Company Overview: General Electric Company is a global digital industrial company. The Company's products and services range from aircraft engines, power generation, and oil and gas production equipment to medical imaging, financing and industrial products. Its segments include Power, which includes products and services related to energy production; Renewable Energy, which offers renewable power sources; Oil & Gas, including liquefied natural gas and pipelines; Aviation, which includes commercial and military aircraft engines, and integrated digital components, among others; Healthcare, which provides healthcare technologies in medical imaging, digital solutions, patient monitoring and diagnostics, and drug discovery, among others; Transportation, which is a supplier to the railroad, mining, marine, stationary power and drilling industries; Energy Connections & Lighting, which includes Energy Connections and Lighting businesses, and Capital, which is a financial services division.


GE Details

While the globally diversified and digital industrial company, General Electric Company (NYSE: GE) seems to be having a tough time with many challenges building up and dividends under scrutiny, the recent dip in stock price is opening investing opportunities. Primarily, the latest execution of Reverse Morris Trust (RMT) for the transportation business into Wabtec comes with a decent cash component and consideration which is more than what was expected in exchange for $2.9 billion of upfront cash and a 50.1% equity stake in Wabtec. Further, deal implies a good equity market value for the asset that is about 9-10% of group’s market cap. Through the transportation exit, the impact from cyclical industries including oil will be done away with while the move is expected to be of strategic advantage. This deal that appears to de-risk GE by providing about $4.3 billion post tax and the $20 billion asset sale proceeds target are looked upon as key drivers for upside momentum in next one year. On another note, GE’s electric equipment and  gas turbines may find some buying in from China with the move on natural gas use and this can help GE’s Power segment. The group is expected to benefit from aviation unit given favorable market scenarios and healthcare businesses with good growth in emerging markets.

Spinning off non-core businesses: General Electric Company (NYSE: GE) is divesting its non-core businesses and has planned to rip off $20 billion of assets over the next one to two years. The disposition of Industrial Solutions would finish during the second quarter 2018 and Value-Based Care in the early third quarter 2018. In addition, the company is in active discussions on multiple smaller Aviation platforms, Current & Lighting, Distributed Power and Transportation. Further, GE is working to resolve legacy matters in the discontinued operations, and has recorded a reserve of $1.5 billion related to the WMC FIRREA investigation in the first quarter of FY 18. Meanwhile, GE is working with investment bankers to find ways to shed its insurance business, which has caused it to book hefty charges while sparking shareholder lawsuits and an investigation by U.S. regulators. GE's insurance operations stopped generating new business and therefore the current contracts were managed to maturity in a process known as run-off, and this has become a major financial burden for the U.S industrial conglomerate. GE had spun out much of its insurance business in 2004 into Genworth Financial, itself currently attempting a sale to China Oceanwide Holdings Group Co for $2.7 billion. That deal has been held up by the Committee on Foreign Investment in the United States, which is a U.S. national security panel. GE is focused on shedding its troubled LTC business, and it is open to divesting other insurance assets, including structured settlements and other life and disability products.
 

Orders and Industry Trends (Source: Company Reports)

First Quarter 2018 Performance: GE has witnessed improvement year over year in the first quarter of 2018 for Industrial earnings, free cash flow, and margins. The company has reduced Industrial structural costs by $805 million in the first quarter 2018, and is on track to exceed the cost reduction goal of $2 billion in 2018. Moreover, in the first quarter of 2018, GE has reported the adjusted earnings per share (non-GAAP) of $0.16 beating the consensus estimate of $0.11.. The company has posted the adjusted GE Industrial free cash flows (non-GAAP) of $(1.7) billion in the first quarter 2018, which is in line with the company’s plan and $1.1 billion better than prior year. Additionally, the first-quarter orders have totaled $27 billion, which is up 10% reported but flat organically.


