The market was somewhat unimpressed by General Electric's (GE 6.14%) first-quarter earnings. The results were mixed, but in general, it's a case of GE performing where it could, but continuing to face difficult market conditions in aviation. As such, it's likely that when commercial air travel picks up globally, the company will be well-positioned to take advantage. Here's what happened and why investors should remain positive about the stock.
General Electric's first-quarter earnings
There were five things investors should be checking for in the earnings, so let's take a look at them and see how GE fared in the quarter.
First, in an environment where many other industrial companies have been reporting good results and raising guidance -- not least GE's fellow aerospace-focused industrial Honeywell (HON 0.78%) -- it might have been a bit disappointing to see the company merely maintain full-year revenue, earnings, and free cash flow guidance.
Image source: Getty Images.
However, it's worth noting that Honeywell also reported some weakness in its aerospace earnings, with management outlining that its aerospace segment revenue was trending toward the low end of its full-year guidance. Honeywell's strength came from its non-aerospace businesses.
The difference with GE is that its aviation segment is its most important earnings generator.
|
Segment Profit |
First Quarter 2021 |
First Quarter 2020 |
|---|---|---|
|
Power |
($87 million) |
($131 million) |
|
Renewable energy |
($234 million) |
($327 million) |
|
Aviation |
$641 million |
$1,003 million |
|
Healthcare |
$698 million |
$867 million |
Data source: General Electric presentations.
GE Aviation
Second, the key metric to follow in the aviation segment is its spares rate, and as you can see below, the first-quarter numbers weren't impressive.
Data source: General Electric presentations. Chart by author.
On the other hand, there's little GE can do about the timing of the recovery in commercial air travel and, subsequently, demand for aviation spares. However, management has a lot more control over costs, and the good news is that the aviation segment margin was 12.8%. Given the weakness in the quarter and the fact that GE's full-year guidance for segment margin is for "low-double-digit," the first-quarter margin implies that GE could beat its full-year margin guidance if the market comes back.
Power and renewable energy
The two segments are often discussed together because management aims to increase profit margin and get them close to their peers. GE's combination of wind power (renewable energy segment) and gas power (power segment) also means it gives investors exposure to two of the most cost-effective ways to generate electricity. As such, GE is one of the best stocks in the renewable energy sector.
Image source: Getty Images.
Regarding the immediate plans, CFO Carolina Dybeck Happe put it best during the earnings call: "[P]ower declined, and renewables was roughly flat, these were largely driven by our increased focus on profitable growth. Examples include reducing turnkey scope in gas power, exiting new coal in power portfolio and increasing project selectivity in renewables."
The following chart shows how power and renewable energy margin have expanded on a year-over-year basis for the last three quarters. Indeed, Dybeck Happe outlined that GE's adjusted industrial margin expanded from 4% to 5.1% (equivalent to 110 basis points, or bps) on a year-over-year basis and was up 450 basis points if you exclude aviation.
Data source: General Electric presentations. Chart by author.
Of particular note, gas power services -- the area where GE has the most upside potential in power -- had "double-digit revenue growth and significant margin expansion." Management also cited "cost out and better project execution" in the grid and hydro business -- two businesses that have been the slowest to improve in GE's portfolio since Larry Culp took over as CEO.
Healthcare
This is probably the least talked-about GE business, but definitely the most intriguing in 2021. Management's full-year guidance calls for low- to mid-single-digit organic revenue growth and organic margin expansion of 25bps to 75bps. However, in the first quarter alone, margins expanded 270bps on an organic basis , revenue was up 7% organically, and orders were up 5% organically.
Image source: Getty Images.
Culp said that core imaging and ultrasound orders were up 20% as healthcare bodies start to make capital expenditures on non-COVID-related equipment again. It all points to the healthcare segment having a strong year. Interestingly, Culp outlined that he was willing to sacrifice some margin in 2021 to make investments in the business to drive growth in the future. As such, it's possible GE could meet its full-year targets and invest in increasing growth in the future.
The key takeaway
The first quarter was all about margin. Aviation was weaker than many expected, but commercial air travel will surely recover in time, and GE is very well positioned. Meanwhile, there's real progress on margin in all the other segments, plus a strengthening growth profile in healthcare. GE continues to stand well for 2021.
