Given the negative expectations going into the quarter, all General Electric (GE -3.19%) had to do was credibly maintain its outlook for 2022, and the stock was liable to benefit. That's pretty much what happened, but with the stock up nearly 13% in July, were the results good enough to justify even more gains? Let's take a closer look at what happened and what investors can expect for the rest of 2022.
General Electric's headline guidance
Management maintained its headline guidance for full-year revenue growth in the low-single-digit to mid-single-digit range and adjusted earnings per share of $2.80 to $3.50, but said it was trending toward the low end of the ranges. However, its free cash flow (FCF) guidance of $5.5 billion to $6.5 billion was walked back, with CEO Larry Culp saying investors should expect a"push out approximately $1 billion of free cash flow into the future."
There are two ways to look at the FCF situation. If you pencil in, say, $4.5 billion for FCF in 2022, then GE's current market cap of $78.7 billion puts it on 17.5 times FCF for 2022. That's an excellent multiple for a stock in recovery mode. On the other hand, RBC analyst Deane Dray asked about the company's long-standing target of $7 billion in FCF in 2023.
Unfortunately, Culp and CFO Carolina Dybeck Happe fell short of explicitly reiterating that target, with Dybeck Happe concluding, "we still expect a significant improvement on profit as well as free cash flow for 2023." It's a somewhat disappointing response, not least because it's reasonable to expect a significant amount of the $1 billion in "push out" to fall in 2023.
Detailed analysis of General Electric
The best way to see the underlying trends is by comparing what management guided toward on the investor day presentation in March with what was reported in the first half and the updated guidance.
There are a few key things to note from the table:
- Aviation is running ahead of schedule, and management maintained guidance.
- Healthcare operating profit is set to come in some $200 million below the midpoint of initial full-year guidance, and it appears to need a big second half to meet guidance -- the segment has suffered significantly from raw material and supply chain inflation as well as COVID-19 lockdowns in China.
- The power segment is on track, standing as a testimony to CEO of GE Vernova (the new power and renewable energy business) Scott Strazik's work in restructuring the business.
Focusing on GE Renewable Energy for the moment, its performance is obviously disappointing. However, as previously discussed, it's a deeply challenged industry right now, with all the leading players seeing margin erosion, soaring costs, highly competitive pricing, and an uncertain demand environment. GE is responding by renewing its focus on geographies management and feels it can be profitable by increasing pricing. At the same time, its main rivals Siemens Gamesa and Vestas have also reduced guidance through 2022 and taken action to improve profitability.
|
General Electric Segment |
Updated Guidance |
Investor Day Guidance |
First-Half Performance |
|---|---|---|---|
|
Aviation |
Organic revenue growth above 20%, operating profit of $3.8 billion to $4.3 billion |
Organic revenue growth above 20%, operating profit of $3.8 billion to $4.3 billion |
Revenue up 19%, segment profit of $2 billion, margin at 17.5% |
|
Healthcare |
Mid-single-digit revenue growth, "segment profit is expected to be approximately $3.0 billion, slightly below prior outlook." |
Low-single-digit to mid-single-digit revenue growth, operating profit of $3.1 billion to $3.3 billion |
Revenue up 1%, segment profit of $1.2 billion, margin at 13.4% compared to 17.1% in last year's first half |
|
Power |
Low-single-digit revenue growth, operating profit of $1 billion to $1.2 billion |
Low-single-digit revenue growth, operating profit of $1 billion to $1.2 billion |
Revenue down 6%, segment profit of $383 million, margin at 5% compared to 2.6% in last year's first half |
|
Renewable Energy |
Previously said results would be below investor day outlook, now "we no longer expect a step-up profit in the second half." |
Low-single-digit revenue growth, operating loss of $0.5 billion to $0.7 billion |
Revenue down 18%, segment loss of $853 million |
Data source: General Electric presentations.
Is General Electric stock a good value?
On balance, the stock does look attractive, provided the company hits management's guidance. However, GE Healthcare making its numbers in 2022 is probably the biggest concern right now, and GE Renewable Energy is not going to be a quick fix. Meanwhile, the 2023 FCF outlook is now much more uncertain. So there are red flags here.
However, GE Aviation is enjoying the commercial aerospace recovery, GE Healthcare's biggest issues (supply chain) are likely to be temporary, and GE Power is on the right track. Meanwhile, the stock's valuation will attract investors, and it has plenty of upside potential from here.
