Just as General Electric (GE 4.98%) has been hard hit by the pandemic, it's also likely to be a significant beneficiary once an approved coronavirus vaccine reaches the public. While many companies will see near-term boosts from that event, its impact on GE could be a lasting one. As such, the stock deserves another look.
A coronavirus vaccine will make air travel easier. Image source: Getty Images
By the numbers
To understand why, let's start by breaking down how the industrial conglomerate makes its money. Its strength pre-2020 was in aviation, with strong support from healthcare, and patchy performances from its power and renewable energy businesses. Notably, GE's non-industrial business, GE Capital, actually generates the bulk of its profit from its aircraft-leasing business, GECAS.
The aviation segment has taken a significant hit during the pandemic. Meanwhile, while a recovery has been in progress within its power unit, but that's been constrained by the inability of personnel to service equipment. Even GE Healthcare has suffered due to people postponing elective medical procedures.
| GE Segment |
Q3 2020 Profit |
Full-Year 2019 Profit |
Full-Year 2018 Profit |
|---|---|---|---|
|
Power |
$150 million |
$386 million |
($808 million) |
|
Renewable Energy |
$5 million |
($666 million) |
$292 million |
|
Aviation |
$356 million |
$6.820 billion |
$6.466 billion |
|
Healthcare* |
$765 million |
$3.896 billion |
$3.698 billion |
|
GE Capital |
($52 million) |
($530 million) |
($489 million) |
Data source: General Electric presentations. Full-year 2018 and 2019 figures include the now-divested biopharma business.
As such, the wide-scale rollout of a COVID-19 vaccine is likely to lead to a near-term pickup in both the power business (as GE regains access to sites in order to service equipment) and the healthcare unit (as non-coronavirus related medical procedures and doctor's visits increase).
GE Aviation
The aviation-focused businesses will receive a temporary boost as airlines begin to feel more comfortable opening up routes. Similarly, aircraft orders and deliveries may well improve as the commercial aviation industry recovers.
However, that near-term impact on aviation likely will be relatively muted. No matter -- it's the long-term growth prospects that deserve attention here. Simply put, a coronavirus vaccine will help to de-risk the commercial aerospace sector at a time when many of the stocks in it, including GE's, already look undervalued.
To put this in context, here's a breakout of GE's industrial free cash flow (FCF) by segment in 2019.
|
GE Segment |
2019 Free Cash Flow |
|---|---|
|
Power |
($1.5 billion) |
|
Aviation |
$4.4 billion |
|
Healthcare* |
$1.2 billion |
|
Renewable Energy |
($1 billion) |
Data source: GE presentations. *excludes the now-divested biopharma business.
Given that many analysts view a price-to-FCF multiple of around 20 as a decent value for an industrial conglomerate, you could argue that, based on 2019 FCF, GE Aviation is worth at least $88 billion. That's a very favorable figure given that GE's current market cap is only $78 billion.
GE Aviation's recovery
However, the real question is when will activity in the aviation industry recover to its 2019 levels? According to the International Air Transport Association (IATA), global passenger traffic won't get back to last year's volumes until 2024. Similarly, the CEO of GE competitor Raytheon Technologies, Greg Hayes, says the earliest he's expecting a recovery to 2019 levels is 2023.
Clearly, it's going to be a slow climb back. However, GE Aviation did generate $4.4 billion worth of FCF in 2019, so it's reasonable to expect it will do something similar at some point in the future, even if it takes the company until 2024 (or longer) to manage it.
With a vaccine, though, investors can feel more confident in that scenario, and about in penciling in such a figure for GE in a few years' time. And such a vaccine's rapid deployment may well pull the date we reach that full recovery point forward.
What does this mean for GE investors?
Armed with the assumption that GE Aviation will get back to 2019 levels of FCF in, say 2024, you can begin to build a case that the stock is a solid long-term value. Assuming GE Healthcare achieves low-single-digit percentage growth, then at that point, it will be generating $1.2 billion to $1.4 billion in annual revenue.
GE Power and GE Renewable Energy are in turnaround mode, and management expects positive FCF from both segments in 2022. If each can hit the kind of margins generated by its peers, then they could be producing $1 billion in FCF apiece by 2024. Putting it all together, GE could easily be generating $5 billion to $7 billion in annual FCF within the next five years. That would make the company look like a bargain investment at its current market cap of $88 billion. And given the recent upbeat news on the COVID-19 vaccine front, those sorts of FCF scenarios look more likely now.
