Last week, General Electric (NYSE:GE) CEO Larry Culp gave a presentation at the 36th annual Bernstein Strategic Decisions Conference that could best be described as a reset of a reset. This was supposed to be the year when GE would start growing earnings and free cash flow (FCF) again, but the COVID-19 pandemic upended that plan. The company's change in fortune is best highlighted by Culp's comment that FCF would be negative this year, compared to the original guidance range of $2 billion to $4 billion.

Here's what it all means for the investment thesis around the company, and what you need to know before considering a purchase of GE stock.

A whole new outlook

It's worth pausing to reflecting on the momentous shift in perception that's taken place in regard to GE as a company and as an investment in the wake of the coronavirus crisis.

An airport boarding gate.

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

The company started the year being looked at as a powerful commercial aviation business with some far less attractive industrial businesses attached to it. Two business segments were in need of restructuring (power and renewable energy). Another, moderately growing business (healthcare) was about to sell its growth and cash-flow engine (biopharma) to Danaher. In other words, valuing GE was an exercise in calculating what GE Aviation was worth, with the rest of the conglomerate seen as supporting acts at best.

The following table charting last year's results effectively illustrates where matters stood. Excluding its now-divested biopharma business, GE generated only $1 billion in industrial FCF in 2019. This means the original guidance range of $2 billion to $4 billion in FCF for this year actually implied a significant increase -- even if it contained one quarter of FCF from the biopharma unit before it was sold.

GE Industrial Business

2019 Free Cash Flow

Power

($1.5 billion)

Aviation

$4.4 billion

Healthcare*

$1.2 billion

Renewable Energy

($1 billion)

Corporate and Eliminations

($2.1 billion)

Overall*

$1 billion

Data source: General Electric presentations.  * Excludes $1.3 billion from the now divested biopharma business.

Then comes the coronavirus crisis and its negative impact on the commercial aviation industry. However, the pain doesn't stop there as GE faces near-term challenges across all its businesses. It gets even worse when you consider that the biggest earnings generator among its non-industrial businesses, GE Capital, is dominated by its aircraft leasing arm GECAS. 

The sea change in the fortunes of the commercial aviation industry now means investors are looking at GE Aviation in a more negative light than they did just a few months ago. As such, the key question has become what the non-aviation businesses can do to support GE's valuation as GE Aviation goes through a very difficult period?

Investing in General Electric will require patience -- a lot of it

One way to try and answer this question is by looking at the challenges and opportunities ahead for each GE segment, as outlined in the table below. The near-term challenges are taken from Culp's presentation at the Bernstein event.

On the plus side, Culp is a highly regarded executive with a great track record. If anyone can wring every inch of profit out of GE Power and GE Renewable Energy, it's him. Meanwhile, GE Aviation will surely improve, not least because the commercial aviation industry has a history of attracting capital investment even if it hasn't always been great for equity holders. 

Offshore wind tubines.

GE is hoping its bet on offshore wind energy will pay off. Image source: Getty Images.

However, the downside is no one really knows exactly what the shape of the commercial aviation recovery will be like. Moreover, it's far from clear whether gas turbine demand will stagnate for the next few years, or whether GE's bet on offshore wind energy will pay off. 

Finally, any overall improvement is going to take time. For example, even before the COVID-19 pandemic hit, GE was forecasting its power business would not start generating FCF until 2021, while renewable energy wouldn't do so until 2022. Those timelines may be pushed out now.

Meanwhile, healthcare divested the highly cash generative biopharma business (responsible for $1.3 billion of the segment's $2.5 billion in FCF in 2019) and it's anyone's guess what the shape of the commercial aviation recovery will be like.

GE
Segment

Near-Term
Challenges

Long-Term
Challenges

Long-Term
Opportunity

Key
Question

Power

Gas turbine utilization expected to decline 10% in 2020, gas turbine orders pushed out

Gas turbine demand could remain weak

Internal restructuring and improving margins

Is gas turbine demand facing structural weakness as renewable energy grows in importance?

Aviation

Spares rate down 60%, aftermarket shop visits down 60%

Weak FCF may constrain investment in future solutions

GE Aviation will remain the leading player in aircraft engines

What shape is the recovery in commercial aviation?

Healthcare

COVID-19 has impacted demand for non-coronavirus related capital equipment

Low-single-digit growth now that biopharma has been sold

Strong global franchise

Does GE Healthcare need investment and acquisitions to boost growth, and where would the money come from?

Renewable Energy

Supply chain issues with wind turbine blades

The industry is traditionally low margin

Internal restructuring and improving margin to the high single digits achieved by peers, onshore wind remains in growth mode

Will the bet on offshore wind energy pay off?

Data source: General Electric presentation, author's analysis. 

The key takeaway

On the positive side, Culp may well have just low-balled FCF guidance in the same way that he arguably did last year. Also, it's not a good idea to bet against him in terms of margin improvements in the power and renewable energy businesses, so expect profit improvements over time.

On the other hand, a lot of things will need to go right for GE to start producing the kind of FCF that most investors will feel comfortable with, and it will take some time to get there. Meanwhile, there's little downside protection in terms of FCF if things go wrong with commercial aviation. All told, GE stock is only for the very patient investor.