In early November, General Electric (GE 1.30%) announced that it would split into three separate companies focused on the aviation, healthcare, and power markets, respectively. Investors applauded the move, boosting GE stock beyond $110 for the first time in months.
Since then, a variety of factors (including inflation fears, concerns about the omicron variant, and continued supply chain headwinds) have crushed the stock's momentum. GE shares have moved even lower since the company reported its fourth-quarter results on Tuesday, falling to around $90.
General Electric stock performance, data by YCharts.
This pullback represents an excellent buying opportunity for long-term investors. Continued turnaround progress, debt reduction, and the upcoming corporate breakup will likely drive strong gains for GE shareholders over the next several years.
Fourth-quarter results sow confusion
General Electric achieved solid results overall for the fourth quarter. Evidently, that wasn't apparent to many investors, as GE stock fell after the earnings report came out.
The main negative in GE's results was that revenue fell 3% year over year last quarter and slipped 2% for the full year. Management's initial guidance had called for low-single-digit organic revenue growth in 2021. More recently, it had projected that revenue would be roughly flat on a full-year basis.
Adding to the confusion, the industrial conglomerate reported multiple metrics for both earnings per share (EPS) and free cash flow. It didn't have much choice, as it is transitioning to a new business structure, with the remains of its GE Capital unit no longer treated as a separate segment. However, the change in reporting partly obscured the company's turnaround progress.
On the bright side, GE beat its full-year earnings and cash flow projections (as they stood under the old reporting system). Adjusted EPS reached $2.12, compared to an initial target range of $1.20 to $2.00. Industrial free cash flow came in at $5.1 billion, or $5.8 billion excluding the impact of GE discontinuing its factoring programs.
Don't worry about the revenue decline
Importantly, GE's revenue decline wasn't caused by lack of demand. Supply chain challenges crimped production, particularly in the healthcare segment. Meanwhile, management is getting even more selective about pursuing deals, sacrificing revenue growth to bolster earnings.
Image source: General Electric.
These efforts appear to be working. GE's adjusted industrial profit margin expanded by 3.9 percentage points on an organic basis last year. That caused its adjusted industrial profit to nearly double.
Moreover, GE booked $79.4 billion of orders last year: up 12% year over year organically. Orders easily eclipsed GE's organic industrial revenue of $70.2 billion, setting the stage for higher revenue in the future. Sure enough, management expects high-single-digit organic revenue growth in 2022.
Many reasons to love GE stock
Looking ahead, General Electric is poised to benefit from numerous tailwinds. First, it ended 2021 with the best balance sheet it has enjoyed in a long time, after reducing gross debt by $87 billion in three years. The company's rising free cash flow and $13 billion of investments in AerCap and Baker Hughes give it plenty of firepower to continue paying down debt in 2022 and 2023.
Second, GE's aviation business is poised for a strong rebound as air travel demand continues to recover from the pandemic and supply chain constraints ease. Last quarter, the aviation segment earned a 20% operating margin: in line with pre-pandemic levels. If it can maintain that level of profitability while growing revenue beyond its 2019 high-water mark of $32.9 billion, GE could more than double its operating profit from the aviation business to around $7 billion within a few years.
Third, the upcoming split into three public companies will separate the high-margin healthcare and aviation businesses from GE's less successful power and renewables segments. That should unlock higher valuations for the healthcare spinoff and the remaining aviation business.
GE expects to generate between $5.5 billion and $6.5 billion of free cash flow in 2022. That makes GE stock cheap based on its current market cap of roughly $100 billion. And considering the aviation and healthcare units' strong growth prospects and the benefits of splitting into three simpler companies, GE shares look like an absolute steal.
