GE Investor Day: 3 Crucial Takeaways You Might Have Missed

General Electric's (GE -3.19%) annual investor day event produced few surprises on 2022 guidance -- management merely maintained 2022 guidance. However, there was a host of information on 2023 and just how management plans to make its breakup plans work. On balance, GE's presentation was a net positive for investors, and the stock remains attractive even as there are some risks to its outlook. Here's why.

Conservative guidance

In recent years, GE has acquired a reputation for being conservative with guidance and then beating expectations, notably its free cash flow (FCF). Under CEO Larry Culp, GE has tended to give very wide guidance ranges and often exceeded them. Looking into the 2022 and 2023 guidance, it seems likely that GE is set up to do the same in the future.

Culp has done an excellent job framing investor expectations toward the key medium-term objectives. Specifically, he's looking for an adjusted operating profit of around $10 billion in 2023, with an FCF of more than $7 billion. It's an outlook he first outlined in the summer of 2021, and it's the same outlook given in the earnings presentation.

To demonstrate, here's a comparison of what Culp said in June of last year compared to the updated guidance. As you can see below, the key difference in the 2023 outlook comes from the renewable energy segment, where "positive" has turned into "approaching breakeven." It reflects the difficulties the wind power industry is facing right now, with surging raw material costs and logistics issues putting severe pressure on an industry with slim margins.

Data source: General Electric presentations. 

There are three reasons why GE stands well placed for 2022 and 2023 and stands a good chance of hitting its targets.

Healthcare guidance looks conservative

First, the healthcare guidance looks conservative. The segment generated $3 billion in operating profit in 2021 on revenue of $17.7 billion with a segment margin of 16.7%. Turning to the guidance for 2022 and 2023, management expects revenue growth in the low single digits to mid single digits in 2022 and then mid single digits in 2023. In both years, the margin is expected to expand by 25 basis points to 75 basis points (100 basis points equals 1%).

With revenue growth and margin expansion along the way, it's somewhat puzzling that the profit guidance range for 2022 is $3.1 billion to $3.3 billion. Yet, the 2023 guidance is for $3 billion to $4 billion, implying a reduction at the low point of the 2023 guidance range. Management was asked about the matter, with GE Healthcare CEO Peter Arduini referring to the possibility of material price inflation. However, it doesn't answer the question of how revenue growth and margin expansion could turn into a profit decline.

All told, the 2023 GE Healthcare guidance looks conservative.

Image source: Getty Images.

Renewable energy needs work

The deterioration in the outlook for renewable energy is a concern, but it's essentially a consequence of a very complex set of trading conditions. As noted earlier, raw material and supply chain costs have soared, while price competition remains fierce as GE battles to win a foothold in a growing market.

That said, GE is already taking action on pricing, with Onshore Wind CEO Patrick Byrne noting, that GE was able to improve pricing by double-digits "over the last 3 to 6 months." 

Aviation and power are strong points

While renewable energy faces challenges, the aviation and power segments are on an excellent track. In power, the gas turbine market has stabilized, and management sees the gas power business, and the power segment overall, as growing at a low single-digit rate. As a result, overall, the segment's margin is expected to improve to high single digits from 4.3%, with strong services growth from its installed base.

In aviation, the recovery in commercial flight departures is expected to drive 20% annual revenue growth over the next two years, and there was some good news on cost reductions on the Leap engine (an option on the Airbus A320 Neo and the sole option on the Boeing 737 MAX). The military business looks set for recovery from a difficult 2021 where supply chain difficulties and the withdrawal from Afghanistan created challenges.

Image source: Getty Images.

General Electric remains on track

On balance, there were enough positives in healthcare, power, and aviation to more than offset weakness in renewable energy. In addition, management is already taking action to improve profitability in renewable energy. The outlooks for 2022 and 2023 haven't changed much, probably reflecting management's conservatism on guidance, so don't be surprised if GE beats expectations in the coming years.