General Electric (NYSE:GE) has faced some tough times over the last 20 years. This industry leader was forced to completely reshape the company after the economic crisis in 2008, and GE again faced adversity after Covid hit in late 2019. General Electric has also had 2 CEOs in the just the last 5 years, with John Flannery running the company for just over a year before current leader Larry Culp took over in October of 2018. Culp has finally been able to refocus GE on their two most successful businesses in the aerospace and health care industries.
Today, General Electric is buy. This company an undervalued stock with a strong balance sheet that is very well positioned to take advantage of the decades of strong growth that the company should see in the Aerospace and health care industries.
GE has performed badly over the last 15 years. This company sold off hard after 2008, and the stock has also gone nowhere over the last 5 years.
Today General Electric’s future is clear, management has refocused the business on the Aerospace and health care divisions. The company is also now well positioned to take advantage of a number of positive long-term catalysts.
GE’s recent earnings report showed how strong the company’s core businesses are right now.
General Electric recently reported fourth quarter revenues of $21.79 billion and organic revenue growth of 11%. The company’s adjusted revenues grew GE reported 7% year-over-year, with currency moves hurting the company’s bottom line. Management also disclosed that yearlong orders of $83 billion were up 6% organically, adjusted revenues of $73.6 billion were up 6% organically, and 3% on an adjusted basis. The company also reported that adjusted profit margins came were 7.9%. GE’s net margins are now at the highest levels the company has seen in 5 years. General Electric also now has a very strong balance sheet, with $21.77 billion in cash, and $34.74 billion in manageable long-term debt. The company reported free cash flow for the quarter was up $2.1 billion to $4.8 billion for the full year.
GE also issued bullish guidance for 2023. Management expects the Aerospace division to continue to grow in the mid to high teens, and GE Healthcare also recently raised guidance for next year as well. General Electric plans to spin-off the company’s energy businesses in early 2024 under the name GE Vernova. GE recently spun-off their health care business, which has nearly $19 billion in annual revenue. The newly spun off company is called GE Healthcare (GEHC), and General Electric has retained 20% equity position in this stock. Culp’s long-term plan is to split GE into three companies, and he expects to complete this goal by early 2024 after GE Vernova is spun off.
GE’s two main power divisions also performed well last quarter. GE Power saw full year orders of $17.8 billion, which was an increase of 9% and 17% in organic growth, driven primarily by gas equipment. GE Renewable Energy saw orders fall 19% year-over-year primarily because of weakness in the wind power market, but orders in this division were up in the last quarter by 4%. GE guided to the low to mid-single digit range for revenue growth in GE Vernova in 2023.
The key to GE’s future will be the aerospace and health care business, and the long-term outlook for General Electric’s cores industries is strong. GE recently reported full-year revenues in the Aerospace division of $26 billion, with orders of $31.1 billion. Revenue in this division was up 22% on an adjusted basis, and 23% organically. Management also issued bullish guidance, saying that GE expects their Aerospace division to grow in the mid to high teens in 2023.
Air traffic levels are supposed to return to prepandemic levels in 2023, and companies such as United Airlines (UAL) continue to order massive amounts of new planes to replace and build out their fleet. United Airlines recently announced the largest purchase of wider body aircrafts in industry history in December of last year, and this industry leader has not made any cancellations to their massive orders for new planes. Air Travel was nearly .5% of GDP prior the pandemic, and with governments and companies increasingly requiring people to return to work next year and travel restrictions in Asia and other region are continually being eased. China recently removed key travel restrictions to people coming to and from Hong Kong and Macau earlier this month, a significant recent policy change by the Chinese Government. Asia continues to open up. Analysts are also expecting the airline industry to do well in 2023. Delta (DAL), United, and American (AAL), have all issued bullish guidance for next year.
GE Health Care also recently reported strong results and issued bullish guidance. GE Healthcare reported fourth quarter earnings per share of $1.31, operating income of $844 million, and sales of $4.9 billion. Management issued bullish guidance for 2023, discussing how they expect 5-7% sales growth, operating profit margins of 15-15.5%, sales of $19.4 billion, and operating profit of $3 billion. The company also raised earnings per share estimates for 2023 to $3.60-$3.75 a share from previous expectations of $3.38 in earnings per share.
Even though GE trades at nearly 41x forward earnings estimate, this company looks cheap using a number of different metrics. General Electric trades at 1.37x enterprise value to sales, and 1.19x sales. The sector average is 1.75x Enterprise value to sales, and 1.4x price to sales. GE recently issued bullish guidance for next year, the company expects overall organic earnings growth across all division to be in the high single digits next year. The company the company is also recentering their business around the Aerospace division, which management expects to grow in the mid to high teens next year. GE is expected grow their earnings per share from $1.92 in 2023 to $3.45 in 2024, and analysts also expect the company to be able to grow earnings per share by 44% per year over the next 5 years.
GE also now has a very strong balance sheet with $21.77 billion in cash and operating annual free cash flow of $5.92 billion. General Electric has massively reduced the company’s debt level over the last 3 years, and the company currently has nearly $30 billion in long-term debt, which is a historically low level for GE. Management also initiated a $3 billion share buyback plan in March of 2022, and the company’s strong balance sheet gives this company a lot of flexible options for future use of capital.
General Electric is a buy. GE is now well run and strongly positioned for the long-term. The company’s core Aerospace and health care businesses are very well setup to take advantage of strong multi-year trends. GE’s decision to divest from GE capital has also created significant flexibility and by freeing the company up from tougher financial regulations. While General Electric has struggled for years with failing businesses and bad management teams, this company now has an effective leadership team that has refocused GE’s business model on the company’s core divisions that are setup well for decades of strong growth.