On a headline basis, General Electric's (GE +6.68%) recent investor presentation was excellent. Management reaffirmed its 2022 guidance and its targets for 2023, which means it's on track with its breakup plans. GE's management expects $5.5 billion to $6.5 billion in free cash flow (FCF) in 2022 and more than $7 billion in 2023. The current market cap is $102 billion, so those figures make GE look very attractive. That said, what level of confidence can investors have in these expectations? I think the answer is "quite a lot," and here are five reasons why.
The guidance looks achievable in healthcare and power
NYSE: GE
Key Data Points
To help flesh out these arguments, here's a quick look at the details behind the guidance and the relative importance of each segment. The first point to note is that the low end of the 2023 profit guidance for healthcare and power is below the midpoint of guidance for 2022. This is despite management predicting revenue growth and margin expansion for both segments in 2022 and 2023. As such, the headline 2023 guidance looks conservative.
| GE Segment Adjusted Operating Profit |
2023 (Est) |
2022 (Est) |
2021 |
|---|---|---|---|
|
Healthcare |
$3 billion to $4 billion |
$3.1 billion to $3.3 billion |
$3 billion |
|
Power |
$1 billion to $2 billion |
$1 billion to $1.2 billion |
$0.7 billion |
|
Renewable energy |
0 |
($0.5) billion to ($0.7) billion |
($0.8) billion |
|
Aviation |
$6 billion |
$3.8 billion to $4.3 billion |
$2.9 billion |
|
Corporate costs |
($1) billion |
($1.1) billion |
($1.2) billion |
|
Total adjusted operating profit |
$10 billion |
$6.5 billion |
$4.6 billion |
|
Free cash flow |
$7 billion |
$5.5 billion to $6.5 billion |
$5.1 billion |
Data source: General Electric presentations.
GE Aviation
Two things in the GE Aviation presentations caught my eye. First, management expects its military sales to bounce back strongly in 2022 after declining from $4.6 billion in 2020 to $4.1 billion in 2021. This was a welcome forecast given that the military business suffered from supply chain issues in 2021.
Second, management expects shop visits to grow 25% in 2022 based on an increase in commercial flight departures. Moreover, GE Aviation has many years of growth ahead of it, given the fact that 50% of CFM56 engines (used on the Airbus A320 family and Boeing 737 NG) are yet to have their first shop visit. That should drive after-market sales growth through the decade while shop visits for newer LEAP engines (on the Airbus A320 NEO family and Boeing 737 MAX) start to kick in.
Image source: Getty Images.
GE Renewable Energy
GE Renewable Energy has been hit hard by supply chain pressures and raw material cost increases. On the other side of the equation, pricing competition has been fierce as the leading players battle to win market share in a growth market. The result is shrinking margins.
However, the good news is management's recent efforts to be more selective and improve pricing are working, with Patrick Byrne, who is CEO of the GE Onshore Wind business under the renewable energy segment, noting that pricing had improved in double-digits "over the last 3 to 6 months." In addition, management is cutting costs in line with its new, more focused strategy in wind power.
GE Power
After being in the epicenter of GE's problems, GE Power has been successfully restructured. Management believes it's set for low single-digit revenue growth and margin expansion.
On reason for optimism at GE Power comes from its ability to grow services revenue from its installed base, particularly from its heavy-duty HA turbine. The CEO of GE's Global Energy Business Portfolio, Scott Strazik, noted:
We have 65 H's running today. We'll have approximately 100 by the end of the year and into early next year. This is a part of the business that in 2020 generated $300 million of services collections. But by mid-decade, that number will be $1 billion.
Image source: Getty Images.
General Electric can hit its numbers
While there are still question marks around near-term margin in renewable energy (not least in GE's backlog of already won contracts) and the possible impact of the conflict in Ukraine on raw material costs, GE looks well placed to hit its targets. Its newer technologies, like the LEAP aircraft engine and HA heavy-duty gas turbine, will drive growth in aviation and power. At the same time, the healthcare segment is solid, and management is focused on improving execution in renewable energy.
