VALUATION HIGHLIGHTS

1. Aviation constitutes 49% of the Trefis price estimate for General Electric's stock.
2. Healthcare constitutes 34% of the Trefis price estimate for General Electric's stock.
3. Power constitutes 16% of the Trefis price estimate for General Electric's stock.

WHAT HAS CHANGED?

1. 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 $100 as of May 4, 2023.

2. Latest Earnings

General Electric Q1 2023 results were better than the street estimates. The company reported revenue of $14.5 billion, up 14% y-o-y. Revenue growth was driven by the Aerospace segment, rising 25%, and Power, up 9%. This was partly offset by lower sales for its Renewable Energy, down 1%. The bottom line of $0.27 on a per share and adjusted basis was well above the $0.14 consensus estimate and compares with a loss of $0.09 in the prior-year quarter.

3. 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.

4. 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 in pre-tax charges related to the de-consolidation of the Oil & Gas segment. These one-time charges were recorded under discontinued operations.

5. 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.

6. GE Split

General Electric is in the process of its planned split into three different companies focused on Aviation, Healthcare, and Energy. The Healthcare business was split in 2023, and Energy is expected to be separated in 2024, leaving the Aviation business with GE.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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.

BUSINESS SUMMARY

General Electric (GE) is one of the largest and most diversified core infrastructure and financial services companies in the world, with revenues of around $77 billion in 2022. 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 competing 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.

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 is expected to be separated in 2024.

SOURCES OF VALUE

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 $13 billion in 2022, and we estimate this to reach $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.

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.