What Is GE’s Fundamental Value Based On Expected 2019 Results?

by Trefis Team
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General Electric (NYSE:GE) shares have rallied so far this year after a brutal few years in terms of its financial results. The conglomerate posted better-than-expected revenue in Q4, as strong aviation results in the fourth quarter overshadowed lingering problems in the GE Capital and Power businesses. However, the industrial giant earned 17 cents per share during the quarter, which was a 60% decline from last year, and weaker than the 22 cents per share expected by Trefis. GE earnings per share have fallen for two straight years, crumbling 35% to 65 cents in 2018.

We currently have a price estimate of $12 per share for GE, which is ahead of the current market price. We have summarized our full year expectations for GE, based on the company’s guidance and our own estimates, on our interactive dashboard GE’s Fiscal 2019 Outlook You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Industrials data here. Below we outline some of the key takeaways from GE’s performance in 2018 and its fiscal 2019 outlook.

How Did GE Fare in FY 2018? 

  • General Electric’s consolidated Q4 revenue stood at $33.2 billion, up 5.0% year-over-year. Aviation segment revenues of $8.5 billion were up 21% year over year, while Power segment revenues of $6.8 billion were down by 25% year-over-year.
  • Adjusted EPS stood at $0.17 for the quarter, compared to a $0.43 in Q4 FY’17.
  • Total orders for FY 2018 were $124 billion, up 6% year-over-year, while total backlog also increased by 5% to $391 billion.
  • For the year, adjusted margins were down 110 basis points (9.0% of revenue vs. 10.1% in the prior year), primarily due to the struggling Power business.

Why Is GE’s Power Business Struggling?

  • The company’s Power business saw further year-over-year declines, with revenues falling 22% in FY 2018.
  • The segment reported a loss of $808 million with a margin of -3.0%
  • The segment has been negatively impacted by continued execution and operational issues on equipment projects and transactional services.
  • The Power business has continued to deteriorate driven by the significant overcapacity in the industry resulting in decreased utilization of the power equipment, lower market penetration and increased price concessions on certain long-term contracts.
  • Total orders for the segment stood at $27.5 billion in FY 2018, down by 23% year-over-year.

What Drove Growth In Aviation Segment Revenue?

  • GE’s Aviation segment designs and produces commercial and military aircraft engines, integrated digital components, electric power and mechanical aircraft systems, and accounts for more than 25% of GE’s total revenues.
  • The segment’s orders were up 22% while revenues increased to $30.6 billion (13% y-o-y) driven by continued strong momentum of the LEAP engine program.
  • Operating margin for the segment improved by 130 basis points (21.2%) in FY 2018 largely due to improved pricing and cost efficiency.
  • We expect this segment to continue its sustained growth and record revenues of approximately $32 billion in FY 2019.

 How Did The Oil and Gas Segment Fare In 2018 And What’s The Forecast?

  • GE holds more than a 50% share in Baker Hughes and reports its results under the Oil and Gas segment.
  • Revenue for the fourth quarter was up 8% (y-o-y) driven by Oilfield Equipment which was up 12%, Oilfield Services up 10% and Turbomachinery machinery up 8%, partially offset by Digital Solutions down 4%.
  • The segment is expected to sustain its growth momentum in FY 2019 as crude prices are beginning to rebound.
  • GE was also able to derive synergies of $800 million from the Baker Hughes deal in 2018, with $650 million of these synergies coming from costs and $150 million on the revenue side.

What’s General Electric’s Guidance For Fiscal 2019?

  • GE’s management expects organic revenues to grow in the low- to mid-single-digit range and EPS to be in the range of $0.50 to $0.60.
  • Adjusted Industrial margin is expected to be in a range from flat to 100 basis points while free cash flows are guided to be in the range of $(2) billion to zero.
  • The Aviation and Oil & Gas Segments are expected to drive the majority of growth for the company in FY 2019 as GE struggles to revamp its underperforming Power business.
  • Our price estimate of $12 for GE is based on 6x forward Enterprise Value to EBITDA multiple.

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