What 2017 Holds For General Electric: GE’s Investments To Start Paying Off

General Electric (NYSE: GE) had an eventful year in 2016 and we expect that the investments made in the year will start to pay off in 2017. We expect GE’s overall businesses to grow by high single digits in 2017, driven by its strong growth in the Power and Renewable Energy segment, as well as continuing stable revenues from GE Aviation and GE Healthcare. We also believe that GE-Baker Hughes deal may push GE’s stock price as the deal moves towards completion and its performance benefits from the finalization of OPEC deal and its impact on oil prices. GE Digital is also growing at a very high rate and has shown significant promise in its initial phases. GE Digital has won several contracts in 2017 and this segment also has the potential to surprise GE investors with its growth. Lastly, we still remain cautious on GE Transportation as commodity prices have not yet improved.  With further delays, GE’s Transportation revenues may continue to decline over  near term.

GE Power, Aviation and Healthcare Reaffirm GE’s Growth Rate

GE’s overall revenues grew nearly 9% in the first nine months of 2016 despite, the huge decline in its Oil & Gas and Transportation segments’ revenues. GE benefited from the Alstom-GE joint venture in its power and renewable energy segment which started its operations in late 2015. We expect GE Power and GE Renewable energy segment to continue to drive GE’s revenue growth in 2016 given the high backlog of these segments. GE Aviation contributes nearly 21% to GE’s overall revenues and is expected to grow further in 2017 due to newly acquired businesses and some of the new customers. Additionally, as global passenger air travel continues to see strong growth in both domestic and international markets, GE Aviation revenues will continue to contribute revenue growth for GE.

GE’s global market share in healthcare equipment has remained close to 3.5% in the last few years and is expected to go up in the coming years due to its market leading products, its presence in developing countries and its financial strength. GE has about 11% market share in U.S. healthcare market and its R&D is well supported by its strong financials and capital division which makes its healthcare division revenues fairly stable. GE Healthcare contributed nearly 15% to GE’s overall revenues in 2016 and we continue to expect a significant contribution from this business in 2017 due to GE’s market leading products and its marketing muscle in China and India.

GE Digital and Baker Hughes Deal Likely To Stand Out In 2017

GE launched its industrial internet of things (IoT) platform named Predix for general availability in early 2016, though beta versions were first unveiled in 2013. Its goal was to bolster its position in the fast-growing industrial IoT market. By leveraging Predix with its industrial segments, GE plans to optimize production operations, asset management and bring digital technology into its engineering, procurement, and construction processes. GE also acquired several artificial intelligence firms in 2016 in order to consolidate GE’s industrial internet vision in the coming years. GE Digital’s revenues, which come primarily from its Power and Healthcare segments, are expected to have been about $7 billion in 2016. With 270 partners and close to 20,000 developers already working on its Predix platform by early autumn, GE’s software business is estimated to reach $15 billion by 2020. We believe that this segment has the potential to surprise GE’s investors if GE is able to generate high revenues from this segment in 2017 itself.

GE reached a deal with Baker Hughes to form a joint venture, which will be the second-largest oilfield services company globally with estimated annual revenues of $32 billion. The deal is expected to close by the end of 2017 after approval by regulators and Baker Hughes shareholders. The new entity will be able to compete effectively against other oil-field services companies by cost cutting and expanding its offerings and distribution. The transaction is expected to be accretive to GE’s earnings per share by $.04 by 2018 and $.08 by 2020. This is assuming that oil prices will reach $60 per barrel by 2020. Although, this is not expected to add significant revenue growth in 2017, but as OPEC deal is signed and crude oil prices already approaching $55 per barrel, GE’s valuation could go up significantly in 2017.

GE Transportation May Continue To Decline

However, there are certain risks that GE investors will have to keep in mind. GE Transportation revenues have relatively flat for the past couple of years as low oil prices globally have suppressed demand for transportation equipment. Consensus expectations are for only modest stock price appreciation potential from current levels. However, any improvement in oil prices above the $60 level is likely to drive upside.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of General Electric

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