General Electric (GE 3.77%) investors are hoping the company can engineer a turnaround and get back to producing substantive amounts of earnings and free cash flow (FCF) again. To do so, GE is going to have to generate improved performance at its power, renewable energy, and aviation businesses. With this in mind, let's dig into the recently published SEC 10K filing and pull out one thing investors need to see from each business.
The importance of each General Electric segment
In order to frame the discussion, here's a brief look at GE's earnings by segment over the last few years. Putting healthcare aside as it's performing well for the company right now, GE's aim is to generate margin improvement at GE Power and GE Renewable Energy, and to prepare GE Aviation for a multi-year recovery.
| GE Industrial Segment |
2020 |
2019 |
2018 |
|---|---|---|---|
|
GE Power |
$274 million |
$291 million |
($1,105 million) |
|
GE Renewable Energy |
($715 million) |
($791 million) |
$140 million |
|
GE Aviation |
$1,229 million |
$6,812 million |
$6,454 million |
|
GE Healthcare |
$3,060 million |
$3,737 million |
$3,522 million |
Data source: General Electric presentations.
GE Power
This segment is made up of two businesses. Gas power (72% of power segment revenue) offers gas turbines and services, while the power portfolio (28%) offers steam power, power conversion, and nuclear applications and services. The key product at GE Power is gas turbines.
Unfortunately, it's a market that's halved (in terms of gigawatts, or GW) in the last five years. In 2015 large gas turbine industry orders were at 58 GW but CEO Larry Culp believes that they will stay in the 25 GW to 30 GW range for the foreseeable future. The reason? Simply put, the growth in the use of renewable energy as a source of electricity production has stolen the thunder from gas.
Image source: Getty Images.
In this context, it's important for GE to win out on turbine orders. Here, there is reason for optimism. GE's largest turbine is its H-class turbine, known as the HA. The table below shows how GE has been growing its HA turbine orders in recent years even as other turbine orders fell in 2020. As such, GE's total GW orders have actually increased over the last few years. Aeroderivatives are much smaller gas turbines derived from aviation engines.
|
GE Gas Turbine Orders (by type) |
2020 |
2019 |
2018 |
|---|---|---|---|
|
Non-HA turbine (units) |
37 |
45 |
33 |
|
HA turbines (units) |
20 |
18 |
10 |
|
Aeroderivatives (units) |
11 |
11 |
9 |
|
GE gas turbine gigawatts |
15 GW |
13.6 GW |
8 GW |
Data source: General Electric 10K filing.
With the heavy-duty gas turbine market set for low or even no growth in the future, it's essential for GE to keep growing its HA turbine sales and consequently power services sales. It's something that will help offset industry weakness.
If the market is shifting to larger turbines and the GE's HA turbine is winning out then continued growth in HA turbines is likely result in growth in overall power equipment and sales revenue at GE.
Renewable Energy
GE Renewable Energy is really a few businesses put together, namely onshore wind, grid solutions, hydro, and offshore wind. The company reports as shown below, but in reality offshore wind is a new market for GE. Culp's aim is to improve margin at onshore wind, grid, and hydro as GE works through legacy contracts.
Data source: General Electric 10K filing. Chart by author.
However, the key to GE Renewable Energy growth over the medium term is the establishment of offshore wind orders with its giant Haliade-X wind turbine. The competition in the market is fierce. However, GE has made a good start with the Haliade-X by winning 190 unit orders on the first two phases of the 3.6 GW Dogger Bank Wind Farm project in the U.K. Moreover, more orders are likely as GE is also the preferred turbine supplier on the third phase of Dogger Bank (set to be completed in 2026).
GE investors should look out for more Haliade-X orders as it's the key to GE Renewable Energy making significant leaps in sales.
GE Aviation
It goes without saying that GE investors will be hoping that commercial air travel makes a comeback over the next few years. To do that, conditions around the pandemic will have to ease, and equally importantly the commercial aviation industry must be in good financial health.
For the industry to be in good health it's going to need capital. On this note there's cause for optimism. The aviation industry has traditionally not had a problem raising capital -- it's historically been a very good business for debt investors but not so good for equity investors.
General Electric needs the aviation industry to recover. Image source: Getty Images.
In addition, GE itself is contributing to facilitating the raising of capital. In October, GE Capital Aviation Services (GECAS, a GE Capital business) announced an agreement with investment manager PIMCO to "develop an aviation leasing venture to support up to $3 billion in aircraft asset financings" according to the 10K filing. The deal will add liquidity to the market and give access to capital or airlines looking to add to their fleet.
As such, GE investors should view the deal as ongoing evidence that investors are willing to put up capital for the industry, and that's ultimately good news for aerospace suppliers like GE Aviation.
Looking forward
All told, GE can battle the headwinds in the gas power industry by continuing to win HA turbine orders, while GE Renewable Energy has a big opportunity to grow offshore wind power orders with the Haliade-X. Finally, more evidence of available capital in the airline industry is usually good news for aerospace suppliers.
