General Electric (GE -2.11%) has had its fair share of bad luck over the last decade. That's not to say its management hasn't made mistakes, but it can't control its end markets.
That said, there are signs that GE is on track to release a lot of value for investors in the coming years. Here's the lowdown.
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Investments in oil and gas that didn't pan out
First, former CEO Jeff Immelt made a slew of acquisitions in the oil and gas industry, with the price of oil at around $100. Unfortunately, the price of oil slumped after these acquisitions, and the growth of renewable energy (I'll come back to this point in a moment) led to a threat to the long-term growth potential for oil services companies.
Partly driven by the need to diversify away from fossil fuels, and partly by the need to reduce debt, GE merged its oil and gas business with Baker Hughes in 2017 and promptly set about reducing its stake in the business.
The problem was that GE was selling its Baker Hughes stake as the stock price fell in sympathy with a declining price of oil.
Gas turbine demand fell
Second, GE's power segment is mainly dependent on demand for gas turbines. Unfortunately, the market for large gas turbines fell by half from 2015 to 2019. As such, GE repeatedly missed expectations in its power segment, whether under Immelt or his predecessor, John Flannery. The low point was hit in 2018, with the power segment losing a whopping $808 million.
Pandemic problems
Third, GE was severely hit by the pandemic. GE Aviation is the jewel in its crown and its key earnings and cash flow generator. The segment generated $4.4 billion in free cash flow in 2019, offsetting a combined $2.5 billion outflow at GE Power and GE Renewable Energy. Fast-forward to the pandemic in 2020, and GE Aviation broke even on cash flow -- a demonstration of how badly the pandemic hit air travel.
If that wasn't bad enough, the sale of its biopharma business to Danaher in 2020 couldn't possibly have been more poorly timed. Partly thanks to the biopharma business (which helps medical bodies develop vaccines and therapies), Danaher has been one of the big winners of the pandemic. As a result, it's a business that could have generated a lot of cash flow for GE during this time. Furthermore, it would have commanded a much higher valuation if sold now than back in 2020.
It gets worse. The supply chain issues (largely a consequence of the impact of the pandemic on the economy) that continue to dog the economy through the winter and spring hit GE Renewable Energy particularly hard, as did the ongoing price competition in the industry. It's hardly surprising, as wind turbines require significant logistics input to be built, assembled, and put in place. As such, GE significantly missed its revenue guidance in the fourth quarter.
While GE isn't alone in suffering from the pandemic, it's been hit from all sides and has even had to watch as a divested business flourished under its new management, Danaher.
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Don't give up on GE just yet
All of this is in the past, though. Looking forward and at some of the positive aspects of the business, the company has plenty of potential for improvement before it separates into three different parts. Here are some things to keep in mind:
- GE still owned 116.6 million shares in Baker Hughes as of February 4th, and the substantial rise in the stock price this year means the stake is currently worth around $3.4 billion.
- GE Power's turnaround plan is ahead of schedule, and the segment generated $726 million in earnings in 2021.
- The man largely responsible for the turnaround at GE Power, Scott Strazik, is now the head of all GE's energy businesses (power, renewable energy, and GE Digital) and is charged with turning around GE Renewable Energy.
- Many of GE Renewable Energy's supply chain issues are likely to prove temporary, and the change of management at a significant rival could lead to firming of margins in the industry.
- Healthcare remains a strong cash-generative business, and GE Aviation is embarking on a multiyear recovery in line with an improvement in commercial flight departures.
Image source: Getty Images.
General Electric's best days are ahead of it
Putting it all together, GE has had a lot of bad luck over the last decade, but there's no need to be superstitious and conclude that it will always be so. The gas turbine market is stabilizing, GE Power is profitable again, GE Aviation is recovering, and GE Renewable Energy has probably already passed its low point. All told, many of its end markets look likely to improve through 2022 and beyond.
