General Electric (NYSE:GE) investors had a wild ride in 2020, but what might 2021 hold in store? It's not hard to see that GE's primary aim will be to improve industrial earnings and free cash flow (FCF). Consequently, I thought it would be interesting to focus on the key factors within each of GE's businesses that will determine GE's earnings/FCF. Here's the lowdown.

How General Electric makes money

It's useful to break out GE's earnings by segment in order to see just what's going on and where improvement is needed in 2021. The table below shows the extent of the pandemic's impact on GE's key aviation segment. As you will see in a moment, there are some signs of improvement in power and renewable energy while healthcare continues to generate solid earnings and FCF in a difficult environment for the company.

GE Industrial Segment

Year-to-Date 2020 Segment Earnings

2019 Segment Earnings

2019 Free Cash Flow

Power

($0.02) billion

$0.39 billion

($1.5) billion

Renewable energy

($0.49) billion

($0.67) billion

($1) billion

Aviation

$0.68 billion

$6.8 billion

$4.4 billion

Healthcare

$2.21 billion**

$3.9 billion*

$2.5 billion*

Data source: General Electric presentations. *Includes the now divested biopharma business, which generated $1.3 billion FCF in 2019. **Includes one-quarter of the now divested biopharma business.

General Electric Healthcare

The key metric to follow here is healthcare equipment orders. At the end of the third quarter, GE Healthcare's backlog stood at $17 billion with $5.5 billion of it in equipment and the rest in services. As the key to future services growth is equipment growth, it's essential that GE start to grow healthcare equipment orders again.

Although it might seem like a sector relatively immune from the COVID-19 pandemic, GE's healthcare systems orders suffered as non-COVID-19 related surgeries were foregone and medical budgets were prioritized toward combating the pandemic. Hopefully, equipment orders will come back strongly in the fourth quarter and beyond for GE Healthcare.

GE Healthcare equipment orders

Data source: General Electric presentations.

Power and renewable energy

I'm discussing these segments together because they are both businesses in turnaround mode. Simply put, CEO Larry Culp is trying to improve margins at both businesses and get them back to generating FCF in a couple of years.

The chart below shows one of the reasons the market got excited about GE's third-quarter earnings report. Both segments delivered a positive earnings margin in the quarter.

Chart of GE Power and GE Renewable Energy Margin

Data source: General Electric presentations. Chart by author. 

The key difference between the two segments is that power is a relatively slow-growth business because renewable energy is increasingly being used to generate electricity rather than the gas turbines that GE manufactures. That's good news for GE Renewable Energy, but not such good news for GE Power.

Subsequently, the key focus at GE Power (and specifically the gas power business) is to reduce costs. Culp plans to reduce gas power fixed costs to $2.5 billion by 2021 from $3.46 billion in 2018. It's a key number to watch in GE's fight to improve its margin.

Wind turbines.

Image source: Getty Images.

Turning to renewable energy, the key focus is on working through the low-margin legacy contracts in grid/hydro (business generating $5 billion in revenue in 2019) and improving margins in onshore wind ($10 billion). There's also an opportunity to use GE's digital capability to improve services revenue at onshore wind and grid/hydro.

Finally, GE generated negligible revenue from offshore wind in 2019, but investors should keep a close eye on the development of orders for GE's monster Haliade-X offshore wind turbine. It promises to be a key revenue generator for the company in the future.

GE Aviation

Last, but definitely not least. The key focus of investors' attention will be on GE Aviation in 2021. Given the disappointing flight data in the fourth quarter so far it could be a difficult start to the year, but investors need to keep the big picture in mind.

The key headline data to follow is the level of global commercial flights, in comparison with, say a normal year such as 2019.

Chart of Global commercial flights

Data source: radarbox.com. Chart by author. 

For GE, the hope is that its engine and its services/aftermarket revenue will recover in line with a general recovery in flights. The key number to follow is the GE Aviation spares rate. For reference, management defines it as "commercial externally shipped spares and spares used in time and material shop visits in millions of dollars per day."

Chart of GE Aviation spares rate.

Data source: General Electric presentations. Chart by author. 

General Electric heading into 2021

A recovery in commercial aviation combined with margin improvement in power, renewable energy, and healthcare equipment sales is the recipe for success that GE investors will be hoping for 2021. Fortunately, GE is a company set to benefit from the coronavirus vaccine and investors have cause to believe significant progress on earnings and cash flow will take place.