General Electric: Whether You Should Be Buying The Revival

seekingalpha2021-04-25

Summary General Electric continues to make progress in rebuilding the fundamentals of its business. However, its aviation exposure was a setback due to Covid. Trading at 18x 2023 estimated earnings, ...

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Comments

WeeNi
2021-04-26
WeeNi
Keep it
- 林癸源:
  [微笑]
wc77
2021-04-25
wc77
like and comment pls
- WeeNi:
  done & comments
Taylorx
2021-04-25
Taylorx
??
KelvinChan
2021-04-25
KelvinChan
Good
szueyann
2021-04-25
szueyann
Please like and comment. Thanks
- szueyann:
  thanks.
- Jetblack:
  ??
Angel686868686868
2021-04-25
Angel686868686868
Comment and like pls
- szueyann:
  Okie

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The company is in the midst of rebuilding the fundamentals of its business and balance sheet.\nFortunately, progress is being made and General Electric looks to be on the right track (finally). However, while the outlook appears positive, the stock has priced much of the near-term upside in already. The stock has rallied hard this year, and investors would be better off waiting for the stock to come back down some before buying in. We will review the company and our investment thesis below.\nGeneral Electric Is Making Progress\nTo start, let's talk about General Electric. The company is massive, doing more than $79 billion in revenues (in a down year). General Electric has several main business segments that branch into a variety of applications in their own right. These are:\nsource: General Electric Company\nThese segments generate the vast majority of General Electric's business. The company also has its Capital arm (a shell of its former size) and a Research/Digital segment. The company's corporate backlog is massive at a whopping $386 billion as of year-end.\nI will keep this as a forward-looking discussion (versus explaining the history of General Electric's restructuring). The important thing to know is that GE is working to improve in two key areas. These are the company's margins and its balance sheet. We can see above that the company's main businesses (industrial segments) combine for just a 3.4% margin. Its free cash flow margin is even worse at just 1%.\nsource: General Electric Company\nPart of the company's struggles this year were due to the pandemic, as we can see the FCF margin in 2019 will match what the company is forecasting for 2021. The long-term goal of management is to get FCF margins up to high single digits.\nThe company has set out on an agenda to streamline operations and cut costs/grow efficiencies, but what may actually help GE more is an evolving make-up of its backlog. Many of the products that General Electric sells are capital intensive, cost a lot to produce, and sell at very low margin. Some examples of this would include wind turbines, gas turbines, plane engines, etc.\nLet's look at a couple examples of General Electric's products and the revenue generation throughout their lifecycle:\n\nsource: General Electric Company\nWe can see how in both cases there is an upfront creation of revenue from the sale of equipment, but that most of the revenue comes throughout the lifecycle of the product via service contracts.\nGeneral Electric has an enormous base of installed equipment including:\n\n7,000+ gas turbines\n50,000 offshore/onshore wind turbines\n37,700 commercial grade aviation engines\n26,500 military grade aviation engines\n4 million healthcare installations\n\nThe majority of GE's backlog ($386.5 billion) consists of service revenue. In 2020 the company generated:\n\n62% of its revenues from services in the Power segment, but 78% of the Power backlog is services.\n18% of its revenue from services in the Renewables segment, but 42% of the Renewables backlog is services.\n61% of its revenue from services in the Aviation segment, but 87% of its Aviation backlog is services.\n45% of its revenue from services in the Healthcare segment, but 68% of its Healthcare backlog is services.\n\nsource: General Electric Company\nWe can see that over the coming years, the revenue mix should shift more towards services, which will carry higher margins. The Aviation business will also rebound as we come out of the pandemic.\nFinancially, General Electric has also been working to deleverage its balance sheet. The job isn't \"done\" here, but GE has made strong progress.\nsource: General Electric Company\nThe company is in the middle of a pending deal to sell its GE Capital Aviation Services business (used to finance leasing of aircrafts) to AerCap (AER). General Electric will receive equity and $24 billion in cash in the transaction. The deal's proceeds will be used to further deleverage, and General Electric will have cleared approximately $70 billion in debt since 2018.\nThe deal will further enable General Electric to streamline its business, and positions the company to deleverage to below 2.5X EBITDA by 2023 per management's goals. At this point, General Electric will be more profitable, leaner, and have a strong balance sheet that can backstop the company moving forward.\nThe Pandemic Has Not Been Kind To GE\nThe company has made considerable progress, but 2020 was not a kind year to General Electric. The company's Aviation arm is a critical part of GE's business, and the aviation industry as a whole suffered in 2020.\nGeneral Electric saw its organic revenues in 2020 drop 17% companywide, 95% of which was related to the fall-off in the Aviation segment. This makes sense, given that airlines essentially cut all spending with so few flights throughout the year. The aviation recovery will take a few years, with General Electric forecasting a minor improvement in 2021 before accelerating in 2022.\nsource: General Electric Company\nIf not for the pandemic, I think you could move a lot of General Electric's financial projections up into this year, but the pandemic virtually set the company back 12-18 months due to its exposure to the aviation industry.\nNear Term Upside Is Priced In\nWith that said, we need to consider this when talking about valuation. The stock has rallied hard over the past 12 months. At more than $13 per share, the stock has appreciated 108%.\nsource: YCharts\nWe can see the expected pivot that revenues will make according to analyst estimates. Revenues will gain traction this year, with momentum beginning to drive growth of revenues beyond pre-pandemic levels next year.