 2021 to around $135 now (early April 2024), vs. an increase of about 40% for the S&P 500 over this roughly 3-year period.

However, the increase in GE stock has been far from consistent. Returns for the stock were 10% in 2021, -11% in 2022, and 95% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that GE underperformed the S&P in 2021.

3. Latest Earnings

GE's Q4 2023 results were much better than the street estimates. The company reported adjusted revenue of $18.5 billion, up 13% y-o-y organically. Revenue growth was driven by the Renewable Energy segment (rising 23%), Aerospace sales (up 12)%, and Power (up 15%). The bottom line of $1.03 on a per-share and adjusted basis was well above the $0.91 consensus estimate.

4. Impact of Coronavirus Crisis On GE

Industrial companies' stocks generally move in tandem with the broader market and economic growth trends. In the case of GE, its stock halved from levels of around $103 in mid-February 2020 to levels of under $52 in late March, when broader markets made a bottom. GE stock saw a sharp recovery off its March 2020 bottom to levels of around $140 as of mid-February, 2024.

5. GE AerCap Deal

In March 2021, GE announced the sale of its GE Capital Aviation Services business to AerCap in a deal valued at over $30 billion. The deal was completed in Nov 2021. GE has now brought the remaining debt and assets of GE Capital to its industrial business. It received cash of $24 billion, and it now owns 46% of the new AerCap-led entity.

6. 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%. As a result, GE incurred $8.7 billion in pre-tax charges related to the deconsolidation of the Oil & Gas segment. These one-time charges were recorded under discontinued operations.

7. 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.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 the company's value and continues to remain GE's cash cow. The company's LEAP Engine program has been gaining traction with deliveries of 845 LEAP units, up 30 from last year. There is, however, a headwind in terms of the supply chain disruption in the near term.

BUSINESS SUMMARY

General Electric (GE) was one of the largest and most diversified core infrastructure and financial services companies in the world, with revenues of around $77 billion in 2022. At that time, the company's products and services included aircraft engines, power generation turbines, and medical imaging machinery.

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 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 competing with large digital players such as IBM. GE Digital will integrate the company's Software Center, global IT and commercial software teams, and Wurldtech, which provides industrial security systems.

In June 2018, GE announced its intention to streamline its business by focusing on Aviation, Power, and Renewable Energy segments. The primary goal of creating a simpler, stronger, leading high-tech industrial company was to strengthen its balance sheet - which has plagued the company for a long period. The company is currently in the process of its planned split into three different companies focused on Aviation, Healthcare, and Energy. The Healthcare business was split in early 2023, and Energy was separated in early 2024, leaving GE Aerospace as the direct successor of the once-diversified industrial giant that continues to trade under the ticker 'GE'.

SOURCES OF VALUE

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

The aviation segment accounted for about 35% of total revenue in 2022. 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. With ample order backlog and the continued efficiency of its LEAP engine, the segment margin is expected to expand and boost profitability.

KEY TRENDS

Upcycle in the global commercial aerospace sector

With the impact of the Covid-19 pandemic behind us, global airline passenger traffic has seen a sharp recovery, driven by 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 has 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.