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

Industrial Blue-chip Player, General Electric Company (NYSE: GE), is taking a deep dive into its business revamping with focus shifting to its aviation, power and renewable energy businesses. The group aims to have a leaner structure now. GE has lined up many initiatives to achieve industrial net debt-to-EBITDA ratio lower than 2.5x and a long-term A credit rating. Its ROE as at March 2018 has been 0.8% against (9.8%) as at December 2017. While GE being removed from Dow Jones Industrial Average may not be good news, the company nonetheless is putting many efforts, along with divestment of assets, in place to regain the lost luster and drive future performance.

Planned to spin off its health-care unit & fully separate its 62.5% interest in BHGE: General Electric Company (NYSE: GE) has planned to spin off its health-care unit into a standalone company and separate its stake in oil services company Baker Hughes over the next two to three years. The group continues to have its current quarterly dividend as it is till the time the spin-off of the health-care unit happens. The dividends will later be adjusted as per trends in the sector and in line with peers. The group’s 2017 revenues were over $19 billion depicting a 5% growth supported by a 9% segment profit growth. The healthcare business segment provides medical imaging (including contrast agents), bio-manufacturing, monitoring and cell therapy technology, artificial intelligence, leveraging deep digital, and data analytics capabilities. The segment caters to the customers in 140 countries all over the world.  Further, GE will be generating cash from the disposition of 20% of interest in Healthcare business while 80% of the interests have been flagged for distribution to GE shareholders through a tax-free means. This has boosted the stock in the past couple of days. The spin-off has been slated for completion in the next 12 to 18 months. The move is thus expected to have GE with a capital structure more aligned to peers. It is also noteworthy that about $18 billion of debt and pension obligations will be passed on to Healthcare under the transaction. At the same time, GE is also gearing up for getting away with its interest (62.5%) in Baker Hughes (BHGE) in the coming 2-3 years. This indicative separation will be beneficial for both GE and BHGE as the latter would have better agility with more focus on oil and gas industry.


GE Healthcare performance (Source: Company reports)

Focus on Aviation, Power and Renewable Energy: GE has now planned to focus on its operations on the aviation, power and renewable energy businesses, which are three highly complementary businesses poised for future growth.GE Aviation will be emerging as a leader in the aviation industry and this asset is a premier asset of the company with over $200 billion in backlog and visibility to long-term growth. Every two out of three commercial departures around the world are powered by GE technology and GE’s global installed base has over 65k engines. Moreover, GE’s energy strategy, through GE Power and GE Renewable Energy, provides a diverse set of energy solutions across the entire electricity value chain. This enables having an affordable, reliable, efficient energy to businesses and consumers. Over one-third of the world’s electricity given 1,600 gigawatts of installed capacity, is being powered by GE, and the company has an installed base of approximately 7,000 gas turbines, with a track record of increasing productivity. However, there are certainly macro and secular challenges to this business, but the company is taking actions to remediate the issues that GE saw in 2017, and to right-size the cost structure for a lower heavy-duty gas turbine market in the near term. Furthermore, GE’s Renewables business is an important part of the energy mix. 67% of 2017 global power capacity additions were from renewable sources, with some sources now estimating 70% of 2018 to 2021 additions from renewable sources. GE is a leading player in onshore wind, gaining market share in 2017. The company is making inroads into offshore wind and has a strong hydro business. Additionally, GE has planned to continue to invest for the technologies like additive manufacturing and digital to lead the next level of industrial productivity.

Focus on GE Capital: GE has also indicated to have a significant reduction in the balance sheet of GE Capital. With this, the group is targeting sales of $25 billion in energy and industrial finance assets by 2020. The company is expecting an approximately $3 billion capital contribution to GE Capital in 2019.  In addition, the company is actively exploring options to reduce its insurance exposure. For the second half of 2018, the group’s average commercial paper balance is forecasted to fall to $10 billion, as compared to $16 billion in 2017. Peak usage is forecasted to fall to $13 billion, against $20 billion in 2017. They forecast an average usage to be less than $5 billion by 2020 while peak usage is expected to be about $5 billion. The cash is expected to be more than $15 billion.

Merger of Wabtec and GE Transportation: General Electric Co earlier announced a $11.1 billion deal for the merger of its transportation business with the U.S. rail equipment manufacturer Wabtec Corp. As per the deal, GE will get a $2.9 billion of intial payment in cash and a 9.9 percent stake in the combined company, with GE shareholders awarded 40.2 percent and existing Wabtec shareholders owning 49.9 percent. The deal is tax-free for GE and Wabtec shareholders because it is structured as a so-called Reverse Morris Trust. The resulting company formed will have approximately $8 billion in revenues, a more diversified business mix, higher margins, and approximately 15 percent cash EPS accretion in year one. The transaction is expected to close in early 2019. Moreover, GE Transportation is positioned for a substantial rebound, with projected adjusted EBITDA growing from about $750 million in 2018 to between $900 million and $1 billion in 2019.


Repositioning businesses to unlock value (Source: Company reports)

Rating: Moody’s Investors Service has reaffirmed its A2 rating and its negative outlook for GE’s debt. The outlook is negative because of continued weakness in earnings and cash flows, which are expected through 2019 and into 2020 but expected to be managed in the long run.

Future Plans: The group intends to grow their overall Renewables market while expand the market share into new areas, like offshore wind and storage. They aim to see earnings growth in the turnaround of their Power business with 1/3 of the world's electricity from their installed base and 2 of every 3 flights on their engines. Digital and Additive are further major opportunities across all 3 segments that would offer benefits to boost growth and cut costs. With the use of AI and machine learning, the group aims for a combination of in vivo and in vitro diagnostic data sets which would offer new insights on the underlying causes of disease. They are the biggest generators of in vivo data in the world. In imaging, they are co-investing with their customers in these exciting new areas while the group already showed better workflows for radiologists and provide clinical decision support tools for doctors.


Reducing GE Industrial leverage (Source: Company reports)

Stock Recommendation: GE has planned to separate GE Healthcare into a standalone company, pursue an orderly separation from BHGE over the next two to three years, make its corporate structure leaner and substantially reduce debt. GE has planned to reduce its net debt by approximately $25 billion by 2020 and generate $500 million or more in corporate cost savings by the end of 2020. The company intends to maintain more than $15 billion of cash on the balance sheet.  GE is targeting for an Industrial debt to EBITDA ratio to be less than 2.5 times and a long-term A credit rating. GE stock has been in bullish momentum this week and we believe the momentum to continue going forward. The stock has fallen down -48.70% in last one year and surged up over 7.7% on June 26, 2018 with another 1.6% rise on June 27, 2018. The stock has a decent dividend yield and we rate it a “Buy” at the current price of $ 13.96.
 

GE Daily Chart (Source: Thomson Reuters)

 
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