With the rapid contraction of air travel, the company’s aviation business took a hit in 2020. Boeing, one of GE’s customers, stopped making MAX aircraft in January 2020. Also, with the coronavirus outbreak, several types of surgeries were postponed in 2020, which has impacted the company’s healthcare business. Overall, GE faced immense pressure on its top line as well as bottom-line in 2020.
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 the company’s value and continues remaining 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.
General Electric (GE) is one of the largest and most diversified core infrastructure and financial services companies in the world, with revenues of around $74 billion in 2021. The company’s products and services include aircraft engines, power generation turbines, and medical imaging machinery. GE serves customers in more than 175 countries and employs more than 168,000 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 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.
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 a long period. 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 the 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 $16 billion in 2021, and we estimate this to reach just under $21 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 30% of total revenue in 2021. 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.
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 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 the 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 of 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.