\nsource: Seeking Alpha\nFrom an earnings standpoint, General Electric is forecasted to earn the following over the next few years:\n\n2021: $0.24 per share\n2022: $0.51 per share\n2023: $0.75 per share\n\nThe rebound in revenues combined with expectedly higher margins produces strong earnings growth that will see earnings per share triple over the next few years. It's a little tricky to compare valuations to historical data because the company has changed so much over the past decade.\nIf we used estimated earnings for this year, the stock is trading at an earnings multiple of approximately 56X. This is obviously overpriced, but we see the company's strong earnings growth that is expected. If we were to target a 20X multiple on the company, the 2023 estimate of $0.75 puts the stock at 18X.\nThis is much more reasonable, but it's also three fiscal years away from now. In other words, the market has already priced in General Electric's near-term upside. I would like to see shares fall back under $10, otherwise investors should be prepared to wait for General Electric to grow into its valuation over several years.\nWrapping Up\nGeneral Electric has fallen from grace and has struggled to find its footing throughout the decade. Fortunately, the company finally seems to be on the right track, and I am impressed with the progress the business has made given its size and complexity. The market is right to be excited, but I just think the stock has gotten too far ahead of itself.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":375468338,"gmtCreate":1619392469224,"gmtModify":1704723009687,"author":{"id":"3571130591653625","authorId":"3571130591653625","name":"WeeNi","avatar":"https://static.tigerbbs.com/5cec7818309dd699c7e66180fe4d2081","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Keep it","listText":"Keep it","text":"Keep it","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/375468338","repostId":1151656752,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4132117,"gmtCreate":1619393938024,"gmtModify":1680785565220,"authorId":3581608528633395,"author":{"id":3581608528633395,"authorId":3581608528633395,"name":"林癸源","avatar":"https://community-static.tradeup.com/news/64ab6cd5db62119f730277b3a65da70c","vip":1,"crmLevel":1,"crmLevelSwitch":1,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":375468338,"type":1,"supId":0,"prevId":0,"content":"[微笑]","text":"[微笑]","html":"[微笑]"}],"langContent":"EN"},{"id":375650975,"gmtCreate":1619335717397,"gmtModify":1704722628122,"author":{"id":"3576029059404897","authorId":"3576029059404897","name":"wc77","avatar":"https://static.tigerbbs.com/9ece187c7197f1ec611a9df7730f776e","vip":1,"crmLevel":3,"crmLevelSwitch":0},"htmlText":"like and comment pls&nbsp;","listText":"like and comment pls&nbsp;","text":"like and comment pls","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/375650975","repostId":1151656752,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4131776,"gmtCreate":1619392454061,"gmtModify":1680785567992,"authorId":3571130591653625,"author":{"id":3571130591653625,"authorId":3571130591653625,"name":"WeeNi","avatar":"https://static.tigerbbs.com/5cec7818309dd699c7e66180fe4d2081","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":375650975,"type":1,"supId":0,"prevId":0,"content":"done &amp; comments","text":"done &amp; comments","html":"done &amp; comments"}],"langContent":"EN"},{"id":375624523,"gmtCreate":1619335639062,"gmtModify":1704722626022,"author":{"id":"3565441185903042","authorId":"3565441185903042","name":"Taylorx","avatar":"https://static.tigerbbs.com/84412f9fbac6499d2be3af213b212654","vip":1,"crmLevel":5,"crmLevelSwitch":0},"htmlText":"??","listText":"??","text":"??","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/375624523","repostId":1151656752,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":375621281,"gmtCreate":1619335008443,"gmtModify":1704722618566,"author":{"id":"3570776252336545","authorId":"3570776252336545","name":"KelvinChan","avatar":"https://static.tigerbbs.com/322f5dea7567e161ddef26aec462d83d","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Good","listText":"Good","text":"Good","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/375621281","repostId":1151656752,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":375663854,"gmtCreate":1619333652078,"gmtModify":1704722603297,"author":{"id":"3573721781255613","authorId":"3573721781255613","name":"szueyann","avatar":"https://static.tigerbbs.com/cba9c6b1e785a9cf7301a7e6a2ff2354","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Please like and comment. Thanks","listText":"Please like and comment. Thanks","text":"Please like and comment. Thanks","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":2,"repostSize":0,"link":"https://ttm.financial/post/375663854","repostId":1151656752,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4140178,"gmtCreate":1619450608794,"gmtModify":1680785691558,"authorId":3573721781255613,"author":{"id":3573721781255613,"authorId":3573721781255613,"name":"szueyann","avatar":"https://static.tigerbbs.com/cba9c6b1e785a9cf7301a7e6a2ff2354","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":375663854,"type":1,"supId":4132955,"prevId":0,"content":"thanks.","text":"thanks.","html":"thanks."},{"id":4132955,"gmtCreate":1619397350399,"gmtModify":1680785580950,"authorId":3579853052339740,"author":{"id":3579853052339740,"authorId":3579853052339740,"name":"Jetblack","avatar":"https://static.tigerbbs.com/4a0c1f4e2b96ed7161c524e90d66da61","vip":1,"crmLevel":1,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":375663854,"type":1,"supId":0,"prevId":0,"content":"??","text":"??","html":"??"}],"langContent":"EN"},{"id":375617383,"gmtCreate":1619331982442,"gmtModify":1704722585451,"author":{"id":"3579220751420160","authorId":"3579220751420160","name":"Angel686868686868","avatar":"https://static.tigerbbs.com/71fc4ab29f054bb2e134f3b1d997271e","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Comment and like pls","listText":"Comment and like pls","text":"Comment and like pls","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/375617383","repostId":1151656752,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4128288,"gmtCreate":1619333671180,"gmtModify":1680785512393,"authorId":3573721781255613,"author":{"id":3573721781255613,"authorId":3573721781255613,"name":"szueyann","avatar":"https://static.tigerbbs.com/cba9c6b1e785a9cf7301a7e6a2ff2354","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":375617383,"type":1,"supId":0,"prevId":0,"content":"Okie","text":"Okie","html":"Okie"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":31,"commentSize":10,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1151656752"}