It's a question that might seem comical to younger investors, but there was once a time when General Electric (NYSE:GE) really was a millionaire maker stock. During the period of Jack Welch's tenure as CEO (April 1981 to Sept. 2001), the stock generated a total return of an incredible 4,280%. However, in the nearly two decades since then, it's lost 71.6% and is down 52% in the last decade alone. Can GE's glory days return, or is more pain to come for long-term investors?

Two questions

One way to look at long-term investing is to ask yourself the following question: What views of the world am I manifesting by taking a long-term position in this stock? In the case of GE, there are two key questions:

  • In a post-COVID-19 world, is commercial aviation set to return to multi-year growth in line with the previous decade?
  • Is there a future for the use of gas as a source for electricity production in light of the growth of renewable energy?

Both of these questions relate to long-term structural issues for GE, and the resolution to them will probably decide the fate of the stock price over the long term. Let's look closer at why these questions are key, and what they mean to long-term holders.

Airplanes in the air.

GE needs the aviation market to recover. Image source: Getty Images.

Why it matters so much

A quick look at GE's revenue and segment profit in 2019 helps to explain matters. Clearly, aviation is GE's most important profit generator and where most of the value in the company lies. In addition, aircraft leasing business General Electric Capital Aviation Services, or GECAS, is by far the most valuable part of GE Capital -- GECAS made $1 billion in profit in 2019, helping to partially offset losses elsewhere at GE Capital

Turning to power, although the segment's profit in 2019 seems negligible, it's a significant improvement on the $808 million loss in 2018, and GE CEO Larry Culp is making good strides in turning around profitability. It's also worth noting that GE Power had a 13.8% segment profit margin in 2016 and generated $5.1 billion in segment profit in the same year. Its long-term profitability is a key driver of GE's value.

With regard to the other two businesses, renewable energy has never been a business to move the needle on GE's profits. The wind power industry is highly competitive, so much so that GE's main competitors, Siemens Gamesa and Vestas, reported net profit declines in their most recent quarters.   

Turning to healthcare, the figures below include the biopharma business, which has now been sold to Danaher. The biopharma business was the growth business of GE Healthcare and also responsible for $1.2 billion of the segment's $2.5 billion in free cash flow in 2019.

Without biopharma, GE Healthcare's CEO sees the segment as being a "low single-digit to mid-single-digit" grower after 2021. That's fine, but the loss of biopharma means GE Healthcare is unlikely to be more than a useful support actor to the main roles of GE Aviation and GE Power in improving earnings and cash flow going forward.

GE Segment

Revenue

Segment Profit

Power

$18.6 billion

$386 million

Aviation

$32.9 billion

$6.82 billion

Healthcare*

$19.9 billion

$3.9 billion

Renewable energy

$15.4 billion

($666) million

Capital

$8.7 billion

($530) million

Data source: General Electric presentations. *Figures include the biopharma business recently sold to Danaher. 

GE Power

The segment's key product is gas turbines used for electricity generation. However, the market for heavy-duty gas turbines fell in half between 2015 to 2019, and GE's acquisition of Alstom's energy assets in late 2015 proved extremely ill-timed.

Part of the issue has been the rise in the use of renewable energy as a source of electricity generation. However, there's evidence to suggest that this is a cyclical issue rather than a structural one. As you can see below, gas usage has been on the increase in the last couple of years in the U.S., and this is likely to lead to orders for gas turbines in the future.

U.S. net electricity generation by source.

Data source: U.S. Energy Information Administration.

GE Aviation

It would be an understatement to say the commercial aviation market is facing uncertainty in the years ahead. In the near term, the COVID-19 pandemic and the actions taken to contain it have severely affected the outlook for passenger revenue. The chart below shows the last International Air Transport Association, or IATA, estimate for airline passenger revenue in 2020.

While the IATA is predicting a recovery to begin in the third quarter of 2020, it's far from clear what the financial state of the industry will be after the pandemic is contained. Moreover, ongoing travel restrictions and/or a shift in passenger behavior could affect growth prospects.

As the biggest player in the commercial aircraft engine market, GE Aviation desperately needs the commercial aviation market to recover.

Worldwide airline passenger revenue.

Data source: International Air Transport Association.

Could GE be a millionaire-maker stock?

The short answer is yes. Gas turbine demand could come back in line with the increased usage of gas for electricity generation, and commercial air traffic is likely to improve. GE will see better days ahead.

However, that doesn't mean the stock is a buy. A lot of things still need to go right before you can definitively conclude that there isn't a decade-long structural issue with gas turbine and/or aircraft engine demand coming up. Moreover, if you are wrong about these questions, then there's significant downside to GE's stock.