First Quarter 2018 Financial Performance (Source: Company Reports)

Segment Performance in the first quarter of 2018 with renewables picking up: GE’s Aviation, Healthcare, Renewables, and Transportation grew in terms of earnings, and BHGE continues to execute on the company’s plan. Power is making progress on cost actions and operational and services execution, but the industry continues to be challenging and is trending softer than the company’s forecast. Power segment in the first quarter 2018 has posted 29% fall in the orders to $5.6 billion, revenue fell 9% to $7.2 billion and the group posted the segment profit of $273 million, which is down 38%. The Renewable Energy in the first quarter of 2018 has reported 15% rise in the Orders to $2.4 billion. However, the revenue fell 7% to $1.6 billion, driven by lower Onshore Wind equipment sales given timing of shipments relative to last year’s profile. The Segment profit is of $77 million, which rose 10% reported. The backlog of Renewable Energy grew 8% from the prior quarter, principally from strength in Onshore Wind. Moreover, in the first quarter of 2018, BHGE’s orders were up 102% reported and down 3% organic to $5.2 billion. The revenues of BHGE were up 74% reported and down 14% organic to $5.4 billion and the adjusted segment profit was down 30% reported and down 79% organic to $181 million. The profit of BHGE fell due to declines in the longer cycle oilfield equipment and turbomachinery businesses. However, synergies remain on track for the year. During the first quarter 2018, GE has received cash distributions from BHGE totaling $441 million, including the portion of share repurchases of $314 million and quarterly dividend of $127 million.

Strong Aviation segment: The group continues to be a leader in this business with the Orders in the first quarter reaching $8.1 billion, which is a rise of 13% while the profit grew 26% to $1.6 billion. The segment profit was mainly on the back of the higher price on commercial engines and aftermarket materials, as well as product cost productivity, which was partly offset by negative mix from higher LEAP shipments. During the first quarter of 2018, Aviation margins improved 340 basis points, rising year-over-year on cost out and higher service revenue, offsetting the drag of 186 LEAP shipments in the quarter as compared to 77 last year. Transportation margins rose 520 basis points boosted by falling costs and a higher mix of services. Moreover, at the Industrial level, cost out was $800 million. The group aims to beat their $2 billion plus target for cost out. Power cost out was $350 million and the group is aiming for a $1 billion Power cost out target. As per the Transportation segment performance, in the first quarter 2018, the orders were up 46% and the profit was up 37%.  The segment profit was driven by services growth more than offsetting locomotive volume declines. It built a 65,000 engine install base and has $200 billion revenue backlogs. Additionally, in the first quarter 2018, GE Capital’s continuing operations generated a loss of $215 million, versus a loss of $47 million in the prior year. GE Capital has ended the first quarter 2018 with $146 billion of assets, including $22 billion of liquidity.

Focusing on Healthcare: The group’s imaging and mobile diagnostics business is going strong and has over 1 million machine install base. There are 16,000 scans a minute coming off of that install base. Their Life Science business continues to be a lucrative segment promising good growth margin, cash conversion and a robust durable business model. The group sees an investment opportunity in cell therapy.

Merger of GE transportation into Wabtec: The group is merging their GE transportation into Wabtec, which is a public firm. They are going to take a $2.9 billion dividend on day one, while GE would own 50.1% of the shares after effective merger. GE transportation had reported $3.9 billion as FY17 revenue with an adjusted EBIT Margin of over 18%. Wabtec Corporation has $3.9 billion with over 13% Adjusted EBIT Margin. The group expects over $250 million run rate synergies and a net tax benefit of over $1.1 billion. The transaction is valued at over $11.1 billion while GE shareholders would get 50.1% of shares.
 

Merger rational (Source: Company reports)
 
Outlook: GE has reaffirmed 2018 guidance and there is no change to the framework of $1 to $1.07 earnings per share and $6 to $7 billion of free cash flow. This earnings per share guidance is above the market consensus (below $1). The company expects earnings pressure in Power will be offset by better Aviation and better Healthcare earnings and lower corporate costs. GE is aiming for a $2 billion cost target. It intends to be ahead of plan on that, as well as investing in other areas of the company, additive and digital.

Stock Recommendation: GE stock has fallen over 48% in last one year, as at May 30, 2018 given the subdued performance of some of its business segments. In fact, the value has been halved since the end of 2016. On the other hand, and with the new initiatives, the group now forecasts $5 billion to $10 billion of cash proceeds out of the disposition pool. It is strengthening liquidity in GE Capital and got over $22 billion as of the end of the first quarter. It aims over $10 billion as of the end of the year, and $5 billion plus 2020 and beyond. The stock’s return on equity has improved to 0.8% as at March 2018 from -9.8% as at December 2017, while it is yet to match up with industry median. The return on invested capital has improved to 0.2% from -2.3% for the same respective periods. We rate a “Buy” on the stock at the current price of $ 14.17 with many catalysts being established for future.
 

GE Daily Chart (Source: Thomson Reuters)

 
Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.