Please ensure Javascript is enabled for purposes of website accessibility

How the COVID-19 Pandemic Will Impact General Electric

By Lee Samaha - Updated Apr 7, 2020 at 5:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

GE's aerospace business is the key driver of its earnings -- and conditions in that industry are ugly. But there are a lot of other reasons to worry about GE's health right now.

Even before the COVID-19 pandemic slammed the brakes on global commerce, General Electric (GE 1.90%) was hurting. And it's one of the many industrial companies that are likely to take heavy damage as the coronavirus -- and the efforts to stem its spread -- ripple across the world economy.

The stock is down about 35% so far in 2020, and it may well be a good long-term value right now, but investors need to be aware of the near- and medium-term risks, because they are coming from a number of different angles right now. While GE's aviation segment is likely to take the heaviest blow, investors should brace themselves for declines across its other businesses as well. 

Passengers on a commercial airplane.

General Electric needs commercial aviation to come back. Image source: Getty Images.

It's more than just aviation

Let's start with a look at the key risk factors. They include:

  • The COVID-19 pandemic threatens GE Aviation in both the near and medium terms; reduced demand for spare engines could be followed by order cancellations from Boeing (BA 3.37%) and Airbus (EADSY 0.77%).
  • The value of GE's 36.8% stake in oil services company Baker Hughes (BKR 1.28%) has been significantly reduced due to the crash in the price of oil.
  • GE Healthcare is "managing through reduced demand for certain equipment as elective procedures are postponed or canceled around the world," according to a company update.
  • GE Power's revenue from gas turbine services may decline if there are fewer power outages than expected due to reduced economic activity.
  • The most valuable part of GE Capital is GE Capital Aviation Services, or GECAS, a commercial aviation leasing company; its customers are being significantly impacted by the COVID-19 crisis.

The chart below illustrates how bad the stock market's sentiment is around the parts of GE's businesses right now. For example, AerCap (AER 1.33%) is the biggest competitor to GECAS, and clearly, the market is fearful about conditions in the aviation leasing market. That pessimism was compounded by a recent order cancellation of Boeing planes by the third-biggest leasing company, Avolon. 

France's Safran is GE Aviation's joint-venture partner at CFM International, which manufactures the LEAP engine for the Boeing 737 MAX and the Airbus A320 NEO family. Meanwhile, GE's stake in Baker Hughes is now worth less than $4 billion -- compare that with the $12 billion that GE's management assumed, in January, that it would have as a resource in order to reduce debt. As for GE Power, it's worth noting that the one reason the segment's cash flow generation was better than expected in 2019 was an increase in power outages. In a weak power-demand environment, the frequency of outages could drop. 

BKR Chart

Data by YCharts

Aviation's problems could run

When it comes to the outlook for GE Aviation, there are two diametrically opposed ways to view matters, and they are probably both wrong. Those who take a glass-half-full view expect the aviation market will bounce back just as it did after the SARS outbreak in 2002-2003. Based on that scenario, all investors need to do is make a slight downward revision to their estimates of the long-term earnings and cash flow from GE Aviation to reflect a couple of weak quarters.

Those taking a glass-half-empty view expect that the recovery in aviation will be very slow, and will feature airline bankruptcies and an overall step-down in growth expectations for the industry. In this scenario, investors will have to significantly downgrade earnings and cash flow expectations, principally from GE Aviation engine spares and aftermarket sales.

Frankly, it's impossible to predict which of these views will prove more accurate, not least because the outcome will be contingent on how well the world's COVID-19 containment measures work.

However, it's worth noting that there's substantial risk in the latter scenario. Boeing CEO Dave Calhoun is already preparing his workers for a "new reality" in the industry. If this implies a step-down in order expectations for narrow-body aircraft, then the LEAP engine simply won't generate as much cash flow over the long term as previously expected.

Similarly, Boeing's previous CEO Dennis Muilenburg was expecting a wide-body aircraft replacement cycle would kick in this year, driven by demand for Boeing's 777X. That's surely not going to happen now, which is bad news for GE as its GE9X engine is the sole option on the plane.

To cap it all, if the long-term growth rate of air passenger traffic declines, then the highly profitable services revenue generated by GE's installed base of engines is under threat too.

Where next for General Electric?

Cautious investors will surely prefer to adopt a "wait and see" approach to matters. While history suggests the commercial aviation market will eventually return to growth, there's a lot of near-term risk around GE right now, and not just from its aviation business. In addition, it's far from clear how long governments' COVID-19 containment measures will need to stay in place. The longer they do, the more financial stress the airlines will come under. That's not good news for GE.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$75.77 (1.90%) $1.41
The Boeing Company Stock Quote
The Boeing Company
BA
$170.60 (3.37%) $5.56
AerCap Holdings N.V. Stock Quote
AerCap Holdings N.V.
AER
$45.74 (1.33%) $0.60
Airbus Stock Quote
Airbus
EADSY
$27.00 (0.77%) $0.20
Baker Hughes, a GE company Stock Quote
Baker Hughes, a GE company
BKR
$24.18 (1.28%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.