General Electric (GE) Last Update 6/1/22
Related: CAT BA LMT GLW
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
General Electric
STOCK PRICE
DIVISION
% of STOCK PRICE
Aviation
50.1%
$66
Healthcare
33.4%
$44
Power
16.5%
$22
Net Debt
22.2% $29
TOTAL
100%
$131
$100.55
Yours
Trefis Price
N/A
$61.57
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

General Electric Company

VALUATION HIGHLIGHTS

  1. Aviation constitutes 50% of the Trefis price estimate for General Electric's stock.
  2. Healthcare constitutes 33% 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 trend 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 $105 towards the end of October 2021. However, it has fallen to $79 currently (end of May 2022), given the inflationary environment, rising interest rates, and the supply chain disruption impacting its jet engine production.

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.

  1. Latest Earnings
General Electric posted mixed performance in Q1 2022. The company reported total revenue of $16.3 billion, falling short of the $16.9 billion consensus estimate. A 12% growth in Aviation revenues was offset by a 12% decline in Renewable Energy and an 11% drop in Healthcare sales. However, the bottom line of $0.24 on a per share and adjusted basis was well above the $0.18 consensus estimate and reflected an 85% y-o-y growth.

  1. 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.

  1. 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.

  1. 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

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.

  • 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 $18 billion in 2021. We currently estimate it to increase gradually throughout our forecast period and reach around $22 billion by the end of our forecast period.

    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 $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.

    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 $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.

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

    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.

    KEY TRENDS

    Upcycle in the global commercial aerospace sector

    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.

    Rising healthcare spending from the emerging regions

    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.

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