Is Ge A Good Buy Now
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is ge a good buy now
I'm giving away the ending now because the same investors I'm saying are safe to buy the stock also need to understand that, after seeing the company's fourth-quarter earnings and outlook, the recurring theme for 2023 will be patience. Across all three segments (the healthcare segment is now listed separately as GE HealthCare Technologies), it's a case of profit and cash flow headwinds in 2023. The reasons behind the headwinds are what is setting up the company for improved long-term growth.
GE Aerospace is the company's most substantial segment, and it's the one that beat management's guidance in the fourth quarter. Overall guidance for 2023 though appears to be a little weak on a headline basis. Looking back at the investor day presentation given in March 2022, management told investors to expect earnings of $3.8 billion to $4.3 billion and free cash flow (FCF) of $4.6 billion, which will be down slightly from 2021. The 2023 guidance in that March report called for $6 billion in earnings and improved FCF.
Ultimately, GE Aerospace sailed past the 2022 guidance with a profit of $4.8 billion and FCF of $4.9 billion. However, the updated guidance for 2023 now calls for just $5.3 billion to $5.7 billion in earnings, with FCF "up." On a superficial basis, it's disappointing earnings guidance for 2023, but here we see a positive headwind (pardon the oxymoron).
Engine suppliers need to ramp up production in order to help ramp up airplane production. For reference, GE Aerospace's joint venture with Safran, CFM International, is the sole engine provider (the LEAP engine) on the Boeing 737 MAX and one of two on the Airbus A320 neo family. However, airplane engines tend to lose money when initially sold, only to generate decades worth of higher-margin service/aftermarket revenue afterward.
The segment's problems in 2022 can be seen in this guidance table. Earnings come in worse than expected in 2022, but the guidance for "significantly better" earnings in 2023 doesn't mean a lot when it's a comparison based on a loss of $2.2 billion in 2022.
That said, the three businesses that comprise the segment (onshore wind, offshore wind, and grid) are all forecast to improve through 2023. Onshore orders in North America "more than doubled" in the fourth quarter, and CEO Lawrence Culp expects them to grow by 50% in 2023. Culp said, "We also expect a significant step-up in profit driven by lower warranty and related reserves, better price, and restructuring benefits."
This confirms the improvement in order pricing seen elsewhere. If warranty reserves do indeed improve, it implies that GE feels confident it won't suffer the kind of execution issues currently bedeviling Siemens Gamesa. With management being more selective over onshore orders, 2023 should be a better year.
Offshore wind is a budding business for GE. It was only a $0.5 billion revenue business in 2022, but Culp expects it to more than double in 2023, and management previously made plans for $3 billion in 2024. Here again is a positive headwind. According to Culp, margins on its key projects "will be challenging between typical new product margins and inflation resulting in rising losses." These are the growing pains this segment is trying to work through.
On a more positive note, the grid business (switchgear, transformers, grid automation, and grid software) turned profitable in the fourth quarter after losing $400 million in 2021. It is expected to be modestly profitable in 2023.
The guidance for low-single-digit revenue growth, a slight improvement in profit, and lower FCF is slightly disappointing. Still, as with GE Aerospace, there's a negative margin mix impact with relatively more equipment revenue, as GE Power delivers more heavy-duty HA turbines in 2023.
All told, management is guiding toward high-single-digit revenue growth and $3.4 billion to $4.2 billion in FCF in 2023. The midpoint of the FCF guidance puts GE on a forward price-to-FCF multiple of around 23 times, but management has proven to be conservative on guidance, and for the reasons outlined above, earnings/FCF will be held back in 2023.
After a powerful recent run, the stock isn't cheap on a 2023 basis, but the actions taken this year (including LEAP, offshore wind turbine, and HA gas turbine deliveries) are setting up the company for long-term growth. Investors should look out for commentary on 2024 in the March update.
