General Electric (GE 0.80%) will report fourth-quarter earnings on Jan. 25, and investors will focus on its earnings trajectory and outlook for 2022. In this vein, let's look ahead at what investors might expect to hear from the company.
Expect a wide range of guidance
If there's one thing sure about the upcoming earnings presentation, GE's guidance will involve some pretty wide ranges. Under CEO Larry Culp, GE has acquired a reputation for underpromising and overdelivering on guidance instead of previously doing the opposite under prior management. Culp tends to give wide guidance ranges at the start of the year and then tighten it throughout the year, while keeping investors informed on business trends.
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For example, GE started 2021 forecasting full-year GE Industrial organic revenue growth in the low-single-digit range, with 250 basis points (where 100 basis points, or bp, equals 1%) of adjusted industrial organic margin expansion. Finally, GE Industrial's free cash flow (FCF) was expected to be in the $2.5 billion to $4.5 billion range. Come the third quarter, and management now expects full-year revenue to be flat, with margin-expansion guidance increasing to 350 bp, and the FCF range tightened to $3.75 billion to $4.75 billion.
Given the level of uncertainty in three of GE's four industrial businesses right now, it's highly likely that CEO Culp will opt for a wide range of guidance, again. As such, it's essential to focus on the underlying trends in the businesses and the nuances of management's commentary. Before picking out one key thing from each segment to focus on, I'm going to take a look at the relative importance of each segment.
Data source: General Electric presentations.
GE Healthcare
Management started the year forecasting full-year segment margin expansion of 25 bp-75 bp. Thanks to ongoing productivity actions, however, Culp expects margin expansion close to 100 bp in 2021. GE Healthcare hitting this target would be an excellent result, given the ongoing cost pressures coming from rising raw-material prices and supply chain constraints.
However, there's some pressure building in 2022 on the healthcare segment. For example, Culp and CFO Carolina Dybeck Happe have already told investors the supply chain would negatively impact the segment through the first half of 2022. In addition, GE's rival in healthcare imaging, Philips, recently warned investors that hospitals were pushing equipment installations, and elective procedures would come under pressure early in 2022.
As a rough guide to what might be a good guidance for GE Healthcare in 2022, I would look for a least low-single-digit revenue growth combined with at least 50bp of margin expansion.
Back in March 2021 management guided toward 25bp-75bp of margin expansion in 2021 & 2022, respectively, implying a range of 50bp-150bp from 2020-2022. Assuming 100 bp of margin expansion is in the bag for 2021, it suggests margin expansion guidance of 50bp for 2022 would keep GE Healthcare on track for the highpoint of its guidance from March 2021.
Aviation
Management expects to hit its initial guidance for a low-double-digit segment margin in 2021. It's a result driven by better-than-expected growth in commercial-aviation shop visits (now seen as improving mid-single digits for the full year, compared to previous guidance for "flat").
The big negative in 2021 came from GE's military business. Management originally expected to grow full-year military revenue at a high-single-digit rate, but the latest guidance calls for a revenue decline due to supply chain constraints.
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Investors will want to hear about commercial-aviation shop visits in light of the COVID-19 resurgence and when the supply chain issues will ease in the military business.
Renewable energy and power
Unfortunately, GE renewable energy is now expected to see a cash outflow this year, when management started the year hoping to generate FCF. It comes down to a combination of supply chain cost pressures -- key rivals Vestas and Siemens Gamesa lowered guidance through 2021. Moreover, the extension of production tax credits (PTC) pushes out U.S. onshore installments, as customers no longer need to pull forward orders to qualify for PTC.
As such, investors will be looking for some information about when GE renewable energy will start to generate cash.
Last but not least, GE Power could surprise on the upside in 2021. During the third-quarter earnings call, Dybeck Happe said: "Gas Power services was up high single-digits, trending better than our initial outlook due to strong CSA volume. We now expect Gas Power services to grow high single-digits this year." CSA simply means contractual service agreements, and given that power services are the segment's main profit generator, it's possible gas power could exceed its high-single-digit margin guidance for 2021.
Given that strength in gas power services, investors will want to hear about FCF projections for 2022 and beyond, particularly as the business will be combined with GE renewable energy and then spun off in 2024.
All told, the devil will be in the details in GE's results. Listening to the nuances in the earnings call will be as important as the headline guidance.