It's been a mixed year for General Electric (GE 0.04%), with disappointing healthcare and renewable energy earnings offset by robust aerospace and power performance. Still, it might surprise investors that the stock's price decline of 11.6% is an outperformance compared to the S&P 500 index's 20% decline.
GE will likely miss the earnings expectations in its investor day presentation in March -- management has already told investors it will. The current full-year adjusted earnings per share (EPS) guidance is $2.40 to $2.80, compared to guidance for $2.80 to $3.50 given in March. Moreover, the segment commentary and outlook comments provided on the third-quarter earnings presentations imply that GE will have difficulty getting near its full-year guidance.
This table shows the March guidance and the updates given in late October. A quick look shows Power and Aerospace in line, with a significant shortfall in Renewable energy and a disappointment in HealthCare. Meanwhile, corporate costs are forecast to be less than previously expected.
First, the HealthCare shortfall is largely down to supply chain challenges, which should ease in the future, and orders growth (up 4% in the third quarter and year to date) is in line with management's expectation for mid-single-digit revenue growth.
There isn't a problem with orders or market positioning at GE HealthCare. Instead, the problem lies with executing on a backlog while dealing with supply chain constraints and inflationary pressures -- both issues stress profit margins. Still, the supply chain issues won't last forever, and GE HealthCare CEO Peter Arduini says, "While challenging, we expect supply chain pressures to improve for the remainder of '22 and into '23."
Second, management expects to have less corporate costs than expected in 2022 -- something CFO Carolina Dybeck Happe put down to "a few hundred million of favorability, primarily from interest rate and favorable currency movements." Given that interest rates have continued to rise through the current quarter, it's reasonable to expect some potential improvement on the expectation of a loss of $700 million.
Fourth, and most significantly, GE Aerospace is set to trump existing guidance considerably. At the investor day, management guided toward more than 20% full-year growth with a "mid-teens" profit margin, leading to segment profit of $3.8 billion to $4.3 billion. However, revenue growth was 24% in the third quarter and 21% in the first nine months compared to the same period of 2021. Given that supply chain issues are easing, organic orders growth was 25% in the third quarter, and GE Aerospace spares rate sales are soaring (see chart), it's reasonable to expect a solid fourth quarter.
Moreover, management now expects "high teens" margins for GE Aerospace in 2022. Penciling in 20% growth for the fourth quarter leads to revenue of $7.3 billion for the quarter and $25.7 billion for the full year -- or 20.7% growth on 2021. Assuming "high teens" means 17.5% to 20%, GE Aerospace could report $4.5 billion to $5.1 billion in profit for 2022 -- significantly ahead of the $3.8 billion to $4.3 billion guidance.
The conditions for the GE HealthCare spinoff in January aren't perfect, but investors shouldn't overly discount the stock because of near-term supply chain issues that are likely to prove temporary. Management is planning for a further reduction of $450 million in corporate costs in the coming years. In addition, this is likely to prove a trough year in GE Renewable Energy. GE Power has been turned around, and GE Aviation's recovery is building steam.
"It's unfortunate that in the eleventh hour, GE decided to pull out and now of course with the sale to Haier, we understand why, given the price ($5.4 billion) that they got for it," Keith McLoughlin, Electrolux's CEO told CNBC Thursday.
"It's business. Things happen but if you don't take prudent risk, you never transform a company; you never get a big return. It was a smart, prudent deal, but we knew there was risk associated from the beginning."
Electrolux announced it had entered an agreement with GE to acquire its appliances business back in September 2014, a move which would've improved Electrolux's footprint both in the U.S. and globally.
In December 2015 however, GE announced it had terminated the $3.3 billion deal and was looking to pursue other options. The news came only months after the Department of Justice initiated court proceedings against the acquisition, citing concerns that the deal would eliminate competition, leaving consumers with little choice.
McLoughlin admitted Electrolux knew from the start there would be risks, however planned to see the deal "all the way through." With a third of the company's sales coming from the U.S., the CEO remained confident that the company was a strong player in the region and would continue to grow. 041b061a72